UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes__x__ No_____
(2) Yes__x__ No_____
The number of shares outstanding of the issuer's common stock, $1.00 par
value per share, was 825,301 at September 30, 1999.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTHWEST EQUITY CORP.
Dated:___10/27/99______________ By:____/s/_Brian L Beadle___
(Brian L. Beadle, President
Principal Executive Officer and
Principal Financial and
Accounting Officer)
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on August
17, 1999. There were 825,301 shares of common stock of the Company entitled to
vote at the Annual Meeting, and 774,447 shares present at the meeting by holders
thereof in person or by proxy, which constituted a quorum. The following is a
summary of the results of the votes:
Number of Votes
----------------------
For Withheld
Nominees for Director for a Three-Year Term
Expiring in 2002
Michael D. Jensen........................... 773,407 1,040
James L. Moore.............................. 772,226 2,221
Number of Votes
---------------------------
For Against Abstained
Ratification of Wipfli Ullrich Bertelson LLP as
independent auditors for the fiscal year ending
March 31, 2000..................................... 773,607 0 840
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-k.
A report on Form 8-K dated July 26, 1999, was filed by the Registrant
during the three months ended September 30, 1999. Item 5. Other Events notified
the SEC that the Registrant and Bremer Financial Corporation amended their
definitive agreement and plan of merger dated February 16, 1999. Item 7.
Financial Statements and Exhibits provided a copy of the Third Amendment to
Agreement and Plan of Merger dated July 26, 1999 and a copy of the July 26, 1999
press release.
2
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
September 30,
1999 March 31,
(unaudited) 1999
--------- ---------
Cash and due from banks $4,808 $4,749
Interest-bearing deposits with financial institutions 1,180 5,721
Securities held to maturity 8,850 9,435
Investment in Federal Home Loan Bank stock 712 850
Loans held for sale 234 143
Loans receivable - Net of allowance for loan losses 75,689 73,347
Foreclosed properties and properties subject to foreclosure 63 63
Accrued interest receivable 544 556
Premises and equipment 2,112 2,176
Prepaid expenses and other assets 474 545
-------- --------
TOTAL ASSETS $94,666 $97,585
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand and NOW deposits $12,363 $9,936
Savings and money market deposits 14,549 13,419
Certificates of deposit 36,047 38,648
--------- --------
Total deposits 62,959 62,003
Advances from Federal Home Loan Bank 12,829 16,990
Borrowed funds 5,458 5,625
Accounts payable and accrued expenses 629 606
--------- ---------
Total liabilities 81,875 85,224
--------- ---------
Stockholders' equity
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares authorized;
1,032,517 shares issued; 825,301 shares outstanding 1,033 1,033
Additional paid-in capital 6,582 6,582
Less unearned Employee Stock Ownership Plan (52) (155)
Less 207,216 treasury stock - at cost (2,549) (2,549)
Retained earnings - Substantially restricted 7,777 7,450
--------- --------
Total stockholders' equity 12,791 12,361
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $94,666 $97,585
========= ========
See accompanying Notes to Consolidated Financial Statements
3
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $1,604 $1,780 $3,223 $3,525
Interest on mortgage-backed securities 94 110 191 225
Interest and dividends on investments 92 79 203 176
------------ ------------ ----------- ------------
Total interest income 1,790 1,969 3,617 3,926
------------ ------------ ----------- ------------
Interest expense:
Interest on deposits 627 712 1,282 1,432
Interest on borrowings 245 322 500 648
------------ ------------ ----------- ------------
Total interest expense 872 1,034 1,782 2,080
------------ ------------ ----------- ------------
Net interest income 918 935 1,835 1,846
Provision for loan losses 22 25 22 50
------------ ------------ ----------- ------------
Net interest income after provision for loan losses 896 910 1,813 1,796
------------ ------------ ----------- ------------
Other income:
Mortgage servicing fees 27 23 53 44
Service charges on deposits 70 66 141 128
Gain on sale of mortgage loans 30 59 38 97
Other 36 36 75 119
------------ ------------ ----------- ------------
Total other income 163 184 307 388
------------ ------------ ----------- ------------
General and administrative expenses:
Salaries and employee benefits 321 323 688 659
Net occupancy expense 94 92 178 178
Data processing 36 37 71 72
Federal insurance premiums 9 10 17 20
Other 114 155 229 289
------------ ------------ ----------- ------------
Total general and administrative expense 574 617 1,183 1,218
------------ ------------ ----------- ------------
Income before provision for income taxes 485 477 937 966
Provision for income taxes 172 167 329 334
------------ ------------ ----------- ------------
Net income $313 $310 $608 $632
============ ============ =========== ============
Basic earnings per share $0.39 $0.40 $0.77 $0.82
============ ============ =========== ============
Diluted earnings per share $0.37 $0.38 $0.72 $0.77
============ ============ =========== ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
4
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In Thousands)
<CAPTION>
Unearned
Additional Unearned ESOP
Common Paid-In Restricted Compen- Treasury Retained
Stock Capital Stock sation Stock Earnings Total
-------- ---------- ----------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended September 30, 1998
Balance - March 31, 1998 $1,033 $6,584 $(26) $(389) $(2,557) $6,869 $11,514
Comprehensive income:
Net income - - - - - - - - - - 632 632
Amortization of unearned ESOP and restricted stock
award - - - - 26 92 - - - - 118
Exercise of incentive stock options - - (2) - - - - 8 - - 6
Cash dividends - $.33 per share - - - - - - - - - - (272) (272)
--------- -------- ------- ------- -------- ------- --------
Balance - September 30, 1998 1,033 6,582 $ - (297) (2,549) 7,229 11,998
========= ======== ======= ======= ======== ======= ========
Six Months Ended September 30, 1999
Balance - March 31, 1999 1,033 6,582 - - (155) (2,549) 7,450 12,361
Comprehensive income:
Net income - - - - - - - - - - 608 608
Amortization of unearned ESOP and restricted stock
award - - - - - - 103 - - - - 103
Cash dividends - $.34 per share - - - - - - - - - - (281) (281)
--------- ------- ------- ------- -------- ------ --------
Balance - September 30, 1999 $1,033 $6,582 $ - - $(52) $(2,549) $7,777 $12,791
========= ======== ======= ======= ======= ======= ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
5
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Six Months Ended
September 30,
1999 1998
------ ------
Cash flows from operating activities:
Net income $608 $632
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 73 72
Provision for loan losses 22 50
Amortization of ESOP and restricted stock awards 103 118
Proceeds from sales of mortgage loans 3,610 8,632
Loans originated for sale (3,701) (8,726)
Changes in operating assets and liabilities:
Accrued interest receivable 12 2
Prepaid expenses and other assets 71 (41)
Accrued interest payable 135 128
Accrued income taxes payable 222 (94)
Other accrued liabilities (334) (130)
------- -------
Net cash provided by operating activities 821 643
------- -------
Cash flows from investing activities:
Net decrease in interest-bearing deposits with
financial institutions 4,541 1,854
Proceeds from sales of Federal Home Loan Bank stock 138 206
Proceeds from maturities of held to maturity securities - - 1,700
Purchase of held to maturity securities (500) (2,100)
Principal collected on held to maturity securities 499 - -
Principal collected on mortgage-backed securities 586 791
Net (increase) in loans (2,364) (1,724)
Purchase of office properties and equipment (9) (54)
------- -------
Net cash provided by investing activities 2,891 673
------- -------
See accompanying Notes to Consolidated Financial Statements
6
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
September 30,
1999 1998
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 956 (197)
Net (decrease) in short-term borrowings (4,509) (1,093)
Net increase in long-term borrowings 181 1,274
Proceeds from exercise of stock options - - 8
Dividends paid (281) (272)
-------- --------
Net cash (used in) financing activities (3,653) (280)
-------- --------
Increase in cash and due from banks 59 1,036
Cash and due from banks at beginning 4,749 2,642
-------- --------
Cash and due from banks at end $4,808 $3,678
======== ========
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $ - - $166
Loans charged off 67 58
Interest Paid 1,647 1,952
Income taxes paid 107 428
See accompanying Notes to Consolidated Financial Statements
7
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements
have been prepared by the Company in accordance with the accounting
policies described in the Bank's audited financial statements for the
year ended March 31, 1999 and should be read in conjunction with the
financial statements and notes which appear in that report. These
statements do not include all the information and disclosures required
by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered for a fair presentation have been included.
Note 2. Subsequent Events: none
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
NORTHWEST EQUITY CORP.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and September 30, 1999
Net Income
Net income for the three months ended September 30, 1999, increased
$3,000 or 0.96% to $313,000 from $310,000 for the three months ended September
30, 1998. The increase in net income is due to a decrease of $43,000 in general
and administrative expense from $617,000 for the three months ended September
30, 1998, to $574,000 for the three months ended September 30, 1999. This
decrease was offset by a decrease of $17,000 in net interest income from
$935,000 for the three months ended September 30, 1998, to $918,000 for the
three months ended September 30, 1999, and decrease of $21,000 in total other
income from $184,000 for the three months ended September 30, 1998, to $163,000
for the three months ended September 30, 1999. Provision for income taxes
increased $5,000 from $167,000 for the three months ended September 30, 1998, to
$172,000 for the three months ended September 30, 1999.
Net Interest Income
Net interest income decreased $17,000 from $935,000 for the three
months ended September 30, 1998, to $918,000 for the three months ended
September 30, 1999. The decrease in net interest income results from a decrease
of $179,000 in total interest income to $1,790,000 for the three months ended
September 30, 1999, from $1,969,000 for the three months ended September 30,
1998, while total interest expense decreased only $162,000 to $872,000 for the
three months ended September 30, 1999, from $1,034,000 for the three months
ended September 30, 1998.
Interest Income
Interest income decreased $179,000 or 9.1% to $1,790,000 for the three
months ended September 30, 1999, from $1,969,000 for the three months ended
September 30, 1998. Interest and fees on loans decreased $176,000 to $1,604,000
for the three months ended September 30, 1999, from $1,780,000 for the three
months ended September 30, 1998. This decrease was due to the decrease in the
average outstanding balance of total loans to $74.8 million for the three months
ended September 30, 1999, from $79.8 million for the three months ended
September 30, 1998. The decrease in the average outstanding balance of total
loans was due to a decrease in market interest rates over the two comparable
periods which encouraged customers to refinance adjustable rate mortgages which
are held in the portfolio with fixed rate loans which are sold on the secondary
market. The average yield/rate on total loans decreased 0.34% from 8.92% for the
three months ended September 30, 1998, to 8.58% for the three months ended
September 30, 1999. Interest on mortgage-backed and related securities decreased
$16,000 to $94,000 for the three months ended September 30, 1999, from $110,000
for the three months ended September 30, 1998. This decrease was due to a
decrease in the average outstanding balance of mortgage backed and related
securities of $0.8 million from $6.4 million for the three months ended
September 30, 1998, to an average outstanding balance of $5.6 million for the
three months ended September 30, 1999. Interest on investments increased $13,000
to $92,000 for the three months ended September 30, 1999, from $79,000 for the
three months ended September 30, 1998. The increase was the result of an
increase of $0.7 million in the average outstanding balance of interest bearing
deposits in other financial institutions from $1.7 million for the three months
ended September 30, 1998, to $2.4 million for the three months ended September
30, 1999.
Interest Expense
Interest expense decreased $162,000 or 15.7% to $872,000 for the three
months ended September 30, 1999, from $1,034,000 for the three months ended
September 30, 1998. Interest on deposits decreased $85,000 or 11.9% from
$712,000 for the three months ended September 30, 1998, to $627,000 for the
three months ended September 30, 1999. The decrease in interest on deposits is a
result of a decrease of 0.60% in the average yield of total deposits to 4.06%
for the three months ended September 30, 1999, from 4.66% for the three months
ended September 30, 1998. The average outstanding balance of total deposits
increased $0.7 million to $61.8 million for the three months ended September 30,
1999, from $61.1 million for the three months ended September 30, 1998. Interest
on borrowings decreased $77,000 or 23.9% from $322,000 for the three months
ended September 30, 1998, to $245,000 for the three months ended September 30,
9
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1999. The decrease reflects a decrease of $4.9 million in the average
outstanding balance of advances and other borrowings from $23.2 million of the
three months ended September 30, 1998, to $18.3 million for the three months
ended September 30, 1999. The average yield/rate of advances and other
borrowings decreased 0.22% from 5.56% for the three months ended September 30,
1998, to 5.34% for the three months ended September 30, 1999.
Provision for Loan Losses
The provision for loan losses decreased $3,000 to $22,000 for the three
months ended September 30, 1999, from $25,000 for the three months ended
September 30, 1998. The allowance for loan losses totaled $338,000 at September
30, 1999, from $484,000 at September 30, 1998, and represented 0.44% and 0.60%
of gross loans and 444.7% and 34.3% of non-performing loans, respectively. The
allowance for loan losses calculation is based on a three year actual loss
average. The non-performing assets to total assets ratio decreased to 0.14%
at September 30, 1999 from 1.71% at September 30, 1998.
Other Income
Total other income decreased 11.4% or $21,000 to $163,000 for the three
months ended September 30, 1999, from $184,000 for the three months ended
September 30, 1998. The decrease results from a $29,000 decrease in gain on sale
of mortgage loans to $30,000 for the three months ended September 30, 1999, from
$59,000 for the three months ended September 30, 1998. The decrease in the gain
on sale of mortgage loans reflects the recent upward trend in mortgage interest
rates during the current period that acts to reduce gains on sale of mortgage
loans sold in the secondary market. Service charges on deposits increased $4,000
from $66,000 for the three months ended September 30, 1998, to $70,000 for the
three months ended September 30, 1999. The increase reflects an increase in the
average outstanding balance of NOW accounts of $0.8 million from $10.3 million
for the three months ended September 30, 1998, to $11.1 million for the three
months ended September 30, 1999. Mortgage servicing fees increased $4,000 from
$23,000 for the three months ended September 30, 1998, to $27,000 for the three
months ended September 30, 1999.
General and Administrative Expenses
General and administrative expenses decreased $43,000 or 6.96% to $574,000 for
the three months ended September 30, 1999, from $617,000 for the three months
ended September 30, 1998. The decrease was primarily due to a decrease of
$41,000 in other expenses from $155,000 for the three months ended September 30,
1998, to $114,000 for the three months ended September 30, 1999. The decrease in
other expenses was the result of an accumulation of small decreases in eight
different categories of expenses. The decreases are the result of a cost-cutting
effort on the part of the Bank to offset decreases in net interest income.
Income Tax Expense
Income tax expense increased $5,000 or 3.0% from $167,000 for the three months
ended September 30, 1998, to $172,000 for the three months ended September 30,
1999. The increase in income tax expense is the direct result of the increase in
income before taxes of $8,000 from $477,000 for the three months ended September
30, 1998, to $485,000 for the three months ended September 30, 1999. The
effective tax rate for the three months ended September 30, 1999, was 35.5%
compared to 35.0% for the three months ended September 30, 1998.
10
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Comparison of Operating Results for the Six Months Ended September 30, 1998 and
September 30, 1999
Net Income
Net income for the six months ended September 30, 1999, decreased
$24,000 or 3.8% to $608,000 from $632,000 for the six months ended September 30,
1998. The decrease in net income was primarily due to an decrease in total other
income of $81,000 from $388,000 for the six months ended September 30, 1998, to
$307,000 for the six months ended September 30, 1999. Other income decreased
$44,000 from $119,000 for the six months ended September 30, 1998, to $75,000
for the six months ended September 30, 1999. The decrease in other income was
partially due to a decrease in the profit on sale of real estate held in the
Bank's subsidiary of $50,000 from $50,000 for the six months ended September 30,
1998, to $0 for the six months ended September 30, 1999. Net interest income
decreased $11,000 from $1,846,000 for the six months ended September 30, 1998 to
$1,835,000 for the six months ended September 30, 1999. General and
administrative expenses decreased $35,000 from $1,218,000 for the six months
ended September 30, 1998, to $1,183,000 for the six months ended September 30,
1999. Provision for income taxes decreased $5,000 from $334,000 for the six
months ended September 30, 1998, to $329,000 for the six months ended September
30, 1999.
Net Interest Income
Net interest income decreased by $11,000 from $1,846,000 for the six
months ended September 30, 1998, to $1,835,000 for the six months ended
September 30, 1999. The decrease in net interest income is a result of a
decrease in interest income of $309,000 to $3,617,000 for the six months ended
September 30, 1999, from $3,926,000 for the six months ended September 30, 1998;
combined with a decrease in interest expense of $298,000 to $1,782,000 for the
six months ended September 30, 1999, from $2,080,000 for the six months ended
September 30, 1998.
Interest Income
Interest income decreased $309,000 or 7.9% to $3,617,000 for the six
months ended September 30, 1999, from $3,926,000 for the six months ended
September 30, 1998. The decrease was primarily due to a $302,000 decrease in
interest and fees on loans to $3,223,000 for the six months ended September 30,
1999, from $3,525,000 for the six months ended September 30, 1998. This decrease
was due to the decrease of $5.1 million in the average outstanding balance of
total loans to $74.4 million for the six months ended September 30, 1999, from
$79.5 million for the six months ended September 30, 1998. The decrease in the
average outstanding balance of total loans was due to a decrease in market
interest rates over the two comparable periods which encouraged customers to
refinance adjustable rate mortgages which are held in the portfolio with fixed
rate loans which are sold on the secondary market. The average yield/rate on
total loans decreased 0.20% from 8.87% for the six months ended September 30,
1998, to 8.67% for the six months ended September 30, 1999. Interest on
mortgage-backed and related securities decreased $34,000 or 15.1% to $191,000
for the six months ended September 30, 1999, from $225,000 for the six months
ended September 30, 1998. This decrease was due to a decrease in the average
outstanding balance of mortgage backed and related securities from $6.3 million
for the six months ended September 30, 1998, to an average balance of $5.7
million for the six months ended September 30, 1999. The decrease was the result
of regularly scheduled principle payments and prepayments on the securities
throughout the period. Interest on investments increased $27,000 to $203,000 for
the six months ended September 30, 1999, from $176,000 for the six months ended
September 30, 1998, as a result of an increase in the average outstanding
balances of interest-bearing deposits in other financial institutions,
securities held for sale, and Federal Home Loan Bank stock from $5.9 million for
the six months ended September 30, l998, to $7.2 million for the six months
ended September 30, 1999.
Interest Expense
Interest expense decreased $298,000 or 14.3% to $1,782,000 for the six
months ended September 30, 1999, from $2,080,000 for the six months ended
September 30, 1998. Interest on deposits decreased $150,000 or 10.5% from
$1,432,000 for the six months ended September 30, 1998, to $1,282,000 for the
six months ended September 30, 1999. The decrease reflects a decrease of 0.51%in
the average yield/rate of total deposits to 4.14% for the six months ended
September 30, 1999, from an average yield/rate of 4.65% for the six months ended
September 30, 1998. The average outstanding balance of total deposits increased
$0.4 million to $62.0 million for the six months ended September 30, 1999, from
an average balance of $61.6 million for the six months ended September 30, 1998.
Interest on borrowings decreased $148,000 or 22.8% from $648,000 for the six
months ended September 30, 1998, to $500,000 for the six months ended September
30,
11
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1999. The decrease reflects a decrease of 0.30% in average yield/rate of
advances and other borrowings from 5.62% for the six months ended September 30,
1998, to 5.32% for the six months ended September 30, 1999.
Provision for Loan Losses
The provision for loan losses decreased $28,000 to $22,000 for the six
months ended September 30, 1999, from $50,000 for the six months ended September
30, 1998. The decrease results from the settlement of a lawsuit involving a
commercial loan in the quarter ended December 31, 1998, that the Board had
previously established a loss provision of $25,000 per quarter. The allowance
for loan losses totaled $338,000 at September 30, 1999, from $484,000 at
September 30, 1998, and represented 0.44% and 0.60% of gross loans and 444.7%
and 34.2% of non-performing loans, respectively. The allowance for loan losses
calculation is based on a three year actual loss average. The non-performing
assets to total assets ratio decreased to 0.14% at September 30, 1999 from 1.71%
at September 30, 1998.
Other Income
Total other income decreased $81,000 or 20.9% to $307,000 for the six
months ended September 30, 1999, from $388,000 for the six months ended
September 30, 1998. The decrease results from a decrease of $44,000 in other
income from $119,000 for the six months ended September 30, 1998 to $75,000 for
the six months ended September 30, 1999. The decrease in other income was due to
a decrease of $50,000 in the profit on sale of real estate held in the Bank's
subsidiary to $00 for the six months ended September 30, 1999, from $50,000 for
the six months ended September 30, 1998. The transaction consummated in the
quarter ending June 30, 1998 divested all of the real estate holdings of the
subsidiary. Gain on sale of mortgage loans decreased $59,000 to $38,000 for the
six months ended September 30, 1999 from $97,000 for the six months ended
September 30, 1998. The decrease in the gain on sale of mortgage loans results
from the recent upward trend in mortgage interest rates during the current
period that acts to reduce gains on sale of mortgage loans sold in the secondary
market. Service charges on deposits increased $13,000 from $128,000 for the six
months ended September 30, 1998, to $128,000 for the six months ended September
30, 1999. The increase is a result of an increase in the average outstanding
balance of NOW accounts of $0.8 million from $10.1 million for the six months
ended September 30, 1998, to $10.9 million for the six months ended September
30, 1999. Mortgage servicing fees increased $9,000 from $44,000 for the six
months ended September 30, 1998, to $53,000 for the six months ended September
30, 1999.
General and Administrative Expenses
General and administrative expenses decreased $35,000 or 2.87% to
$1,183,000 for the six months ended September 30, 1999, from $1,218,000 for the
six months ended September 30, 1998. The decrease was primarily due to a
decrease of $60,000 in other expenses from $289,000 for the six months ended
September 30, 1998, to $229,000 for the six months ended September 30, 1999. The
decreases are the result of an accumulation of small decreases in eight
different categories of expenses. The decreases are the result of a cost-cutting
effort on the part of the Bank to offset decreases in net interest income.
The decrease in other expenses was offset by a $29,000 increase in salaries
and employee benefits from $659,000 for the six months ended September 30,
1998, to $688,000 for the six months ended September 30, 1999. The increase
reflects cost of living salary increases.
Income Tax Expense
Income tax expense decreased $5,000 or 1.49% from $334,000 for the six
months ended September 30, 1998, to $329,000 for the six months ended September
30, 1999. The decrease in income tax expense is the direct result of a decrease
in income before taxes of $29,000 from $966,000 for the six months ended
September 30, 1998, to $937,000 for the six months ended September 30, 1999. The
effective tax rate for the six months ended September 30, 1999, was 35.1%
compared to 34.6% for the six months ended September 30, 1998.
12
<PAGE>
Financial Condition
Total assets decreased $2.9 million or 2.97% to $94.7 million at
September 30, 1999, from $97.6 million at March 31, 1999. The decrease is due to
the decrease in cash and interest-bearing deposits with financial institutions
of $4.5 million to $6.0 million at September 30, 1999, from $10.5 million at
March 31, 1999. The cash and interest-bearing deposits were used to reduce
advances from the Federal Home Loan Bank $4.2 million from $17.0 million at
March 31, 1999, to $12.8 million at September 30, 1999. Loans receivable
increased $2.4 million from $73.3 million at March 31, 1999, to $75.7 million at
September 30, 1999. The increase in loans receivable was due the increase in
long-term mortgage interest rates during the current period which encouraged
customers to obtain adjustable rate mortgages which are held in the portfolio as
opposed to fixed rate loans which are sold on the secondary market. Securities
held-to-maturity decreased $0.5 million to $8.9 million at September 30, 1999,
from $9.4 million March 31, 1999. Shareholders' equity increased $430,000 from
$12.4 million at March 31, 1999, to $12.8 million at September 30, 1999, as a
result of net income for the six months ended September 30, 1999, less $281,000
in cash dividends and the amortization of the common stock purchased by the
employee stock ownership plan of $103,000.
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. As of September 30, 1999, the Bank estimates it
will not need to purchase any more hardware and equipment to address the Y2K
issues.
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. The Bank filed its Y2K Contingency Plan
with FDIC before the June 30, 1999 deadline. In a letter dated August 31, 1999,
EDS reported that remediation, testing and implementation are 100% complete and
the implementation of third party vendor code is 100% complete.
13
<PAGE>
Asset/Liability Management
Asset/liability management is an ongoing process of matching asset and
liability maturities to reduce interest rate risk. Management attempts to
control this risk through pricing of assets and liabilities and maintaining
specific levels of maturities. In recent periods, management's strategy has been
to (1) sell substantially all new originations of long-term, fixed-rate single
family mortgage loans in the secondary market, (2) invest in various
adjustable-rate and short-term mortgage-backed and related securities, (3)
invest in adjustable-rate, single family mortgage loans, and (4) encourage
medium and longer-term certificates of deposit. The Company's estimated
cumulative one-year gap between assets and liabilities was a negative 13.2% of
total assets on September 30, 1999. A negative gap occurs when a greater dollar
amount of interest-earning liabilities than interest-bearing assets are
repricing or maturing during a given time period. During periods of rising
interest rates, a negative interest rate sensitivity gap will tend to negatively
affect net interest income. During periods of falling interest rates, a negative
interest rate sensitivity gap will tend to positively affect the net interest
income.
Management believes that its asset/liability management strategies have
reduced the potential effects of changes in interest rates on its operations.
Increases in interest rates may decrease net interest income because
interest-bearing liabilities will reprice more quickly than interest-earning
assets. The Company's analysis of the maturity and repricing of assets and
liabilities incorporates certain assumptions concerning the amortization and
prepayment of such assets and liabilities.
Management believes that these assumptions approximate actual
experience and considers them reasonable, although the actual amortization and
repayment of assets and liabilities may vary substantially.
Management Strategy
Asset Quality
The Company emphasizes high asset quality in both its investment
portfolio and lending activities. Non-performing assets have ranged between
0.32% and 1.72% of total assets during the last three fiscal years and were
0.14% of total assets at September 30, 1999. During the fiscal years ended March
31, 1999, 1998, and 1997, the Company recorded provisions for loan losses of
$100,000, $81,000, and $81,000, respectively, to its allowance for loan losses
and had net charge-offs of $77,000, $53,000, and $25,000, respectively. The
Company's allowance for loan losses at September 30, 1999, totaled $338,000. The
allowance for loan losses calculation is based on a three year actual loss
average. Total non-performing loans decreased to $76,000 at September 30, 1999,
from $238,000 at March 31, 1999
Selected Financial Ratios and Other Data: At or For the
Three months ended Six months ended
September 30, September 30,
Performance Ratios 1999 1998 1999 1998
---- ---- ---- ----
Return on average assets 1.33% 1.26% 1.28% 1.29%
Return on average equity 9.93% 10.51% 9.70% 10.88%
14
<PAGE>
<TABLE>
MANAGEMENT'S DISCUSSION(CONT.)
Three Months Ended September 30,
1999 1998
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans.............................. $64,395 $1,356 8.43% $67,623 $1,502 8.88%
Commercial loans............................ 3,540 81 9.17% 4,304 81 7.53%
Consumer loans.............................. 6,837 167 9.77% 7,920 197 9.93%
--------- -------- ------- --------- -------- -------
Total loans................................ 74,772 1,604 8.58% 79,847 1,780 8.92%
Mortgage-backed securities.................. 5,553 94 6.74% 6,358 110 6.95%
Interest-bearing deposits in other
financial institutions..................... 2,376 30 5.12% 1,679 22 5.32%
Investment securities....................... 3,333 50 5.94% 2,772 44 6.19%
Federal Home Loan Bank stock................ 712 12 6.50% 953 13 6.63%
---------- -------- ------- --------- -------- -------
Total interest-earning assets.............. 86,746 1,790 8.25% 91,609 1,969 8.60%
Non-interest earning assets................. 7,383 6,535
---------- ---------
Total assets.............................. $94,129 $98,144
========== =========
Liabilities and Stockholders' Equity
Deposits:
NOW accounts(1)............................. $11,100 $36 1.28% $10,275 $37 1.44%
Money market deposit accounts............... 7,908 82 4.13% 6,313 84 4.70%
Passbook.................................... 6,817 37 2.16% 6,103 33 2.15%
Certificate of deposit...................... 35,956 472 5.26% 38,411 558 5.74%
---------- -------- ------- --------- -------- -------
Total deposits............................. 61,781 627 4.06% 61,102 712 4.66%
Advances and other borrowings............... 18,308 245 5.34% 23,176 322 5.56%
---------- -------- ------- --------- -------- -------
Total interest-bearing liabilities........ 80,089 872 4.35% 84,278 1,034 4.91%
Non-interest bearing liabilities ........... 1,440 2,075
Equity...................................... 12,600 11,791
---------- ---------
Total liabilities and retained earnings.... $94,129 $98,144
========== =========
Net interest income/interest rate spread (2) $918 3.90% $935 3.69%
======== ======= ======== =======
Net earning assets/net interest margin (3).. $6,657 4.24% $7,331 4.08%
========== ======= ========= =======
Average interest-earning assets to average
interest-bearing liabilities.............. 1.08 1.09
========== ==========
Six Months Ended September 30,
1999 1998
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
Assets
Interest-earning assets:
Mortgage loans............................. $63,779 $2,693 8.45% $67,224 $2,951 8.78%
Commercial loans........................... 3,636 191 10.50% 4,352 185 8.50%
Consumer loans............................. 6,964 339 9.73% 7,879 389 9.87%
---------- --------- -------- ---------- -------- -------
Total loans............................... 74,379 3,223 8.67% 79,455 3,525 8.87%
Mortgage-backed securities................. 5,690 191 6.71% 6,335 225 7.11%
Interest-bearing deposits in other
financial institutions.................... 3,084 79 5.15% 2,009 54 5.41%
Investment securities...................... 3,366 100 5.93% 2,875 90 6.21%
Federal Home Loan Bank stock............... 733 24 6.50% 993 32 6.63%
---------- --------- -------- ---------- -------- -------
Total interest-earning assets............. 87,252 3,617 8.29% 91,667 3,926 8.57%
Non-interest earning assets................ 7,617 5,917
---------- ----------
Total assets............................. $94,869 $97,584
========== ==========
Liabilities and Stockholders' Equity
Deposits:
NOW accounts(1)............................ $10,876 $70 1.29% $10,058 $72 1.43%
Money market deposit accounts.............. 7,555 155 4.13% 6,242 160 4.78%
Passbook................................... 6,684 72 2.15% 6,125 66 2.15%
Certificate of deposit..................... 36,854 985 5.35% 39,216 1,134 5.75%
---------- --------- -------- ---------- -------- -------
Total deposits............................ 61,969 1,282 4.14% 61,641 1,432 4.65%
Advances and other borrowings.............. 18,780 500 5.32% 23,075 648 5.62%
---------- --------- -------- ---------- -------- -------
Total interest-bearing liabilities........ 80,749 1,782 4.41% 84,716 2,080 4.92%
Non-interest bearing liabilities .......... 1,589 1,261
Equity..................................... 12,531 11,607
---------- -----------
Total liabilities and retained earnings... $94,869 $97,584
========== ===========
Net interest income/interest rate spread (2) $1,835 3.88% $1,846 3.65%
========= ======== ======== =======
Net earning assets/net interest margin (3). $6,503 4.21% $6,951 4.03%
========== ======== =========== =======
Average interest-earning assets to average
interest-bearing liabilities.............. 1.08 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>
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> MAR-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,808
<INT-BEARING-DEPOSITS> 1,180
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9,562
<INVESTMENTS-MARKET> 9,413
<LOANS> 75,923
<ALLOWANCE> 338
<TOTAL-ASSETS> 94,666
<DEPOSITS> 62,959
<SHORT-TERM> 8,817
<LIABILITIES-OTHER> 629
<LONG-TERM> 9,470
0
0
<COMMON> 1,033
<OTHER-SE> 11,758
<TOTAL-LIABILITIES-AND-EQUITY> 94,666
<INTEREST-LOAN> 3,223
<INTEREST-INVEST> 394
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,617
<INTEREST-DEPOSIT> 1,282
<INTEREST-EXPENSE> 1,782
<INTEREST-INCOME-NET> 1,813
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,183
<INCOME-PRETAX> 937
<INCOME-PRE-EXTRAORDINARY> 608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 608
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 3.88
<LOANS-NON> 76
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 215
<ALLOWANCE-OPEN> 375
<CHARGE-OFFS> 67
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 338
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
