UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 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 December 31, 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:___02/01/00______________ By: _/s/_Brian L. Beadle____
(Brian L. Beadle, President
Principal Executive Officer and
Principal Financial and
Accounting Officer)
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information.
A Schedule 14A, Preliminary Proxy Statement, was filed with the SEC on
December 21, 1999. The Proxy Statement provided notice of a Special Meeting to
be held on February 29, 2000, to consider and vote upon a proposal and Plan of
Merger dated February 16, 1999, as amended, by and among Northwest Equity Corp.
("Northwest") and Bremer Financial Corporation ("Bremer"), a Minnesota
Corporation, and Bremer Acquisition Corporation), a Wisconsin corporation and
wholly owned subsidiary of Bremer ("Merger Sub"), providing for the merger of
Northwest with and into the Merger Sub.
Item 6. Exhibits and Reports on Form 8-k.
a. No reports on Form 8-K were filed during the quarter for which this
report was filed.
2
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 31,
1999 March 31,
(unaudited) 1999
----------- ---------
----------- ---------
Cash and due from banks $5,796 $4,749
Interest-bearing deposits with financial institutions 892 5,721
Securities held to maturity 8,671 9,435
Investment in Federal Home Loan Bank stock 832 850
Loans held for sale 232 143
Loans receivable - Net of allowance for loan losses 74,346 73,347
Foreclosed properties and properties subject to foreclosure 63 63
Accrued interest receivable 540 556
Premises and equipment 2,075 2,176
Prepaid expenses and other assets 219 545
----------- --------
=========== ========
TOTAL ASSETS $93,666 $97,585
=========== ========
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand and NOW deposits $10,379 $9,936
Savings and money market deposits 12,919 13,419
Certificates of deposit 38,154 38,648
----------- --------
----------- --------
Total deposits 61,452 62,003
Advances from Federal Home Loan Bank 14,129 16,990
Borrowed funds 4,664 5,625
Accounts payable and accrued expenses 470 606
----------- --------
----------- --------
Total liabilities 80,715 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 (34) (155)
Less 207,216 treasury stock - at cost (2,549) (2,549)
Retained earnings - Substantially restricted 7,919 7,450
----------- --------
----------- --------
Total stockholders' equity 12,951 12,361
----------- --------
=========== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $93,666 $97,585
=========== ========
=========== ========
See accompanying Notes to Consolidated Financial Statements
<TABLE>
3
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $1,591 $1,763 $4,814 $5,288
Interest on mortgage-backed securities 90 107 281 332
Interest and dividends on investments 75 87 278 263
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Total interest income 1,756 1,957 5,373 5,883
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Interest expense:
Interest on deposits 617 704 1,899 2,136
Interest on borrowings 264 304 764 952
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Total interest expense 881 1,008 2,663 3,088
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Net interest income 875 949 2,710 2,795
Provision for loan losses 27 323 49 373
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Net interest income after provision for loan losses 848 626 2,661 2,422
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Other income:
Mortgage servicing fees 27 24 80 68
Service charges on deposits 71 64 212 192
Gain on sale of mortgage loans 13 79 51 176
Other 55 31 130 150
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Total other income 166 198 473 586
------ ------------ ----------- ------------
------ ------------ ----------- ------------
General and administrative expenses:
Salaries and employee benefits 321 324 1,009 983
Net occupancy expense 89 93 267 271
Data processing 36 58 107 130
Federal insurance premiums 9 8 26 28
Other 131 132 360 421
------ ------------ ----------- ------------
------ ------------ ----------- ------------
Total general and administrative expense 586 615 1,769 1,833
------ ------------ ----------- ------------
------------- ------------ ----------- ------------
Income before provision for income taxes 428 209 1,365 1,175
Provision for income taxes 146 60 475 394
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
Net income $282 $149 $890 $781
============= ============ =========== ============
============= ============ =========== ============
Basic earnings per share $0.35 $0.19 $1.12 $1.00
============= ============ =========== ============
============= ============ =========== ============
Diluted earnings per share $0.33 $0.18 $1.05 $0.95
============= ============ =========== ============
============= ============ =========== ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
<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
------ --------- ---------- ------ --------- -------- -----
Nine Months Ended December 31, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1998 $1,033 $6,584 $ (26) $ (389) $ (2,557) $ 6,869 $11,514
Comprehensive income:
Net income - - - - - - - - - - 781 781
Amortization of unearned ESOP and restricted stock
award - - - - 26 92 - - - - 118
Exercise of incentive stock options - - (2) - - - - 8 - - 6
Cash dividends - $.50 per share - - - - - - - - - - (412) (412)
----- ----- ---- ---- ------ ----- -------
Balance - December 31, 1998 1,033 6,582 $ - (297) (2,549) 7,238 12,007
===== ===== ===== ===== ======= ===== ======
Nine Months Ended December 31, 1999
Balance - March 31, 1999 1,033 6,582 - - (155) (2,549) 7,450 12,361
Comprehensive income:
Net income - - - - - - - - - - 890 890
Amortization of unearned ESOP and restricted stock
award - - - - - - 121 - - - - 121
Cash dividends - $.51 per share - - - - - - - - - - (421) (421)
------ ----- ----- ----- ------- ------ ------
Balance - December 31, 1999 $1,033 $6,582 $ - - $ (34) $ (2,549) $ 7,919 $12,951
===== ===== ===== ===== ====== ===== ======
See accompanying Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Nine Months Ended
December 31,
1999 1998
----- -----
----- -----
Cash flows from operating activities:
Net income $890 $781
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 110 107
Provision for loan losses 49 373
Amortization of ESOP and restricted stock awards 121 118
Proceeds from sales of mortgage loans 4,434 15,722
Loans originated for sale (4,523) (15,723)
Changes in operating assets and liabilities:
Accrued interest receivable 16 31
Prepaid expenses and other assets 326 209
Accrued interest payable 86 104
Accrued income taxes payable 82 6
Other accrued liabilities (304) (106)
----- -----
----- -----
Net cash provided by operating activities 1,287 1,622
----- -----
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
with financial institutions 4,829 (1,858)
Proceeds from sales of Federal Home Loan Bank stock 18 309
Proceeds from maturities of held to maturity
securities - - 1,700
Purchase of held to maturity securities (500) (2,098)
Purchase of mortgage-backed securities - - (1,000)
Principal collected on held to maturity securities 500 - -
Principal collected on mortgage-backed securities 764 1,810
Net (increase) decrease in loans (1,048) 1,637
Purchase of office properties and equipment (9) (59)
----- -----
Net cash provided by investing activities 4,554 441
----- -----
See accompanying Notes to Consolidated Financial Statements
6
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
December 31,
1999 1998
---- ----
Cash flows from financing activities:
Net increase (decrease) in deposits (551) 2,019
Net increase in short-term borrowings 7,535 (2,279)
Net (decrease) in long-term borrowings (11,357) 209
Proceeds from exercise of stock options - - 8
Dividends paid (421) (412)
----- -----
Net cash (used in) financing activities (4,794) (455)
----- ----
Increase in cash and due from banks 1,047 1,608
Cash and due from banks at beginning 4,749 2,642
----- -----
Cash and due from banks at end $5,796 $4,250
===== =====
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $49 $190
Loans charged off 70 494
Interest Paid 2,577 2,984
Income taxes paid 393 388
See accompanying Notes to Consolidated Financial Statements
7
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with the accounting policies described in
the Bank's audited financial statements for the year ended March 31, 1999, and
should be read in conjunction with the financial statements and notes that
appear in that report. These statements do not include all the information and
disclosures required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered for a fair presentation have been included.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
RESULTS OF OPERATIONS OF NORTHWEST EQUITY CORP.
Comparison of Operating Results for the Three Months Ended
December 31, 1998 and December 31, 1999
Net Income
Net income for the three months ended December 31, 1999, increased
$133,000 or 89.2% to $282,000 from $149,000 for the three months ended December
31, 1998. The increase in net income was primarily due to a decrease of $296,000
in the provision for loan losses from $323,000 for the three months ended
December 31, 1998, to $27,000 for the three months ended December 31, 1999. The
decrease in the provision for loan losses reflects the settlement in the three
months ended December 31, 1998 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 through March 31, 1999. Net interest income increased
$74,000 from $949,000 for the three months ended December 31, 1998, to $875,000
for the three months ended December 31, 1999. Total other income decreased
$32,000 from $198,000 for the three months ended December 31, 1998, to $166,000
for the three months ended December 31, 1999. Total general and administrative
expense decreased $29,000 from $615,000 for the three months ended December 31,
1998, to $586,000 for the three months ended December 31, 1999. The decrease in
the provision for loan losses was offset by a increase in income taxes of
$86,000 from $60,000 for the three months ended December 31, 1998, to $146,000
for the three months ended December 31, 1999.
Net Interest Income
Net interest income decreased by $74,000 from $949,000 for the three
months ended December 31, 1998, to $875,000 for the three months ended December
31, 1999. The decrease in net interest income is a result of an decrease in
interest income of $201,000 to $1,756,000 for the three months ended December
31, 1999, from $1,957,000 for the three months ended December 31, 1998; combined
with a decrease in interest expense of $127,000 to $881,000 for the three months
ended December 31, 1999, from $1,008,000 for the three months ended December 31,
1998.
Interest Income
Interest income decreased $201,000 or 10.2% to $1,756,000 for the three
months ended December 31, 1999, from $1,957,000 for the three months ended
December 31, 1998. Interest and fees on loans decreased $172,000 to $1,591,000
for the three months ended December 31, 1999, from $1,763,000 for the three
months ended December 31, 1998. This decrease was due to the decrease in the
average outstanding balance of total loans to $75.9 million for the three months
ended December 31, 1999, from $79.1 million for the three months ended December
31, 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 0.53% from 8.92% for the three
months ended December 31, 1998, to 8.39% for the three months ended December 31,
1999. Interest on mortgage-backed securities decreased $17,000 to $90,000 for
the three months ended December 31, 1999, from $107,000 for the three months
ended December 31, 1998. This decrease was due to a decrease in the average
outstanding balance of mortgage backed securities from $6.2 million for the
three months ended December 31, 1998, to $5.4 million for the three months ended
December 31, 1999. The decrease was the result of regularly scheduled principle
payments and prepayments on the securities throughout the period. Interest on
investments decreased $12,000 to $75,000 for the three months ended December 31,
1999, from $87,000 for the three months ended December 31, 1998. The decrease
was due to an decrease in the average outstanding balances of interest-bearing
deposits in other financial institutions, investment securities, and Federal
Home Loan Bank ("FHLB") stock of $1.3 million from $6.2 million for the three
months ended December 31, 1998, to $4.9 million for the three months ended
December 31, 1999.
Interest Expense
Interest expense decreased $127,000 or 12.5% to $881,000 for the three
months ended December 31, 1999, from $1,008,000 for the three months ended
December 31, 1998. Interest on deposits decreased $87,000 or 12.3% from $704,000
9
<PAGE>
for the three months ended December 31, 1998, to $617,000 for the three months
ended December 31, 1999. The decrease in interest expense is due to a decrease
in the average yield of total deposits of 0.36% from 4.47% for the three months
ended December 31, 1998, to 4.11% for the three months ended December 31, 1999.
The average outstanding balance of total deposits decreased $2.9 million to
$60.1 million for the three months ended December 31, 1999, from $63.0 million
for the three months ended December 31, 1998. Interest on borrowings decreased
$40,000 or 13.1% from $304,000 for the three months ended December 31, 1998, to
$264,000 for the three months ended December 31, 1999. The decrease reflects a
decrease in the average outstanding balance of advances and other borrowings of
$3.1 million from $22.2 million for the three months ended December 31, 1998, to
$19.1 million for the three months ended December 31, 1999. The average
yield/rate of advances and other borrowings increased 0.05% from 5.48% for the
three months ended December 31, 1998, to 5.53% for the three months ended
December 31, 1999.
Provision for Loan Losses
The provision for loan losses decreased $296,000 from $323,000 for the
three months ended December 31, 1998, to $27,000 for the three months ended
December 31, 1999. The decrease in the provision for loan losses reflects the
settlement in the three months ended December 31, 1998 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 through March 31,
1999. The allowance for loan losses totaled $363,000 at December 31, 1999,
compared to $375,000 at December 31, 1998, and represented 0.48 % and 0.48% of
gross loans and 144.6% and 64.2% 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 was 0.33% at December
31, 1999, compared to 0.72% at December 31, 1998.
Other Income
Total other income decreased $32,000 or 16.2% to $166,000 for the three
months ended December 31, 1999, from $198,000 for the three months ended
December 31, 1998. The decrease results from a decrease in gain on sale of
mortgage loans of $66,000 to $13,000 for the three months ended December 31,
1999, from $79,000 for the three months ended December 31, 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. Other income increased $24,000 from
$31,000 for the three months ended December 31, 1998, to $55,000 for the three
months ended December 31, 1999. The other income increase was primarily due to
an increase of $27,000 in brokerage commissions from $18,000 for the three
months ended December 31,1998, to $45,000 for the three months ended December
31, 1999, in the Bank's subsidiary. Service charges on deposits increased $7,000
from $64,000 for the three months ended December 31, 1998, to $71,000 for the
three months ended December 31, 1999.
General and Administrative Expenses
General and administrative expenses decreased $29,000 or 4.71% to
$586,000 for the three months ended December 31, 1999, from $615,000 for the
three months ended December 31, 1998. The decrease was primarily due to a
decrease in data processing expenses of $22,000 to $36,000 for the three months
ended December 31, 1999 from $58,000 for the three months ended December 31,
1998. Of the decrease, $20,000 was a nonrecurring fee related to Year 2000
compliance testing by the Company's data center paid during the three months
ended December 31, 1998. Salaries and employee benefits decreased $3,000 from
$324,000 for the three months ended December 31, 1998, to $321,000 for the three
months ended December 31, 1999. Net occupancy expense decreased $4,000 from
$93,000 for the three months ended December 31, 1998, to $89,000 for the three
months ended December 31, 1999.
Income Tax Expense
Income tax expense increased $86,000 or 143% from $60,000 for the three
months ended December 31, 1998, to $146,000 for the three months ended December
31, 1999. The increase in income tax expense is the direct result of the
increase in income before taxes of $219,000 or 105% from $209,000 for the three
months ended December 31, 1998, to $428,000 for the three months ended December
31, 1999. The effective tax rate for the three months ended December 31, 1998,
was 28.7% and 34.1% for the three months ended December 31, 1999. An adjustment
for taxes was made due to the loss provision taken in the three months ended
December 31, 1998.
10
<PAGE>
Comparison of Operating Results for the Nine months Ended
December 31, 1998 and December 31, 1999
Net Income
Net income for the nine months ended December 31, 1999, increased
$109,000 or 13.9% to $890,000 from $781,000 for the nine months ended December
31, 1998. The increase in net income was primarily due to an decrease of
$324,000 in the provision for loan losses from $373,000 for the nine months
ended December 31, 1998, to $49,000 for the nine months ended December 31, 1999.
The decrease in the provision for loan losses reflects the settlement of the
case first reported under Part II, Item 1. Legal Proceedings in the Form 10 QSB
dated September 30, 1996, and in subsequent 10QSB and 10KSB reports through
March 31, 1999. Net interest income decreased $85,000 from $2,795,000 for the
nine months ended December 31, 1998, to $2,710,000 for the nine months ended
December 31, 1999. Total other income decreased $113,000 from $586,000 for the
nine months ended December 31, 1998, to $473,000 for the nine months ended
December 31, 1999. Total general and administrative expense decreased $64,000
from $1,833,000 for the nine months ended December 31, 1998, to $1,769,000 for
the nine months ended December 31, 1999. The decrease in the provision for loan
losses was partially offset by a increase in income taxes of $81,000 from
$394,000 for the nine months ended December 31, 1998, to $475,000 for the nine
months ended December 31, 1999.
Net Interest Income
Net interest income decreased $85,000 from $2,795,000 for the nine
months ended December 31, 1998, to $2,710,000 for the nine months ended December
31, 1999. The decrease in net interest income is a result of a decrease in
interest income of $510,000 to $5,373,000 for the nine months ended December 31,
1999, from $5,883,000 for the nine months ended December 31, 1998, combined with
a decrease in interest expense of $425,000 to $2,663,000 for the nine months
ended December 31, 1999, from $3,088,000 for the nine months ended December 31,
1998.
Interest Income
Interest income decreased $510,000 or 8.6% to $5,373,000 for the nine
months ended December 31, 1999, from $5,883,000 for the nine months ended
December 31, 1998. Interest and fees on loans decreased $474,000 to $4,814,000
for the nine months ended December 31, 1999, from $5,288,000 for the nine months
ended December 31, 1998. This decrease was due the decrease in the average
outstanding balance of total loans to $74.9 million for the nine months ended
December 31, 1999, from $79.3 million for the nine months ended December 31,
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 of total loans decreased 0.32% to 8.57%for the nine months
ended December 31, 1999, from 8.89% for the nine months ended December 31, 1998.
Interest on mortgage-backed and related securities decreased $51,000 to $281,000
for the nine months ended December 31, 1999, from $332,000 for the nine months
ended December 31, 1998. This decrease was due to a decrease in the average
outstanding balance of mortgage backed securities from $6.3 million for the nine
months ended December 31, 1998, to an average balance of $5.6 million for the
nine months ended December 31, 1999. The decrease was due to regularly scheduled
principal payments and prepayments of principal on the mortgage backed
securities. Interest on investments increased $15,000 to $278,000 for the nine
months ended December 31, 1999, from $263,000 for the nine months ended December
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 stock from $6.0 million for
the nine months ended December 31, 1998, to $6.4 million for the nine months
ended December 31, 1999.
Interest Expense
Interest expense decreased $425,000 or 13.7% to $2,663,000 for the nine
months ended December 31, 1999, from $3,088,000 for the nine months ended
December 31, 1998. Interest on deposits decreased $237,000 or 11.0% from
$2,136,000 for the nine months ended December 31, 1998, to $1,899,000 for the
nine months ended December 31, 1999. The decrease in interest expense is due to
a decrease in the average yield/rate of total deposits of 0.46% to 4.13% for the
nine months ended December 31, 1999, from an average yield/rate of 4.59% for the
nine months ended December 31, 1998. In addition, the average outstanding
balance of total deposits decreased $0.8 million to $61.3 million for the nine
months ended December 31, 1999 from $62.1 million for the nine months ended
11
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December 31, 1998. Interest on borrowings decreased $188,000 or 19.7% from
$952,000 for the nine months ended December 31, 1998, to $764,000 for the nine
months ended December 31, 1999. The decrease reflects a decrease in average
yield/rate of advances and other borrowings of 0.18% from 5.57% for the nine
months ended December 31, 1998, to 5.39% for the nine months ended December 31,
1999. In addition, the average outstanding balance of advances and other
borrowings decreased $3.9 million form $22.8 million for the nine months ended
December 31, 1998 to $18.9 million for the nine months ended December 31, 1999.
Provision for Loan Losses
The provision for loan losses decreased $324,000 to $49,000 for the
nine months ended December 31, 1999, from $373,000 for the nine months ended
December 31, 1998. The decrease in the provision for loan losses reflects the
settlement in the nine months ended December 31, 1998, of the case first
reported under Part II, Item 1. Legal Proceedings in the Form 10ASB dated
September 30, 1996, and in subsequent 10QSB and 10KSB reports through March 31,
1999. The allowance for loan losses totaled $363,000 at December 31, 1999,
compared to $375,000 at December 31, 1998, and represented 0.48 % and 0.48% of
gross loans and 144.6% and 64.2% 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 was 0.34% at December
31, 1999, compared to 0.72% at December 31, 1998.
Other Income
Total other income decreased $113,000 or 19.3% to $473,000 for the nine
months ended December 31, 1999, from $586,000 for the nine months ended December
31, 1998. The decrease is primarily due to a decrease of $125,000 in gain on
sale of mortgage loans to $51,000 for the nine months ended December 31, 1999,
from $176,000 for the nine months ended December 31, 1998. The decrease in gain
on sale of mortgage loans reflects the recent upward trend mortgage interest
rates during the current period that acts to reduce gains on sale of mortgages
sold in the secondary market. Other income decreased $20,000 from $150,000 for
the nine months ended December 31, 1998 to $130,000 for the nine months ended
December 31, 1999. The decrease in other income was partially 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 nine months ended December 31, 1999, from $50,000 for the nine
months ended December 31, 1998. The transaction consummated in the quarter
ending June 30, 1998 divested all of real estate holdings of the subsidiary. The
decrease in profit on sale of real estate was offset by an increase of $36,000
in brokerage fees in the Bank's subsidiary to $93,000 for the nine months ended
December 31, 1999, from $57,000 for the nine months ended December 31, 1998.
Service charges on deposits increased $20,000 from $192,000 for the nine months
ended December 31, 1998 to $212,000 for the nine months ended December 31, 1999.
The increase reflects an increase in the average outstanding balance of NOW
accounts of $0.6 million from $10.2 million for the nine months ended December
31, 1998 to $10.8 million for the nine months ended December 31, 1999.
General and Administrative Expenses
General and administrative expenses decreased $64,000 or 3.5% to $1,769,000
for the nine months ended December 31, 1999, from $1,833,000 for the nine months
ended December 31, 1998. The decrease was primarily due to a decrease of $61,000
in other expenses from $421,000 for the nine months ended December 31, 1998, to
$360,000 for the nine months ended December 31, 1999. Of the various components
of other expenses, printing and office supplies decreased $16,000; employee
expenses decreased $13,000; bank service charges decreased $11,000; and
organization dues and subscriptions decreased $9,000. The reductions in these
expenses were a direct result of the pending merger of the Bank into Bremer
Financial Corporation expected to be consummated in the first quarter of the
calendar year 2000. Salaries and employee benefits increased $26,000 from
$983,000 for the nine months ended December 31, 1998, to $1,009,000 for the nine
months ended December 31, 1999. The increase was due to cost of living
adjustments in employee salaries. Data processing expense decreased $23,000 from
$130,000 for the nine months ended December 31, 1998, to $107,000 for the nine
months ended December 31, 1999. Of the decrease, $20,000 was a nonrecurring fee
related to Year 2000 compliance testing by the Company's data center paid during
the nine months ended December 31, 1998.
Income Tax Expense
Income tax expense increased $81,000 or 20.6% from $394,000 for the
nine months ended December 31, 1998, to $475,000 for the nine months ended
December 31, 1999. The increase in income tax expense is the direct result of a
increase in income before taxes of $190,000 from $1,175,000 for the nine months
ended December 31, 1998, to $1,365,000 for the nine months ended December 31,
1999. The effective tax rate for the nine months ended December 31, 1998, was
12
<PAGE>
33.5% compared to 34.8% for the nine months ended December 31, 1999. An
adjustment for taxes was made due to the loss provision taken in the nine months
ended December 31, 1998.
Financial Condition
Total assets decreased $3.9 million or 3.99% to $93.7 million at
December 31, 1999, from $97.6 million at March 31, 1999. The decrease is
primarily due to the decrease in cash and interest-bearing deposits with
financial institutions of $3.8 million to $6.7 million at December 31, 1999,
from $10.5 million at March 31, 1999. Loans receivable increased $1.0 million
from $73.3 million at March 31, 1999, to $74.3 million at December 31, 1999. The
cash and interest-bearing deposits were used to reduce advances from the Federal
Home Loan Bank $2.9 million from $17.0 million at March 31, 1999, to $14.1
million at December 31, 1999; and to reduce other borrowed money $0.9 million
from $5.6 million at March 31, 1999, to $4.7 million at December 31, 1999.
Securities held-to-maturity decreased $0.7 million to $8.7 million at December
31, 1999, from $9.4 million March 31, 1999. Shareholders' equity increased
$590,000 from $12.4 million at March 31, 1999, to $13.0 million at December 31,
1999, as a result of net income for the nine months ended December 31, 1999,
less $421,000 in cash dividends and the amortization of the common stock
purchased by the employee stock ownership plan of $121,000.
Disclosures Involving Year 2000 Issues
Issues related to the century date change and the impact on computer
systems and business operations received prominent publicity and attention.
Depositors, business partners, investors, and the general public were said to be
specifically interested in the effect on the financial condition of each
depository institution. The FDIC advised state savings banks that safe and sound
banking practices required 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")
were said to be 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. This abbreviated date
mechanism within Systems was thought by regulators to threaten to disrupt the
function of computer software at nearly every business which relies heavily on
computer systems for accounting and other recordkeeping functions. If the
millennium issue were 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 failed to process the century date change, it may
have impaired the Bank's ability to process loan payments, accept deposits, and
address other operational issues. The Bank's customers, suppliers, other
constituents could have been impaired to meet their contractual obligations with
the Bank. The Bank experienced no system failures or miscalculations that
disrupted operations or impaired its ability to process business transactions in
January of the year 2000. The Bank has no knowledge of customers, suppliers, or
other constituents that have been impaired to meet their contractual obligations
with the bank.
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, at the latest available reporting date of 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.
13
<PAGE>
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 0.33% of total
assets at December 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 loan losses and had net
charge-offs of $485,000, $77,000, and $53,000, respectively. The Company's
allowance for loan losses at December 31, 1999, totaled $363,000. The allowance
for loan losses calculation is based on a three year actual loss average. Total
non-performing loans increased to $251,000 at December 31, 1999, from $238,000
at March 31, 1999
Selected Financial Ratios and Other Data: At or For the
Three months ended Nine months ended
December 31, December 31,
Performance Ratios 1999 1998 1999 1998
---- ---- ---- ----
Return on average assets 1.20% 0.60% 1.25% 1.06%
Return on average equity 8.79% 4.98% 9.40% 8.88%
14
<PAGE>
<TABLE>
MANAGEMENT'S DISCUSSION(CONT.)
<CAPTION>
Three Months Ended December 31,
1999 1998
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans............................$65,759 $1,347 8.20% $66,819 $1,481 8.87%
Commercial loans............................3,457 83 9.55% 4,585 94 8.21%
Consumer loans............................. 6,641 161 9.68% 7,676 188 9.81%
Total loans.............................75,857 1,591 8.39% 79,080 1,763 8.92%
Mortgage-backed securities........... 5,375 90 6.73% 6,228 107 6.99%
Interest-bearing deposits in other
financial institutions.....................738 10 5.23% 2,638 32 4.82%
Investment securities.......................3,399 50 5.96% 2,650 40 5.92%
Federal Home Loan Bank stock................. 769 15 7.50% 911 15 6.63%
Total interest-earning assets...........86,138 1,756 8.15% 91,507 1,957 8.55%
Non-interest earning assets................ 8,028 6,206
Total assets......................... $94,166 $97,713
Liabilities and Stockholders' Equity
Deposits:
NOW accounts(1)...........................$10,611 $34 1.30% $10,619 $34 1.30%
Money market deposit accounts...............7,392 78 4.21% 7,485 80 4.26%
Passbook....................................6,407 35 2.15% 6,281 34 2.15%
Certificate of deposit.................... 35,641 470 5.28% 38,654 556 5.75%
Total deposits..........................60,051 617 4.11% 63,039 704 4.47%
Advances and other borrowings................. 19,121 264 5.53% 22,166 304 5.48%
Total interest-bearing liabilities.........79,172.. 881 4.45% 85,205 1,008 4.73%
Non-interest bearing liabilities ...............2,168. 543
Equity.........................................12,826 11,965
Total liabilities and retained earnings.. $94,166 $97,713
Net interest income/interest rate spread (2) $875 3.70% $949 3.82%
Net earning assets/net interest margin (3).... $6,966 4.06% $6,302 4.15%
Average interest-earning assets to average
interest-bearing liabilities................ 1.09 1.07
<CAPTION>
Nine Months Ended December 31,
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............................$64,439 $4,041 8.36% $67,090 $4,432 8.81%
Commercial loans............................3,576 273 10.19% 4,425 279 8.41%
Consumer loans............................. 6,856 500 9.72% 7,811 577 9.85%
Total loans.............................74,871 4,814 8.57% 79,326 5,288 8.89%
Mortgage-backed securities................ 5,585 281 6.72% 6,299 332 7.02%
Interest-bearing deposits in other
financial institutions...................2,302 89 5.16% 2,219 86 5.17%
Investment securities.......................3,377 151 5.94% 2,800 129 6.16%
Federal Home Loan Bank stock................ 745 38 6.86% 966 48 6.16%
Total interest-earning assets...........86,880 5,373 8.25% 91,610 5,883 8.56%
Non-interest earning assets................ 7,756 6,013
Total assets.......................... $94,636 $97,623
Liabilities and Stockholders' Equity
Deposits:
NOW accounts(1)...........................$10,788 $104 1.29% $10,246 $106 1.38%
Money market deposit accounts...............7,501 233 4.14% 6,656 240 4.80%
Passbook....................................6,592 106 2.15% 6,177 100 2.16%
Certificate of deposit.................... 36,450 1,456 5.32% 39,029 1,690 5.77%
Total deposits..........................61,331 1,899 4.13% 62,108 2,136 4.59%
Advances and other borrowings................. 18,894 764 5.39% 22,772 952 5.57%
Total interest-bearing liabilities.........80,225 2,663 4.43% 84,880 3,088 4.85%
Non-interest bearing liabilities ...............1,782 1,017
Equity.........................................12,629 11,726
Total liabilities and retained earnings.. $94,636 $97,623
Net interest income/interest rate spread (2) $2,710 3.82% $2,795 3.71%
Net earning assets/net interest margin (3).... $6,655 4.16% $6,730 6.10%
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> 9-mos
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> MAR-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,796
<INT-BEARING-DEPOSITS> 892
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9,503
<INVESTMENTS-MARKET> 9,290
<LOANS> 74,578
<ALLOWANCE> 364
<TOTAL-ASSETS> 93,666
<DEPOSITS> 61,452
<SHORT-TERM> 15,683
<LIABILITIES-OTHER> 470
<LONG-TERM> 3,110
0
0
<COMMON> 1,033
<OTHER-SE> 11,918
<TOTAL-LIABILITIES-AND-EQUITY> 93,666
<INTEREST-LOAN> 4,814
<INTEREST-INVEST> 559
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,373
<INTEREST-DEPOSIT> 1,899
<INTEREST-EXPENSE> 2,663
<INTEREST-INCOME-NET> 2,661
<LOAN-LOSSES> 49
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,769
<INCOME-PRETAX> 1,365
<INCOME-PRE-EXTRAORDINARY> 890
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 890
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 3.82
<LOANS-NON> 251
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 797
<ALLOWANCE-OPEN> 375
<CHARGE-OFFS> 70
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 364
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
