-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WeppgJF4MTT6RQwnVGYnlbAiHtJ7oVLgJSHbfBOJvTFhn+ze23dwIFrahO0dk0rT HDQfDJMpKMv3bcbk+yyz6Q== 0000916527-99-000002.txt : 19990208 0000916527-99-000002.hdr.sgml : 19990208 ACCESSION NUMBER: 0000916527-99-000002 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST EQUITY CORP CENTRAL INDEX KEY: 0000916527 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 391772981 STATE OF INCORPORATION: WI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24606 FILM NUMBER: 99522103 BUSINESS ADDRESS: STREET 1: 234 KELLER AVE SOUTH CITY: AMERY STATE: WI ZIP: 54001 BUSINESS PHONE: 7152687105 MAIL ADDRESS: STREET 1: 234 S KELLER AVE STREET 2: PO BOX 46 CITY: AMERY STATE: WI ZIP: 54001 10QSB 1 QUARTERLY REPORT FOR NORTHWEST EQUITY CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 1998 Commission file number 0-24606 NORTHWEST EQUITY CORP. (exact name of small business issuer as specified in its charter) Wisconsin 39-1772981 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 234 Keller Avenue South Amery, Wisconsin 54001 (Address of principal executive offices) (Zip code) (715) 268-7105 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes __x__ No_____ (2) Yes __x__ No_____ The number of shares outstanding of the issuer's common stock, $1.00 par value per share, was 825,301 at December 31, 1998. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST EQUITY CORP. Dated:___02/03/99______________ By: ____/s/Brian L. Beadle___ (Brian L. Beadle, President Principal Executive Officer and Principal Financial and Accounting Officer) PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. Item 2. Management's Discussion and Analysis or Plan of Operation. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-k. a. No reports on Form 8-K were filed during the quarter for which this report was filed. 2 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS
December 31, 1998 March 31, (unaudited) 1998 ------------------------- Cash and cash equivalents: Cash and due from banks $4,250 $2,642 Interest-bearing deposits with financial institutions 5,263 3,405 ---------- ----------- Total cash and cash equivalents 9,513 6,047 Investment securities - held-to-maturity - fair value of $3,432 at December 31, 1998 and $2,999 at March 31, 1998 3,398 3,000 Mortgage backed securities - held to maturity - fair value of $5,718 at December 31, 1998 and $6,546 at March 31, 1998 5,588 6,398 Loans held for sale 143 142 Loans receivable - net 76,308 78,297 Foreclosed properties and properties subject to foreclosure 138 159 Investment in Federal Home Loan Bank stock - at cost - which approximates fair value 850 1,159 Premises and equipment 2,202 2,250 Accrued interest receivable 547 578 Prepaid expenses and other assets 500 709 ----------- ------------ TOTAL ASSETS $99,187 $98,739 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Savings accounts $64,297 $62,278 Advances from Federal Home Loan Bank 17,001 19,062 Other borrowed money 5,249 5,258 Accounts payable and accrued expenses 633 627 ----------- ------------ Total liabilities 87,180 87,225 ----------- ------------ Stockholders' equity Preferred stock - $1 par value; 2,000,000 shares authorized; none issued - - - - Common stock - $1 par value; 4,000,000 shares authorized; 1,032,517 shares issued; 825,301 shares outstanding 1,033 1,033 Additional paid-in capital 6,582 6,584 Less unearned restricted stock plan award - - (26) Less unearned Employee Stock Ownership Plan (297) (389) Less treasury stock - at cost (2,549) (2,557) Retained earnings - substantially restricted 7,238 6,869 ----------- ------------ Total stockholders' equity 12,007 11,514 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $99,187 $98,739 =========== ============ See accompanying Notes to Consolidated Financial Statements
3 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In Thousands except for per share amounts)
Three Months Ended Nine Months Ended December 31, December 31, 1998 1997 1998 1997 ------------- ----------- ----------- ------------ Interest income: Interest and fees on loans $1,763 $1,771 $5,288 $5,201 Interest on mortgage-backed securities 107 121 332 379 Interest and dividends on investments 87 67 263 221 ------------- ------------ ----------- ------------ Total interest income 1,957 1,959 5,883 5,801 ------------- ------------ ----------- ------------ Interest expense: Interest on deposits 704 733 2,136 2,179 Interest on borrowings 304 342 952 1,012 ------------- ------------ ----------- ------------ Total interest expense 1,008 1,075 3,088 3,191 ------------- ------------ ----------- ------------ Net interest income 949 884 2,795 2,610 Provision for loan losses 323 25 373 75 ------------- ------------ ----------- ------------ Net interest income after provision for loan losses 626 859 2,422 2,535 ------------- ------------ ----------- ------------ Other income: Mortgage servicing fees 24 18 68 57 Service charges on deposits 64 75 192 197 Gain(loss) on sale of investments - - - - - - (24) Gain on sale of mortgage loans 79 24 176 76 Other 31 18 150 92 ------------- ------------ ----------- ------------ Total other income 198 135 586 398 ------------- ------------ ----------- ------------ General and administrative expenses: Salaries and employee benefits 324 285 983 901 Net occupancy expense 93 87 271 250 Data processing 58 34 130 99 Federal insurance premiums 8 10 28 29 Other 132 144 421 424 ------------- ------------ ----------- ------------ Total general and administrative expense 615 560 1,833 1,703 ------------- ------------ ----------- ------------ Income before provision for income taxes 209 434 1,175 1,230 Provision for income taxes 60 149 394 437 ------------- ------------ ----------- ------------ Net income $149 $285 $781 $793 ============= ============ =========== ============ Basic earnings per share $0.19 $0.37 $1.00 $1.02 ============= ============ =========== ============ Diluted earnings per share $0.18 $0.35 $0.95 $0.97 ============= ============ =========== ============ See accompanying Notes to Consolidated Financial Statements
4 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In Thousands)
Unrealized Gain (Loss) Unearned Additional on Securities Unearned ESOP Common Paid-In Available Restricted Compen- Treasury Retained Stock Capital For Sale Stock sation Stock Earning Total --------------------------------------------------------------------------------- Nine Months Ended December 31, 1997 Balance - March 31, 1997 $1,033 $6,584 $(29) $(115) $(558) $(2,256) $6,200 $10,859 Net income - - - - - - - - - - - - 793 793 Adjustment of carrying value of securities available for sale, net of deferred taxes of $20 - - - - 29 - - - - - - - - 29 Amortization of unearned ESOP and restricted stock award - - - - - - 77 125 - - - - 202 Cash dividends - $.39 per share - - - - - - - - - - - - (327) (327) ------ ------- ------ -------- ------ -------- -------- ------ Balance - December 31, 1997 1,033 6,584 $ - (38) (433) (2,256) 6,666 11,556 ====== ======= ====== ======= ====== ======== ======= ======= Nine Months Ended December 31, 1998 Balance - March 31, 1998 1,033 6,584 - - (26) (389) (2,557) 6,869 11,514 Net income - - - - - - - - - - - - 781 781 Exercise of stock options - - (2) - - - - - - 8 - - 6 Amortization of unearned ESOP and restricted stock award - - - - - - 26 92 - - - - 118 Cash dividends - $.50 per share - - - - - - - - - - - - (412) (412) ------ ------ ------ ------- ------- -------- ------- ------- Balance - December 31, 1998 $1,033 $6,582 $ - $ - $(297) $(2,549) $7,238 $12,007 ====== ======= ====== ======= ======= ======== ======= ======= See accompanying Notes to Consolidated Financial Statements
5 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands)
Nine Months Ended December 31, 1998 1997 ----------- ------------ Cash flows from operating activities: Net income $781 $793 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation 107 111 Provision for loan losses 373 75 Loss on sale of investments - - 24 Deferred income taxes - - (20) Amortization of ESOP and restricted stock awards 118 202 Proceeds from sales of mortgage loans 15,722 3,682 Loans originated for sale (15,723) (3,513) Changes in operating assets and liabilities: Accrued interest receivable 31 20 Prepaid expenses and other assets 209 (226) Accrued interest payable 104 91 Accrued income taxes payable 6 (32) Other accrued liabilities (106) 45 ----------- ------------ Net cash provided by operating activities 1,622 1,252 ----------- ------------ Cash flows from investing activities: Available for sale securities: Proceeds from sales 309 2,536 Held to maturity securities: Proceeds from maturity 1,700 - - Purchases of investment securities (2,098) (3,038) Purchases of mortgage-backed securities (1,000) - - Principal collected on mortgage-backed securities 1,810 730 Principal collected on long-term loans 18,089 21,443 Long-term loans originated or acquired (16,452) (25,158) Purchase of office properties and equipment (59) (47) ----------- ------------ Net cash (used in) investing activities 2,299 (3,534) ----------- ------------ See accompanying Notes to Consolidated Financial Statements
6 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Nine Months Ended December 31, 1998 1997 ----------- ------------ Cash flows from financing activities: Net increase (decrease) in savings accounts 2,019 1,412 Net increase (decrease) in short-term borrowings (2,279) 4,196 Repayments of long-term financing (4,760) (7,894) Proceeds from long-term financing 4,969 5,966 Exercise of stock options 8 - - Dividends paid (412) (327) ----------- ------------ Net cash provided by (used in) financing activities (455) 3,353 ----------- ------------ Increase (decrease) in cash and equivalents 3,466 1,071 Cash and equivalents - beginning 6,047 2,980 ----------- ------------ Cash and equivalents - ending $9,513 $4,051 =========== ============ Supplemental disclosures of cash flow information: Loans receivable transferred to foreclosed properties and properties subject to foreclosure $190 $157 Loans charged off 494 71 Interet Paid 2,984 3,100 Income taxes paid 388 469 See accompanying Notes to Consolidated Financial Statements
7 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies: The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with the accounting policies described in the Bank's audited financial statements for the year ended March 31, 1998, and should be read in conjunction with the financial statements and notes that appear in that report. These statements do not include all the information and disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NORTHWEST EQUITY CORP. Comparison of Operating Results for the Three Months Ended December 31, 1997 and December 31, 1998 Net Income Net income for the three months ended December 31, 1998, decreased $136,000 or 47.7% to $149,000 compared to $285,000 for the three months ended December 31, 1997. The decrease in net income was primarily due to an increase of $298,000 in the provision for loan losses from $25,000 for the three months ended December 31, 1997, to $323,000 for the three months ended December 31, 1998. The increase in the provision for loan losses reflects the settlement of the case first reported under Part II, Item 1. Legal Proceedings in the Form 10QSB dated September 30, 1996, and in subsequent 10QSB and 10KSB reports. Net interest income increased $65,000 from $884,000 for the three months ended December 31, 1997, to $949,000 for the three months ended December 31, 1998. Total other income increased $63,000 from $135,000 for the three months ended December 31, 1997, to $198,000 for the three months ended December 31, 1998. Total general and administrative expense increased $55,000 from $560,000 for the three months ended December 31, 1997, to $615,000 for the three months ended December 31, 1998. The increase in the provision for loan losses was offset by a decrease in income taxes of $89,000 from $149,000 for the three months ended December 31, 1997, to $60,000 for the three months ended December 31, 1998. Net Interest Income Net interest income increased by $65,000 from $884,000 for the three months ended December 31, 1997, to $949,000 for the three months ended December 31, 1998. The increase in net interest income is a result of an decrease in interest income of $2,000 to $1,957,000 for the three months ended December 31, 1998, compared to $1,959,000 for the three months ended December 31, 1997; combined with a decrease in interest expense of $67,000 to $1,008,000 for the three months ended December 31, 1998, from $1,075,000 for the three months ended December 31, 1997. Interest Income Interest income decreased $2,000 or 0.1% to $1,957,000 for the three months ended December 31, 1998, compared to $1,959,000 for the three months ended December 31, 1997. Interest and fees on loans decreased $8,000 to $1,763,000 for the three months ended December 31, 1998, compared to $1,771,000 for the three months ended December 31, 1997. This decrease was due to the decrease in the average outstanding balance of total loans to $79.1 million for the three months ended December 31, 1998, compared to $81.0 million for the three months ended December 31, 1997. Interest on mortgage-backed securities decreased $14,000 to $107,000 for the three months ended December 31, 1998, from $121,000 for the three months ended December 31, 1997. This decrease was due to a decrease in the average outstanding balance of mortgage backed securities from $6.8 million for the three months ended December 31, 1997, to an average outstanding balance of $6.2 million for the three months ended December 31, 1998. Interest on investments increased $20,000 to $87,000 for the three months ended December 31, 1998, compared to $67,000 for the three months ended December 31, 1997. The increase was due to an increase in the average outstanding balances of interest-bearing deposits in other financial institutions, investment securities, and Federal Home Loan Bank ("FHLB") stock of $1.8 million from $4.4 million for the three months ended December 31, 1997, to $6.2 million for the three months ended December 31, 1998. 9 MANAGEMENT'S DISCUSSION (CONT.) Interest Expense Interest expense decreased $67,000 or 6.2% to $1,008,000 for the three months ended December 31, 1998, compared to $1,075,000 for the three months ended December 31, 1997. Interest on deposits decreased $29,000 or 3.9% from $733,000 for the three months ended December 31, 1997, to $704,000 for the three months ended December 31, 1998. The decrease in interest expense is due to a decrease in the average yield of total deposits of 0.18% from 4.65% for the three months ended December 31, 1997, to 4.47% for the three months ended December 31, 1998. The average outstanding balance of total deposits remained virtually unchanged at $63.0 million for the three months ended December 31, 1998, and $63.1 million for the three months ended December 31, 1997. Interest on borrowings decreased $38,000 or 11.1% from $342,000 for the three months ended December 31, 1997, to $304,000 for the three months ended December 31, 1998. The decrease reflects the decrease in the average yield/rate of advances and other borrowings of 0.52% from 6.00% for the three months ended December 31, 1997, to 5.48% for the three months ended December 31, 1998. The average outstanding balance of advances and other borrowings decreased $0.8 million from $23.0 million for the three months ended December 31, 1997, to $22.2 million for the three months ended December 31, 1998. Provision for Loan Losses The provision for loan losses increased $298,000 from $25,000 for the three months ended December 31, 1997, to $323,000 for the three months ended December 31, 1998. The increase provides for the settlement of the case reported in the Legal Proceedings and Provision for Loan Losses sections of 10QSB and 10KSB reports since September 30, 1996. The allowance for loan losses totaled $375,000 at December 31, 1998, compared to $474,000 at December 31, 1997, and represented 0.48 % and 0.59% of gross loans and 64.2% and 40.6% of non-performing loans, respectively. The allowance for loan losses calculation is based on a three year actual loss average, and the current allowance calculation incorporates the effect of the loan provided for in the provision for loan losses mentioned above. The non-performing assets to total assets ratio was 0.72% at December 31, 1998, compared to 1.44% at December 31, 1997. Other Income Total other income increased $63,000 or 46.7% to $198,000 for the three months ended December 31, 1998, compared to $135,000 for the three months ended December 31, 1997. The increase results from an increase in gain on sale of mortgage loans of $55,000 to $79,000 for the three months ended December 31, 1998, from $24,000 for the three months ended December 31, 1997. The increase in gain on sale of mortgage loans is due to the general decline of mortgage interest rates over the two comparable periods, which enhances the bank's ability to generate gains on sale of mortgages. Other income increased $13,000 from $18,000 for the three months ended December 31, 1997, to $31,000 for the three months ended December 31, 1998. The other income increase was primarily due to an increase of $5,000 in brokerage commissions from $11,000 for the three months ended December 31,1997, to $16,000 for the three months ended December 31, 1998, in the Bank's subsidiary. General and Administrative Expenses General and administrative expenses increased $55,000 or 9.8% to $615,000 for the three months ended December 31, 1998, compared to $560,000 for the three months ended December 31, 1997. The increase was primarily due to an increase of $39,000 in salaries and employee benefits from $285,000 for the three months ended December 31, 1997, to $324,000 for the three months ended December 31, 1998. The increase was due to adjustments in employee salaries in response to intense wage competition for employees in the market place. The increase in expenses was also partially due to an increase in data processing expense of $24,000 from $34,000 for the three months ended December 31, 1997, to $58,000 for the three months ended December 31, 1998. Of the increase, $20,000 was related to Year 2000 compliance testing 10 MANAGEMENT'S DISCUSSION (CONT.) by the Company's data center. Net occupancy expense increased $6,000 from $87,000 for the three months ended December 31, 1997, to $93,000 for the three months ended December 31, 1998. The increase was due to some extraordinary repairs and maintenance expense items. Income Tax Expense Income tax expense decreased $89,000 or 59.7% from $149,000 for the three months ended December 31, 1997, to $60,000 for the three months ended December 31, 1998. The decrease in income tax expense is the direct result of the decrease in income before taxes of $225,000 or 51.8% from $434,000 for the three months ended December 31, 1997, to $209,000 for the three months ended December 31, 1998. The effective tax rate for the three months ended December 31, 1997, was 34.3% compared to 28.7% for the three months ended December 31, 1998. An adjustment for taxes was made due to the loss provision taken in the three months ended December 31, 1998. The effective rate for the nine months ended December 31, 1998, is 33.5% and is consistent with the 35.5% recorded for the nine months ended December 31, 1997. Comparison of Operating Results for the Nine months Ended December 31, 1997 and December 31, 1998 Net Income Net income for the nine months ended December 31, 1998, decreased $12,000 or 1.5% to $781,000 from $793,000 for the nine months ended December 31, 1997. The decrease in net income was primarily due to an increase of $298,000 in the provision for loan losses from $75,000 for the nine months ended December 31, 1997, to $373,000 for the nine months ended December 31, 1998. The increase in the provision for loan losses reflects the settlement of the case first reported under Part II, Item 1. Legal Proceedings in the Form 10 QSB dated September 30, 1996, and in subsequent 10QSB and 10KSB reports. Net interest income increased $185,000 from $2,610,000 for the nine months ended December 31, 1997, to $2,795,000 for the nine months ended December 31, 1998. Total other income increased $188,000 from $398,000 for the nine months ended December 31, 1997, to $586,000 for the nine months ended December 31, 1998. Total general and administrative expense increased $130,000 from $1,703,000 for the nine months ended December 31, 1997, to $1,833,000 for the nine months ended December 31, 1998. The increase in the provision for loan losses was partially offset by a decrease in income taxes of $43,000 from $437,000 for the nine months ended December 31, 1997, to $394,000 for the nine months ended December 31, 1998. Net Interest Income Net interest income increased $185,000 from $2,610,000 for the nine months ended December 31, 1997, to $2,795,000 for the nine months ended December 31, 1998. The increase in net interest income is a result of an increase in interest income of $82,000 to $5,883,000 for the nine months ended December 31, 1998, compared to $5,801,000 for the nine months ended December 31, 1997, combined with a decrease in interest expense of $103,000 to $3,088,000 for the nine months ended December 31, 1998, from $3,191,000 for the nine months ended December 31, 1997. 11 MANAGEMENT'S DISCUSSION (CONT.) Interest Income Interest income increased $82,000 or a 1.4% to $5,883,000 for the nine months ended December 31, 1998, compared from $5,801,000 for the nine months ended December 31, 1997. Of the increase, $87,000 was due to an increase in interest and fees on loans to $5,288,000 for the nine months ended December 31, 1998, compared to $5,201,000 for the nine months ended December 31, 1997. This increase was due to the increase in the average yield/rate of total loans to 8.89%for the nine months ended December 31, 1998, from 8.77% for the nine months ended December 31, 1997. Interest on investments increased $42,000 to $263,000 for the nine months ended December 31, 1998, compared to $221,000 for the nine months ended December 31, 1997. The increase was due to an increase in the average outstanding balances of interest-bearing deposits in other financial institutions, securities held for sale, and Federal Home Loan Bank stock from $5.0 million for the nine months ended December 31, 1997, to $6.0 million for the nine months ended December 31, 1998. These increases were offset by a decrease of $47,000 in interest on mortgage-backed and related securities to $332,000 for the nine months ended December 31, 1998, from $379,000 for the nine months ended December 31, 1997. This decrease was due to a decrease in the average outstanding balance of mortgage backed securities from $7.1 million for the nine months ended December 31, 1997, to an average balance of $6.3 million for the nine months ended December 31, 1998. The decrease was due to regularly scheduled principal payments and prepayments of principal on the mortgage backed securities. Interest Expense Interest expense decreased $103,000 or 3.2% to $3,088,000 for the nine months ended December 31, 1998, compared to $3,191,000 for the nine months ended December 31, 1997. Interest on deposits decreased $43,000 or 1.9% from $2,179,000 for the nine months ended December 31, 1997, to $2,136,000 for the nine months ended December 31, 1998. The decrease is due to a decrease in the average yield/rate of total deposits to 4.59% for the nine months ended December 31, 1998, from an average yield/rate of 4.66% for the nine months ended December 31, 1997. Interest on borrowings decreased $60,000 or 5.9% from $1,012,000 for the nine months ended December 31, 1997, to $952,000 for the nine months ended December 31, 1998. The decrease reflects a decrease in average yield/rate of advances and other borrowings from 6.01% for the nine months ended December 31, 1997, to 5.57% for the nine months ended December 31, 1998. Provision for Loan Losses The provision for loan losses increased $298,000 to $373,000 for the nine months ended December 31, 1998, compared to $75,000 for the nine months ended December 31, 1997. The increase provides for the settlement of the case reported in the Legal Proceedings and Provision for Loan Losses sections of 10QSB and 10KSB reports since September 30, 1996. The allowance for loan losses totaled $375,000 at December 31, 1998, compared to $474,000 at December 31, 1997, and represented 0.48 % and 0.59% of gross loans and 64.2% and 40.6% of non-performing loans, respectively. The allowance for loan losses calculation is based on a three year actual loss average, and the current allowance calculation incorporates the effect of the loan provided for in the provision for loan losses mentioned above. The non-performing assets to total assets ratio was 0.72% at December 31, 1998, compared to 1.44% at December 31, 1997. Other Income Total other income increased $188,000 or 47.2% to $586,000 for the nine months ended December 31, 1998, compared to $398,000 for the nine months ended December 31, 1997. The increase is due to an increase in gain on sale of mortgage loans of $100,000 to $176,000 for the nine months ended December 31, 1998, from $76,000 for the nine months ended December 31, 1997. The increase in gain on sale of mortgage loans is due to the general decline of mortgage interest rates over the two comparable periods which enhances the bank's ability to generate gains on sale of mortgages. Other income increased $58,000 12 MANAGEMENT'S DISCUSSION (CONT.) from $92,000 for the nine months ended December 31, 1997, to $150,000 for the nine months ended December 31, 1998. The increase is partially due to an increase of $22,000 in brokerage commissions in the bank's subsidiary to $55,000 for the nine months ended December 31, 1998, from $33,000 for the nine months ended December 31, 1997; and an increase of $39,000 in the profit on sale of real estate held in the Bank's subsidiary to $50,000 for the nine months ended December 31, 1998, compared to $11,000 for the nine months ended December 31, 1997. With the transaction consummated in the quarter ending June 30, 1998, the Bank's subsidiary divested all of its real estate holdings. General and Administrative Expenses General and administrative expenses increased $130,000 or 7.6% to $1,833,000 for the nine months ended December 31, 1998, compared to $1,703,000 for the nine months ended December 31, 1997. The increase was primarily due to an increase of $82,000 in salaries and employee benefits from $901,000 for the nine months ended December 31, 1997, to $983,000 for the nine months ended December 31, 1998. The increase was due to adjustments in employee salaries in response to intense wage competition for employees in the marketplace. Net occupancy expense increased $21,000 from $250,000 for the nine months ended December 31, 1997, to $271,000 for the nine months ended December 31, 1998, and reflects some extraordinary maintenance items occurring during the current period. Data processing expenses increased $31,000 from $99,000 for the nine months ended December 31, 1997, to $130,000 for the nine months ended December 31, 1998. The increase was due to a scheduled contractual increase in the fee based on transaction volumes and a $20,000 fee for testing the data processing system for Year 2000 compliance. Income Tax Expense Income tax expense decreased $43,000 or 9.8% from $437,000 for the nine months ended December 31, 1997, to $394,000 for the nine months ended December 31, 1998. The decrease in income tax expense is the direct result of a decrease in income before taxes of $55,000 from $1,230,000 for the nine months ended December 31, 1997, to $1,175,000 for the nine months ended December 31, 1998. The effective tax rate for the nine months ended December 31, 1997, was 35.5% compared to 33.5% for the nine months ended December 31, 1998. Financial Condition Total assets increased $0.5 million or 0.5% to $99.2 million at December 31, 1998, compared to $98.7 million at March 31, 1998. The increase was due to an increase of $3.5 million in cash and cash equivalents to $9.5 million at December 31, 1998, from $6.0 million at March 31, 1998, that was offset by a decrease in loans receivable of $2.0 million to $76.3 million at December 31, 1998, compared to $78.3 million at March 31, 1998. Mortgage backed and related securities decreased $0.8 million from $6.4 million on March 31, 1998, to $5.6 million at December 31, 1998, as the result of regularly amortized principal repayments and prepayments on the securities. Investment securities increased $0.4 million from $3.0 million at March 31, 1998, to $3.4 million at December 31, 1998. Total liabilities remained at $87.2 million at December 31, 1998, and March 31, 1998. Savings accounts increased $2.0 million or 3.2% from $62.3million at March 31, 1998, to $64.3 million at December 31, 1998. Outstanding advances from the Federal Home Loan Bank decreased $2.1 million from $19.1 million at March 31, 1998 to $17.0 million at December 31, 1998. The increase in savings was used to repay Federal Home Loan Bank advances. Other borrowed money increased $0.1million from $5.3 million at March 31, 1998, to $5.2 million at December 31, 1998. Shareholders Equity increased $0.5 million from $11.5 million at March 31, 1998, to $12.0 million at December 31, 1998. The increase was due to $781,000 of net income for the nine months ended December 31, 1998, less $412,000 in cash dividends; the amortization of the common stock purchased by 13 MANAGEMENT'S DISCUSSION (CONT.) the employee stock ownership plan of $92,000 from ($389,000) on March 31, 1998 to ($297,000) on December 31, 1998; and the amortization of the unearned restricted stock plan award of $26,000 from ($26,000) at March 31, 1998, to ($0) at December 31, 1998. Disclosures Involving Year 2000 Issues Issues related to the century date change and the impact on computer systems and business operations are receiving prominent publicity and attention. Depositors, business partners, investors, and the general public are specifically interested in the effect on the financial condition of each depository institution. The FDIC has advised state savings banks that safe and sound banking practices require them to address Year 2000 issues. The Securities and Exchange Commission (SEC) issued a revised Staff Legal Bulletin NO. 5 to provide specific guidance on disclosure associated with Year 2000 obligations for companies registered under federal securities laws. Computer programs generally abbreviated dates by eliminating the century digits of the year. Many resources, such as software; hardware; telephones; voicemail; heating; ventilating and air conditioning; alarms, etc. ("Systems") are affected. These Systems were designed to assume a century value of "19" to save memory and disk space within their programs. In addition, many Systems use a value of "99" in a year or "99/99/99" in a date to indicate "no date" or "any date" or even a default expiration date. As the year 2000 approaches, this abbreviated date mechanism within Systems threatens to disrupt the function of computer software at nearly every business which relies heavily on computer systems for account and other recordkeeping functions. If the millennium issue is ignored, system failures or miscalculations could occur, causing disruptions of operations and a temporary inability to process business transactions. The Bank has an inventory of personal computers that access a data processing system provided by EDS in Des Moines, Iowa. If the personal computers and data processing systems fail to process the century date change, it may impair the Bank's ability to process loan payments, accept deposits, and address other operational issues. The Bank's customers, suppliers, other constituents may also be impaired to meet their contractual obligations with the Bank. The Bank has developed a Year 2000 Plan (the "Plan"). The Bank's Plan attempts to identify the systems, assess the risk, and conduct inventories as necessary to assure compliance with the Plan. The Plan calls for identifying all systems in need of remediation by June 30, 1999, and remedying all systems in need of remediation by September 30, 1999. As of December 31, 1998, the Bank estimates it will have to purchase hardware and equipment in the amount of $17,000 (pre-tax) to address the Y2K issues. The expenditures would be amortized over a 5 year period, and would add approximately $3,400 in furniture and fixture expense per year for the next 5 years. In addition, the Bank paid in the quarter ended December 31, 1998, a one-time fee of $20,000 by EDS to support the FFIEC's testing guidance regarding Year 2000 efforts of financial institutions as outlined in the April 10, 1998, Interagency Statement. These amounts are not considered to be material. On February 24, 1998, the FDIC conducted an on-site visitation of the Bank's Year 2000 process. The examiner followed guidelines and recommendations contained in the FFIEC Interagency Statement on Year 2000 Project Management Awareness, dated May 5, 1997, and subsequent publications. In a letter dated March 17, 1998, the FDIC stated that the Bank's Year 2000 Committee is adequately monitoring Year 2000 compliance. In a letter dated September 8, 1998, The FDIC reported to the Board of Directors that the Federal Reserve Bank of Dallas had conducted an examination of Electronic Data Systems, Inc.,(EDS) Plano, Texas, the Bank's data processor. The Board of Directors reviewed the Exam at its September 18, 1998, meeting and the record of this action was entered into the minutes. The results of the examination are deemed to be confidential by the FDIC. On October 9, 1998, the Bank received an extensive Y2k Contingency Plan from EDS. In a letter dated December 1, 1998, EDS reported that the overall product line remediation was now 99% complete. 14 MANAGEMENT'S DISCUSSION (CONT.) Asset/Liability Management Asset/liability management is an ongoing process of matching asset and liability maturities to reduce interest rate risk. Management attempts to control this risk through pricing of assets and liabilities and maintaining specific levels of maturities. In recent periods, management's strategy has been to (1) sell substantially all new originations of long-term, fixed-rate single family mortgage loans in the secondary market, (2) invest in various adjustable-rate and short-term mortgage-backed and related securities, (3) invest in adjustable-rate, single family mortgage loans, and (4) encourage medium and longer-term certificates of deposit. The Company's estimated cumulative one-year gap between assets and liabilities was a negative 7.8% of total assets, at December 31, 1998. A negative gap occurs when a greater dollar amount of interest-earning liabilities than interest-bearing assets are repricing or maturing during a given time period. During periods of rising interest rates, a negative interest rate sensitivity gap will tend to negatively affect net interest income. During periods of decreasing interest rates, a negative interest rate sensitivity gap will tend to positively affect the net interest income. Management believes that its asset/liability management strategies have reduced the potential effects of changes in interest rates on its operations. Increases in interest rates may increase net interest income because interest-earning assets will reprice more quickly than interest-bearing liabilities. The Company's analysis of the maturity and repricing of assets and liabilities incorporates certain assumptions concerning the amortization and prepayment of such assets and liabilities. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. Management Strategy Asset Quality The Company emphasizes high asset quality in both its investment portfolio and lending activities. Non-performing assets have ranged between .0.72% and 1.72% of total assets during the last three years and were 0.72% of total assets at December 31, 1998. During the fiscal years ended March 31, 1998, 1997 and 1996, the Company recorded provisions for loan losses of $100,000, $81,000, and $24,000, respectively, to its allowance for loan losses and had net charge-offs of $77,000, $53,000, and $25,000, respectively. The Company's allowance for loan losses at December 31, 1998, totaled $375,000. The allowance for loan losses calculation is based on a three year actual loss average, and the current allowance calculation incorporates the effect of the loan provided for in the provision for loan losses mentioned in Provision for Loan Losses sections of this document. Total non-performing loans decreased to $584,000 at December 31, 1998, from $1.4 million at March 31, 1998. The decrease was due to the settlement of the case reported under the Provision for Loan Losses sections of this document and the payoff of another large loan categorized as real estate in judgement. Selected Financial Ratios and Other Data: At or For the Three months ended Nine months ended December 31, December 31, Performance Ratios 1998 1997 1998 1997 ---- ---- ---- ---- Return on average assets 0.60% 1.06% 1.06% 1.09% Return on average equity 4.98% 9.17% 8.88% 9.53% 15 MANAGEMENT'S DISCUSSION Three Months Ended December 31, 1998 1997 Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate
Assets Interest-earning assets: Mortgage loans....................... $66,819 $1,481 8.87% $68,216 $1,473 8.64% Commercial loans..................... 4,585 94 8.21% 4,826 101 8.34% Consumer loans....................... 7,676 188 9.81% 7,935 197 9.94% -------- ------- ------- -------- ------- ------- Total loans......................... 79,080 1,763 8.92% 80,977 1,771 8.75% Mortgage-backed securities........... 6,228 107 6.99% 6,816 121 7.09% Interest-bearing deposits in other financial institutions............. 2,638 32 4.82% 313 4 5.67% Investment securities................ 2,650 40 5.92% 3,145 49 6.17% Federal Home Loan Bank stock......... 911 15 6.63% 965 14 6.75% -------- ------- ------- -------- ------- ------- Total interest-earning assets....... 91,507 1,957 8.55% 92,216 1,959 8.50% Non-interest earning assets.......... 6,206 5,836 -------- -------- Total assets....................... $97,713 $98,052 -------- -------- -------- -------- Liabilities and Stockholders' Equity Deposits: NOW accounts(1)...................... $10,619 $34 1.30% $9,695 $36 1.46% Money market deposit accounts........ 7,485 80 4.26% 5,847 69 4.74% Passbook............................. 6,281 34 2.15% 6,034 32 2.11% Certificate of deposit............... 38,654 556 5.75% 41,491 596 5.75% -------- ------- ------- -------- ------- ------- Total deposits...................... 63,039 704 4.47% 63,067 733 4.65% Advances and other borrowings........ 22,166 304 5.48% 22,956 342 6.00% -------- ------- ------- -------- ------- ------- Total interest-bearing liabilities... 85,205 1,008 4.73% 86,023 1,076 5.00% Non-interest bearing liabilities .... 543 647 Equity............................... 11,965 11,381 -------- -------- Total liabilities and retained earnings $97,713 $98,052 -------- -------- -------- -------- Net interest income/interest rate spread (2) $949 3.82% $883 3.49% ------- ------- ------- ------- ------- ------- ------- ------- Net earning assets/net interest margin (3) $6,302 4.15% $6,193 3.83% -------- ------- -------- ------- -------- ------- -------- ------- Average interest-earning assets to average interest-bearing liabilities......... 1.07 1.07 -------- -------- -------- -------- Nine Months Ended December 31, 1998 1997 Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Assets Interest-earning assets: Mortgage loans......................... $67,090 $4,432 8.81% $66,729 $4,357 8.71% Commercial loans....................... 4,425 279 8.41% 4,751 279 7.82% Consumer loans......................... 7,811 577 9.85% 7,577 565 9.95% -------- -------- ------- -------- ------- ------- Total loans.......................... 79,326 5,288 8.89% 79,056 5,201 8.77% Mortgage-backed securities............. 6,299 332 7.02% 7,066 379 7.15% Interest-bearing deposits in other financial institutions................ 2,219 86 5.17% 876 36 5.53% Investment securities.................. 2,800 129 6.16% 3,213 138 5.71% Federal Home Loan Bank stock........... 966 48 6.64% 930 47 6.75% -------- -------- ------- -------- ------- ------- Total interest-earning assets........ 91,609 5,883 8.56% 91,141 5,801 8.49% Non-interest earning assets............ 6,013 5,428 -------- -------- Total assets......................... $97,623 $96,569 -------- -------- -------- -------- Liabilities and Stockholders' Equity Deposits: NOW accounts(1)....................... $10,246 $106 1.38% $9,446 $105 1.48% Money market deposit accounts......... 6,656 240 4.80% 5,434 189 4.65% Passbook.............................. 6,177 100 2.16% 6,037 97 2.15% Certificate of deposit................ 39,029 1,690 5.77% 41,470 1,787 5.75% -------- ------- ------- -------- ------- ------- Total deposits....................... 62,108 2,136 4.59% 62,386 2,179 4.66% Advances and other borrowings.......... 22,772 952 5.57% 22,489 1,012 6.01% -------- ------- ------- -------- ------- ------- Total interest-bearing liabilities... 84,880 3,088 4.85% 84,876 3,191 5.01% Non-interest bearing liabilities ...... 1,017 599 Equity................................. 11,726 11,093 -------- -------- Total liabilities and retained earnings $97,623 $96,569 -------- -------- -------- -------- Net interest income/interest rate spread (2) $2,795 3.71% $2,610 3.47% ------- ------- ------- ------ ------- ------- ------- ------ Net earning assets/net interest margin (3) $6,729 4.07% $6,265 3.82% -------- ------- -------- ------ -------- ------- -------- ------ Average interest-earning assets to average interest-bearing liabilities........... 1.08 1.07 -------- -------- -------- -------- ________________________ (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.
16 EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULES TO 10Q
9 1,000 9-MOS Mar-31-1999 DEC-31-1998 4,250 5,263 0 0 0 8,986 9,150 76,451 375 99,187 64,297 8,560 633 13,690 0 0 1,033 10,974 99,187 5,288 595 0 5,883 2,136 3,088 2,795 373 0 1,833 1,175 781 0 0 781 1.00 .95 3.71 577 7 0 917 857 495 13 375 0 0 0
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