-----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, QauYs6RVY2iyflmh/MlPyfrsL2wq8rud2I+NoDHmIASwAL6i+SMWGvGjN+kWRipm +tRpZG1JRXBvn9SGmOAMtA== 0000916527-99-000009.txt : 19990629 0000916527-99-000009.hdr.sgml : 19990629 ACCESSION NUMBER: 0000916527-99-000009 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990628 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-24606 FILM NUMBER: 99653025 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 10KSB40 1 ANNUAL REPORT FOR NORTHWEST EQUITY CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-KSB405 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 Commission file number 0-24606 NORTHWEST EQUITY CORP. (Exact name of small business issuer as specified in its charter) Wisconsin 39-1772981 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 234 Keller Avenue South Amery, Wisconsin 54001 (Address of principal executive offices) (Zip code) (715) 268-7105 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such report(s) and (2) has been subject to such filing requirements for the past 90 days. (1) Yes __x__ No_____ (2) Yes __x__ No_____ Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB405 or any amendment to this Form 10-KSB405. x State issuer's revenues for its most recent fiscal year: $8,517,000 (Total interest and dividend income and total non-interest income). As of May 31, 1999, there were issued and outstanding 825,301 shares of Common Stock of the Registrant. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the bid and asked price of such shares of Common Stock as of May 31, 1999, was $19 million. Solely for purposes of this calculation, all executive officers and directors of the Registrant are considered to be affiliates; also included as "affiliate shares" are certain shares held by various employee benefit plans in which the trustee are directors of the Registrant or are required to vote a portion of unallocated shares at the direction of executive officers or directors of the Registrant. The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE Parts II and IV of Form 10-KSB405: Portions of the Annual Report to Shareholders for the fiscal year ended March 31, 1999 are incorporated by reference into Parts II and IV hereof. Part III of Form 10-KSB405: Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. 1 PART I Forward-Looking Statements When used in this Annual Report on Form 10-KSB405 or future filings with the Securities and Exchange Commission, in quarterly reports or press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, various words or phrases are intended to identify "forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995. Such forward-looking statements include words and phrases such as "will likely result,' "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions and various other statements indicated herein with an asterisk after such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors could affect the Company's financial performance and could cause actual results for future periods to differ materially from those anticipated or projected. Such factors include, but are not limited to: (i) general market interest rates, (ii) general economic conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or composition of the Company's loan and investment portfolios, (vi) demand for loan products, (viii) competition, (ix) demand for financial services in the Company's markets, and (x) changes in accounting principles, policies or guidelines. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. ITEM 1. DESCRIPTION OF BUSINESS General Northwest Equity Corp., a Wisconsin corporation (the "Company" or the "Registrant"), is the holding company for Northwest Savings Bank, a Wisconsin chartered stock savings bank (the "Bank"). The Bank is regulated by the Wisconsin Department of Financial Institutions (the "DFI") and the Federal Deposit Insurance Corporation (the "FDIC"). The Company is regulated by the Federal Reserve Board ("FRB"). The Bank was organized in 1936, and has three full service offices located in Polk, St. Croix and Burnett Counties, Wisconsin. Because the Company's only significant business operations are that of the Bank, the business of the Bank is essentially the only business of the Company. The Bank is a community-oriented, full-service financial institution offering a variety of retail financial services to meet the needs of the communities it serves. The Company's principal business consists of attracting funds in the form of deposits and other borrowings and investing such funds, primarily in residential real estate loans, mortgage-backed securities, and various types of commercial and consumer loans. At March 31, 1999, the Company had total assets of $97.6 million, total deposits of $62.0 million, and shareholders' equity of $12.4 million. The Bank is a member of the FHLB-Chicago, which is one of the twelve regional banks that comprise the FHLB system. The Company's executive office is headquartered at 234 South Keller Avenue, Amery, Wisconsin 54001. Its telephone number at that address is 715-268-7105. Its E-mail address is (nwsbank@win.bright.net). The Company's primary sources of funds are deposits, repayments on loans and mortgage-backed and related securities, and, to a lesser extent, advances from the FHLB-Chicago. The Company's deposits totaled $62.0 million at March 31, 1999. The Company utilized these funds to invest primarily in one-to-four family residential loans and, to a lesser extent, consumer, commercial and other loans, and to invest in mortgage-backed securities and other investment securities. The Company's strategic business plan provides for investments in mortgage-backed securities in addition to its investments in United States Treasury and agency securities. Management believes this investment portfolio provides numerous benefits, including the ability to provide and maintain adequate regulatory liquidity levels, maintain a balance of high quality, diversified investments, and better manage the interest rate risk of the Company. At March 31, 1999, the Company's mortgage-backed securities totaled $6.0 million and the Company's investment securities totaled $3.4 million. 2 Market Area and Competition The Company offers a variety of deposit products, services and mortgage loans primarily in northwestern Wisconsin. The Company's main office is located at 234 South Keller Avenue, Amery, Wisconsin. The City of Amery is located approximately 40 miles northeast of Minneapolis and St. Paul, Minnesota. The Company, in addition to its Amery office, has two full-service branches. One is located in New Richmond and the other in Siren, Wisconsin. All of the Company's locations are in counties generally characterized as rural with a total population of approximately 100,000. The Company has significant competition in both its mortgage and consumer lending business, as well as in attracting deposits. The Company's primary competition for loans are principally from other savings banks, thrift institutions, mortgage banking companies, insurance companies and commercial banks. Its most direct competition for deposits historically has come from other savings banks, thrift institutions, commercial banks, and credit unions. The Company has faced additional competition for funds from a number of institutions, including the availability of short-term money market funds and other corporate and government securities funds offered by other financial service companies, such as brokerage firms and insurance companies. Lending Activities General The largest component of the Company's gross loan receivable of $73.9 million at March 31, 1999, was first mortgage loans secured by owner-occupied one-to-four family residences and totaled $54.2 million at March 31, 1999, or 73.4% of net loans receivable. Other real estate loans were $8.7 million or 11.8% of net loans receivable at March 31, 1999. Of net loans receivable, $59.7million or 80.8% were ARM loans. As part of its strategy to manage interest rate risk, the Company originates primarily ARM loans that have short and intermediate-term maturities for its own loan portfolio. 3 Composition of Loan Portfolio The following table sets forth the composition of the Company's loan portfolio, including loans held for sale, in dollar amounts and in percentages of the gross loan portfolio at the dates indicated.
At March 31, ------------------------------------------------------------------------------------ 1999 1998 1997 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Real estate loans: One-to-four family $54,223 73.38% $58,120 73.64% $55,581 71.14% Multi-family 627 0.85% 536 0.67% 931 1.19% Commercial 5,944 8.04% 5,261 6.67% 6,443 8.25% Construction and land 2,094 2.83% 2,785 3.53% 3,299 4.22% -------- -------- -------- -------- -------- -------- Total real estate loans 62,888 85.10% 66,702 84.51% 66,254 84.80% -------- -------- -------- -------- -------- -------- Consumer loans: Home equity - - - - - - Automobile 5,248 7.10% 5,706 7.23% 4,856 6.22% Credit card 265 0.36% 312 0.40% 304 0.39% Other consumer loans 1,596 2.16% 1,809 2.29% 2,047 2.62% -------- -------- -------- -------- -------- -------- Total consumer loans 7,109 9.62% 7,827 9.92% 7,207 9.23% -------- -------- --------- -------- -------- -------- Commercial loans 3,899 5.28% 4,397 5.57% 4,663 5.97% -------- -------- --------- -------- --------- -------- Gross loans receivable 73,896 100.00% 78,926 100.00% 78,124 100.00% -------- ======== -------- ======== --------- ======== Add: Accrued interest, net 456 492 448 Less: Loans in process - - - Deferred fees and discounts (31) (3) (8) Allowance for loan losses (375) (484) (461) --------- -------- -------- Total additions/deductions 50 5 (21) --------- -------- -------- Loans receivable, net $73,946 $78,931 $78,103 ========= ========= ==========
4 Loan Maturity The following table shows the contractual maturity of the Company's loan and mortgage-backed and related securities portfolio at March 31, 1999. Loans that have adjustable rates are shown as being due in the period during which the underlying contracts mature. Demand loans that have no schedule for repayment and no stated maturity are reported as due in one year or less. The table does not include estimated prepayments or scheduled principal amortization. (CONTRACTUAL MATURITY) At March 31, 1999 ------------------------------------------------------------------------------------------ Total Mortgage- One-to- Commercial Construction Backed and Four Multi- Real and Related Family Family Estate Land Commercial Consumer Securities Total ------ ------ ------ ---- ---------- -------- ---------- -----
Amounts due : Within one year $1,123 $ - $3 $1,573 $1,912 $765 $ - $5,376 -------- ----- ------- ------- -------- ------- -------- ------- After one year: One to three years 1,698 - 746 0 1,079 2,617 - 6,140 Three to five years 2,856 - 225 0 200 3,325 - 6,606 Five to ten years 4,182 - 1,694 0 708 311 995 7,890 Ten to twenty years 11,231 - 1,259 89 - 37 1,842 14,458 Over twenty years 32,102 627 2,017 432 - 54 3,200 39,432 -------- ----- ------- -------- -------- ------- ------- ------- Total due after one year 53,069 627 5,941 521 1,987 6,344 6,037 74,526 ======== ===== ======= ======== ======== ======= ======= ======= Total amounts due 54,192 627 5,944 2,094 3,899 7,109 6,037 79,902 ======== ===== ======= ======== ======== ======= ======= ======= Less: Allowance for loan losses (50) (1) (12) (2) (224) (86) - (375) -------- ----- ------ -------- -------- ------- ------- ------- Loans receivable and mortgage- backed securities, net $54,142 $626 $5,932 $2,092 $3,675 $7,023 $6,037 $79,527 ======== ===== ====== ======== ======== ======= ======= =======
5 The following table sets forth at March 31, 1999 the dollar amount of all loans and mortgage-backed and related securities due after March 31, 2000, such loans and whether such loans have fixed interest rates or adjustable interest rates. --------------------------------- Due After March 31, 2000 --------------------------------- --------------------------------- Fixed Adjustable Total --------------------------------- (In thousands) Mortgage loans: One-to-four family $4,991 $48,109 $53,100 Multi-family - 627 627 Commercial 1,299 4,642 5,941 Construction and land 26 495 521 ------- -------- -------- Total mortgage loans 6,316 53,873 60,189 Consumer loans 6,027 317 6,344 Comercial loans 795 1,192 1,987 ------- -------- -------- Gross loans receivable 13,138 55,382 68,520 Mortgage-backed securities 5,587 450 6,037 ------- -------- -------- Gross loans receivable and mortgage- backed and related securities $18,725 $55,832 $74,557 ======== ======== ======== 6 One-to-Four Family Mortgage Lending The Company's primary lending activity is the origination of first mortgage loans secured by one-to-four family, owner-occupied residences within the Company's primary lending area. The Company sells substantially all of its fixed rate mortgage loans it originates to government secondary market investors. Generally, loans sold to government secondary market investors are sold as whole loans with servicing retained. Substantially all of the ARM loans originated by the Company are retained in its loan portfolio. The Company follows Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines for its one-to-four family mortgage loans. The Company offers a variety of rates, fees, origination terms, and mortgage products. Mortgage loan originations are solicited from real estate brokers, builders, existing customers, community groups and residents of local communities located in the Company's primary market area through its loan origination staff. The Company also advertises its products through local newspapers, periodicals and radio. Upon receipt of a completed mortgage application from a prospective borrower, a credit report is ordered, an appraisal from an independent third party is obtained, income and other deposit information are verified, and, as necessary, additional financial information is requested. The Company requires title insurance or evidence of marketable title and lien position (consisting of an abstract and legal opinion) on all first mortgage loans. Borrowers must present evidence of appropriate hazard insurance and flood insurance (if applicable) prior to the closing. On loans with high loan to value ratios, borrowers are required to escrow funds on a monthly basis for real estate taxes, hazard insurance, and, in some cases, flood insurance. On those loans with no escrow requirement, the Company verifies payment of real estate taxes on a semi-annual basis and requires evidence from the borrower annually of hazard insurance and flood insurance. The lending policy of the Company restricts mortgage loan amounts to 80% of the lesser of the appraised value or purchase price of the real estate to be mortgaged to the Company. The Company makes mortgage loans in amounts up to 95% of the lesser of the appraised value or purchase price, subject to availability of private mortgage insurance insuring the amount in excess of 80% of the appraised value or purchase price. Exceptions to this policy are ARM loans, in which case the Company loans up to 90% of the appraised value or purchase price with the appropriate private mortgage insurance. In addition, the Company may make loans to its most creditworthy customers up to 90% of the appraised value without private mortgage insurance. The Company also currently offers a program for low to moderate income families to lend up to 90% of the appraised value of the property without private mortgage insurance, provided certain credit, property and cost criteria are met. The Company's underwriting department reviews all the pertinent information and makes a credit decision for approval or denial within established Company policy guidelines. Recommendations to deny applications based on underwriting considerations are reviewed by the Company's senior underwriter prior to a final disposition of the loan application. The Board of Directors and the Loan Committee review summaries of all one-to-four family mortgage loan applications on a monthly basis. Mortgage loans held in the Company's loan portfolio generally include due-on-sale clauses, which provide the Company with the contractual right to deem the loan immediately due and payable in the event the borrower transfers the ownership of the property without the Company's prior consent. The Company enforces the due-on-sale clauses of its mortgage loans. The Company makes loans under various governmental programs including the Wisconsin Housing and Economic Development Authority ("WHEDA"), the Federal Housing Administration, the Farmers Home Administration ("FHA") and the Federal Veterans Administration ("VA"). These programs generally have lower down payment and less restrictive qualification ratios. The WHEDA loans are serviced through WHEDA and originated for them, and the Federal Housing Administration, FHA and VA loans are sold in the secondary market with servicing retained. The Company offers one and three-year ARM loans. ARM loans currently adjust a maximum of two percentage points per year with a lifetime interest cap of six percentage points above the initial interest rate. Monthly payments of principal and interest are adjusted when the interest rate adjusts to maintain full amortization of the mortgage loan within the remaining term. The initial rates offered on ARM loans fluctuate with general interest rates changes and are determined by competitive conditions and the Company's yield requirements. The Company currently uses the one-year and three-year, Constant Maturity United States Treasury indexes to determine the interest rate payable upon the adjustment date of outstanding ARM loans. The Company also originates ARM loans with initial interest rates below the fully indexed rate by permitting the borrower to choose the number of percentage points the initial interest rate is below the fully indexed rate (up to two points) and pay origination points in a corresponding amount. Borrowers choosing these ARM loans can effectively lower the lifetime interest rate cap by decreasing the initial interest rate. ARM loans generally pose different risks than fixed rate loans. In a rising interest rate environment, the underlying ARM loan payment rises, increasing the potential for default, and the marketability of the underlying property may be adversely affected. In a decreasing interest rate environment, mortgagors tend to refinance to fixed rate loans. The Company's delinquency experience on its ARM loans generally has been satisfactory to date. 7 The Company has continued to generate a significant amount of adjustable rate loans. The Company's continued ability to originate ARM loans is primarily due to the nature of its market area, which includes rural and vacation properties. Loans on properties with excessive acreage, hobby farm activities or three-season cabins generally cannot be sold into the secondary market, thus making these loans less attractive to competitors of the Company that only originate loans for sale into the secondary market. Furthermore, many of the Company's customers desiring a loan term of short-to-medium-duration (i.e., less than ten years) often prefer ARM loans because of the generally lower closing costs compared to fixed rate loans. The Company generally obtains an abstract and title opinion, rather than title insurance, on loans originated for retention in its portfolio and has not experienced losses attributable to the lack of title insurance. Commercial Real Estate Lending At March 31, 1999, the Company's commercial real estate loan portfolio totaled $5.9 million or 8.0% of net loans receivable. The commercial real estate loans in the Company's portfolio consist of fixed rate and ARM loans generally secured by small office buildings, retail stores and farms, and occupied by the borrower. The Company currently originates ARM loans secured by commercial real estate at 375 to 525 basis points above the rate on U.S. Treasury securities for comparable maturities. These loans typically do not exceed 65% of the lesser of the purchase price or the appraised value of the underlying collateral. At March 31, 1999, the largest outstanding commercial real estate loan was $1.4 million. In underwriting commercial real estate loans, the Company's underwriting procedures require a review of the borrower's credit history, income taxes, personal financial statements, banking relationships, property management experience. An analysis of the property is also required, including cash flow projections, historical operating statements, environmental concerns, compliance with regulations, and prevailing market conditions. Loans secured by commercial real estate properties involve a greater degree of risk than residential mortgage loans. Payments on loans secured by commercial real estate properties are often susceptible to adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by originating commercial real estate loans principally in its primary market area where it has the ability to more closely monitor and anticipate adverse conditions. Commercial Lending The Company engages in a limited amount of commercial business lending activities, generally with existing customers, including secured and unsecured loans and letters of credit. At March 31, 1999, the Company had $ 3.9million in commercial business loans outstanding, which represented 5.3% of net loans receivable. Term loans are amortized over a one to five year term and lines of credit are reviewed annually. Such loans generally are originated at 375 to 525 basis points above the rate on U.S. Treasury securities for comparable maturities. At March 31, 1999, the largest outstanding commercial loan was $0.6 million. The Company originated a majority of the commercial loans in its loan portfolio in the mid-1980's when it hired a commercial loan officer to expand its activity in this area. The Company currently is not actively seeking new commercial lending business and substantially all of its commercial lending consists of renewals of existing commercial loans. The commercial loans in the portfolio are generally performing and, management believes, adequately reserved. Commercial business loans are of higher risk and typically are made on the basis of borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent upon the general economic environment. The Company's commercial business loans usually include personal guarantees and are usually, but not always, secured by business assets, such as accounts receivable, equipment and inventory as well as real estate. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Consumer Lending The Company held $7.1 million or 9.6% of net loans receivable of consumer loans at March 31, 1999. Consumer loans generally have shorter terms and higher interest rates than mortgage loans, but generally involve more risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. Consumer loans generally are dependent on the borrower's continuing financial stability and thus are more likely to be affected by adverse personal circumstances. Often the loans are secured by rapidly depreciable personal property, such as automobiles. Automobile loans generally are underwritten in amounts up to 90% of the purchase price for new and used vehicles. The term of the loans generally cannot exceed six years for new vehicles and five years for used vehicles. The Company's delinquent consumer loans as a percentage of total consumer loans has been minimal. 8 Multi-Family Lending The Company held $.6million or .85%net loans receivable of multi-family loans at March 31, 1999. The rates charged on the Company's multi-family loans typically are slightly higher than rates charged on loans secured by one-to-four family residential properties. Multi-family ARM loans typically adjust in a manner similar to that of the Company's other ARM loans, although generally at a slightly higher margin. An origination fee equal to 1% of the principal amount is usually charged on such loans. Multi-family loans are generally underwritten in amounts to 80% of the lesser of the appraised value or purchase price of the underlying property. An independent appraiser designated by the Company at the time the application is submitted performs appraisals of multi-family properties. In addition, the Company's underwriting procedures require review of the borrower's credit history, income, personal financial statements and banking relationships. A review of the property includes cash flow projections and historical operating results. The Company evaluates all aspects of multi-family lending to mitigate risk to the extent possible. The Company seeks to ensure that the property securing the loans will generate sufficient cash flow to adequately cover operating expenses and debt service payments. The Company obtains individual guarantees for substantially all of its multi-family loans. Loans secured by multi-family real estate generally involve a greater degree of credit risk than one-to-four family mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower's ability to repay the loans may be impaired. Despite the risks inherent in multi-family real estate lending, the Company's delinquent multi-family loans as a percentage of loans receivable has been minimal. Construction and Land Lending The Company offers one-to-four family residential and other construction loans and land loans. At March 31, 1999, construction and land loans totaled $2.1 million or 2.8% of net loans receivable. Construction loans are made to individuals intending to occupy a home who have signed construction contracts with a builder. These loans have loan-to-value ratios not exceeding 90%. When the loan-to-value ratios exceed 80%, private mortgage insurance is required. The Bank offers permanent financing, primarily one-to three-year ARM loans, on residential construction loans that enables borrowers to avoid duplicative closing costs normally associated with temporary financing during construction periods and permanent financing upon completion of construction. The Company has had minimal delinquent residential construction loans to date. Loan Approval Loan approval is based on a customer's aggregate amount of loans outstanding, including the loan application under review. One member of the Loan Committee and a loan officer may approve loan amounts of $100,000 or less. Loan amounts exceeding $100,000 up to $500,000 require the approval of two members of the Loan Committee and a loan officer. Any single loan exceeding $500,000 requires approval from the Board of Directors and a loan officer. Any loans over $25,000 that exceed the aggregate amount of $625,000 require Board approval. Originations, Purchase and Sales of Loans Mortgage loans are solicited from real estate brokers, builders, developers, existing or past customers, and residents of the local communities located in the Company's primary market areas. The Company advertises its mortgage products in newspapers and other media in addition to using its loan officers to directly solicit potential borrowers. The following table sets forth the Company's loan originations, purchases, sales and principal repayments for the periods indicated. Mortgage loans and mortgage-backed and related securities held for sale are included in the totals. 9 Fiscal Years Ended March 31, --------------------------------
1999 1998 1997 (In thousands) Mortgage loans (gross) At beginning of period $66,702 $66,254 $59,604 -------- -------- -------- Mortgage loans originated: One-to-four family 36,564 25,216 21,223 Commercial 1,987 226 1,072 Multi-family 472 - - Construction and land 8,740 3,809 6,690 -------- -------- -------- Total mortgage loans originated 47,763 29,251 28,985 -------- -------- -------- Mortgage loans purchased 581 368 101 -------- -------- -------- Total mortgage loans originated and purchased 48,344 29,619 29,086 -------- -------- -------- Transfer of mortgage loans to foreclosed real estate (254) (159) (72) Principal repayments (32,773) (17,796) (17,890) Sales of fixed rate loans (19,131) (11,216) (4,474) -------- -------- -------- Total reductions (52,158) (29,171) (22,436) -------- -------- -------- At end of period $62,888 $66,702 $66,254 ======== ======== ======== Consumer loans: At beginning of period $7,827 $7,207 $6,897 Consumer loans originated 5,397 6,796 5,313 Principal repayments (6,115) (6,176) (5,003) ------- -------- -------- At end of period $7,109 $7,827 $7,207 ======= ======== ======== Commercial loans: At beginning of period $4,397 $4,663 $4,612 Commercial loans originated and purchased 5,798 3,879 3,356 Principal repayments (6,296) (4,145) (3,305) ------- -------- -------- At end of period $3,899 $4,397 $4,663 ======= ======== ======== Mortgage-backed and related securities: At beginning of period $6,398 $7,421 $5,373 Mortgage-backed securities purchased 2,601 - 2772 Amortization and repayments (2,962) (1,023) (724) ------- -------- ------- At end of period $6,037 $6,398 $7,421 ======= ======== =======
10 The following table sets forth the Company's loan originations and purchases in various loan categories according to whether the loan is fixed rate versus adjustable rate for the periods indicated. Fiscal Years Ended March 31, ------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------------------- Fixed Adjustable Total Fixed Adjustable Total Fixed Adjustable Total -------------------------------------------------------------------------------------------
Mortgage loans: One-to-four family $22,828 $14,156 $36,984 12,658 $12,926 $25,584 $7,796 $13,427 $21,223 Multi-family - 633 633 - - - - - - Commercial - 1,987 1,987 - 226 226 69 1,003 1,072 Construction and land 7,634 1,106 8,740 3,102 707 3,809 5,423 1,368 6,791 -------- -------- -------- -------- -------- -------- ------- -------- ------- Total mortgage loans 30,462 17,882 48,344 15,760 13,859 29,619 13,288 15,798 29,086 Consumer loans 5,397 - 5,397 6,781 15 6,796 5,313 - 5,313 Comercial loans 3,851 1,947 5,798 3,432 447 3,879 2,308 1,048 3,356 -------- -------- -------- -------- -------- -------- ------- -------- ------- Total loans originated and purchased $39,710 $19,829 $59,539 $25,973 $14,321 $40,294 $20,909 $16,846 $37,755 ======== ======== ======== ======== ======== ======== ======== ======== =======
11 Participation Loans In order to meet asset/liability management objectives that are enhanced by loans with higher rates and shorter repricing periods, the Company has purchased from time to time participation interests in a variety of real estate loans, including commercial real estate loans. Prior to purchase, the Company reviews each participation to ensure that the underlying loan complies with the Company's lending policy as in effect and the loans-to-one borrower limitations. The purchase of participation loans involves the same risks as the origination of the same types of loans as well as additional risks related to the purchaser's lower level of control over the origination and subsequent administration of the loan. Many of the participation loans purchased by the Company in the past also have been on projects located outside the State of Wisconsin, primarily in the Minneapolis/St. Paul, Minnesota area. Management does not anticipate future purchases to be significant, and will continue to investigate purchase opportunities on an individual basis. Sale of Mortgage Loans The Company sells loans that it originates, on a non-recourse basis, into the secondary market to the FHLMC, Federal National Mortgage Association ("FNMA") and WHEDA. The amount of loans sold by the Company is based upon market conditions and the Company's asset/liability strategy. For the past three fiscal years, the Company has sold substantially all of the fixed rate loans originated to governmental secondary market purchasers in order to manage interest rate risk. For the fiscal year ended March 31, 1999, the Company's fixed rate loan sales to governmental investors totaled $19.1 million with associated gains of $206,000. The Company is subject to interest rate risk on fixed rate loans in its pipeline from the point in time that the rate is locked with the borrower until it is sold into the secondary market. In a declining interest rate environment, the interest rate is locked in at the time of loan approval and held for sale to take advantage of the market rate of interest. In order to minimize the interest rate risk in a rising interest rate environment, the interest rate is locked in at the time of loan approval and a commitment to sell the loan is obtained simultaneously. These loans are sold on an individual basis when the loan is closed. All mortgage loans are made and underwritten pursuant to the requirements of secondary market investors. The Company retains servicing on loans sold to FHLMC and FNMA, receiving a servicing fee, which represents the difference between the contract rate on the loans sold and the yield at which such loans are sold. The servicing spread earned by the Company is typically 0.25%. The Company also acts as a conduit for loans sold to WHEDA. For those borrowers who qualify under WHEDA guidelines, the Company originates the loan for a $500 fee and sells the loan to WHEDA, on a non-recourse basis, servicing released. Loan Origination, Servicing and Other Fees In addition to interest earned on loans, the Company receives income through fees in connection with loan originations, loan sales, loan modifications, late payments, loan servicing, and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans originated. In connection with the origination of mortgage loans, the Company requires borrower reimbursement for out-of-pocket costs associated with obtaining independent appraisals, credit reports, title insurance or abstract and title opinion, private mortgage insurance and other items. While origination fees ranging from zero to two points generally have been quoted on mortgage loans in recent years, most of the Company's borrowers typically accept a slightly higher interest rate and pay zero points. For loans sold to FHLMC and FNMA, the Company retains the responsibility for servicing such loans. At March 31, 1999, 1998 and 1997, the Bank serviced $46.3 million, $30.7 million and $25.3 million loans for others, respectively. Fee income received in connection with loans serviced for others was $94,000, $77,000 and $77,000 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. The contractual right to service mortgage loans sold has an economic value. The value results from the future income stream of the servicing fees, the availability of the cash balances associated with escrow funds for real estate taxes and insurance, the availability of the cash from monthly principal and interest payments from the collection date to the remittance date, and the ability of the servicer to cross-sell other products and services. The actual value of a servicing portfolio is dependent upon such factors as the age, maturity and prepayment rate of the loans in the portfolio, the average 12 dollar balance of the loans, the location of the collateral property, the average amount of escrow funds held, the interest rates and delinquency experience of the loans, the types of loans, and other factors. Delinquencies, Nonperforming Assets and Classified Assets Delinquent Loans When a borrower fails to make a required payment by the end of the month in which the payment is due, the Company generally initiates collection procedures. The Company will send a late notice, and in most cases, delinquencies are cured promptly. However, if a loan becomes delinquent for more than 60 days, the Company contacts the borrower directly, to determine the reason for the delinquency and effect a cure. Where it believes appropriate, the Company may review the condition of the property and the financial position of the borrower. At that time, the Company may: (i) accept a repayment program for the arrearage; (ii) seek evidence of efforts by the borrower to sell the property; (iii) request a deed in lieu of foreclosure; or (iv) initiate foreclosure proceedings. When a loan secured by a mortgage is delinquent for three or more monthly installments, the Company generally will initiate foreclosure proceedings. With respect to delinquencies on loans sold to FHLMC or FNMA, or insured by FHA or guaranteed by VA, the Company follows the appropriate notification and foreclosure procedures prescribed by the respective agencies. On mortgage loans or loan participations purchased by the Company, the Company receives monthly reports from its loan servicers with which it monitors the loan portfolio. The Company relies upon the servicer to contact delinquent borrowers, collect delinquent amounts, and to initiate foreclosure proceedings, when necessary, in accordance with applicable laws, regulations, and the terms of the servicing agreements between the Company and its servicing agents. Total loans delinquent 90 days or more totaled $.2 million or .3% of loans receivable at March 31, 1999. 13 At March 31, 1999 At March 31, 1998 At March 31, 1997 --------------------------------------------------------------------------------------------------------- 31-89 Days 90 Days or more 31-89 Days 90 Days or more 31-89 Days 90 Days or more --------------------------------------------------------------------------------------------------------- Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal of Balance of Balance of Balance of Balance of Balance of Balance Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans ---------------------------------------------------------------------------------------------------------
Mortgage loans: One-to-four family 20 $904 2 $53 22 $754 5 $109 45 $2,399 7 $179 Multi-family -- -- -- -- -- -- -- -- -- -- -- -- Residential construction -- -- -- -- 1 62 -- -- 1 84 -- -- Commercial 2 114 -- -- 6 471 3 280 6 406 2 199 ---- ------- ---- ---- ---- ----- ----- ----- ---- ------ ---- ----- Total mortgage loans 22 $1,018 2 $53 29 $1,287 8 $389 52 $2,889 9 378 ---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ---- ----- Consumer loans 24 55 3 17 31 161 32 129 39 191 9 137 ---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ---- ----- Comercial loans 1 10 3 159 1 3 9 858 4 204 6 556 ---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ----- ----- Total 47 $1,083 8 $229 61 $1,451 49 $1,376 95 $3,284 24 $1,071 ==== ======= ===== ===== ==== ======= ===== ======= ==== ======= ===== ====== Delinquent loans to gross 1.47% 0.31% 1.84% 1.74% 4.16% 1.36% loans(2) - -------------------------- -1 The Company discontinues the accrual of interest on loans when the borrower is delinquent as to a contractually due principal or interest payment by 90 days or more. -2 Excluding mortgage-backed and related securities.
14 Classification of Assets The FDIC requires each federally insured bank to classify its assets on a regular basis in accordance with the guidelines set forth in the FDIC Manual of Examination Policies. In addition, in connection with examinations of insured banks by the FDIC, FDIC examiners have authority to identify problem assets as Substandard, Doubtful or Loss. Substandard assets have one or more well defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. An asset classified as Loss is considered uncollectible and of such little value that continuance as an asset of the bank is not warranted. The Company has adopted an asset classification methodology that parallels that required by federal regulators. At March 31, 1999, based upon the Company's asset classification methodology, the Company had assets classified as Substandard of $364 million, none as Doubtful and none as Loss. Assets that are classified as Loss are charged off. The FDIC examination policies include a Special Mention category, consisting of assets that currently do not expose the Company to a sufficient degree of risk to warrant adverse classification, but do possess credit deficiencies deserving management's close attention. At March 31, 1999, $238,000 of the Company's assets were classified as Special Mention. Non-Performing Assets Loans are placed on non-accrual status when, in the judgment of Company management, the probability of collection of principal or interest is deemed insufficient to warrant further accrual of interest. The Bank discontinues the accrual of interest on loans when the borrower is delinquent as to a contractually due principal or interest payment by 90 days or more. When a loan is placed on non-accrual status, all of the accrued interest on that loan is reversed by way of a charge to interest income. Accrual of interest on a non-accrual loan is resumed when all contractually past due payments are current and when management believes the outstanding loan principal and contractually due interest is no longer doubtful of collection. The Bank discontinues the accrual of interest on loans more than 90 days past due, at which time all accrued but uncollected interest is reversed by way of a charge to income. Property acquired by the Bank as a result of a foreclosure is classified as real estate owned. Foreclosed properties are recorded at the lower of the unpaid principal balance of the related loan or fair value, less estimated costs to sell. The amount by which the recorded loan balance exceeds the fair value at the time a property is classified a foreclosed property is charged against the allowance for loan losses. Any subsequent reduction in the fair value of a foreclosed property, along with expenses incurred to maintain or dispose of a foreclosed property, is charged against current earnings. At March 31, 1999, the Company had $63,000 of property in real estate owned. 15 Nonperforming loans include loans placed on non-accrual status and troubled debt restructurings. Non-performing assets include non-performing loans and foreclosed properties. The following table sets forth non-performing loans and assets. March 31, -------------------------------- 1999 1998 1997
(Dollars in Thousands) Non-accrual mortgage loans 90 days or more past due $53 $389 $378 Non-accrual consumer loans 90 days or more past due 17 116 128 Non-accrual commerical loans 90 days or more past due 159 858 556 Loans 90 days or more past due and still accruing - 14 9 Troubled debt restructurings 9 11 - ----- ------- ------- Total non-performing loans $238 $1,388 $1,071 ===== ======= ======= Total real estate owned and in judgement, net of related allowance for losses 63 159 - ----- ------- ------- Total non-performing assets $301 $1,547 $1,071 ===== ======= ======= Total non-performing loans to gross loans receivable 0.32% 1.76% 1.37% Total non-performing assets to total assets 0.31% 1.57% 1.13% Total classified assets $602 $1,885 $1,330 Total classified assets to total assets 0.62% 1.91% 1.40% Interest income that would have been recorded on non- performing loans if current $15 $89 $59 Interest income on non-performing loans included in net income $3 $21 $13
As of March 31, 1999, management was not aware of any loans not included in the foregoing tables or discussed above that the borrower could not comply with the loan repayment terms. Allowance for Loan Losses Under federal regulations, when an insured institution classifies problem assets as either Substandard or Doubtful, it is required to establish a general allowance for loan losses in an amount deemed prudent by management. In addition to general valuation allowances, the Bank may establish specific loss reserves against specific assets in which a loss may be realized. General allowances represent loss allowances that have been established to recognize the inherent risks associated with lending activities, but which, unlike specific allowances, have not been allocated to recognize probable losses on particular problem assets. The Bank's determination as to its classification of assets and the amount of its specific and general valuation allowances are subject to review by the DFI and the FDIC, either one of which can order the establishment of additional general or specific loss allowances. The allowance for loan losses is established through a provision for loan losses, which reduces net interest income. The Company's allowance for loan losses at March 31, 1999, totaled $375,000 or 61.0% of cumulative net charge-offs during the last three fiscal years. The allowance for loan losses is determined by multiplying the average balance of real estate loans; installment and credit card loans; and commercial and other loans by the percentage of actual loss experience for the last three years for each category of loans plus 15% for any substandard loans in each category of loans. Substandard loans are evaluated individually and actual loss percentage to the average balance of each category of loans as a group. Any unallocated portion of the allowance is applied to the category with the highest percentage of loss experience for the prior three years. A self-correcting mechanism to reduce differences between estimated and actual observed losses is not necessary since the allowance is determined by actual observed losses. The average balance of each category of loans reflects changes in loan concentration. Loan quality is reflected in the 15% allowance for any substandard loan. As the allowance is based on actual loss experience and the current level of substandard loans, no elimination methods and assumptions are used in determining the allowance. A change in substandard loans and the average balance of the categories of loans will be immediately reflected in the allowance. The level of the allowance is equal to historical net loss experience plus the 15% allowance for the current level of substandard assets. The ratio of allowance for loan losses to gross loans receivable was 0.50% at March 31, 1999. 16 The following table sets forth activity in the Company's allowance for loan losses during the periods indicated. For the Fiscal Year Ended March 31, --------------------------------------------------- 1999 1998 1997
(Dollars in thousands) Balance at beginning of period $484 $461 $433 Additions charged to operations: One-to-four family - 0 0 Multi-family and commercial real estate 2 0 0 Commercial 291 76 75 Consumer 83 24 6 ------ ------ ------ 376 100 81 Recoveries: One-to-four family 0 0 19 Multi-family and commercial real estate 7 3 3 Commercial 0 0 0 Consumer 7 7 0 ------ ------ ------ 14 10 22 Charge-offs: One-to-four family 0 0 0 Multi-family and commercial real estate (2) 0 0 Commercial (413) 0 (19) Consumer (84) (87) (56) ------ ------ ------- (499) (87) (75) Net charge-offs (485) (77) (53) ------ ------ ------- Balance at end of period $375 $484 $461 ====== ====== ======= Percentage of loans to gross loans receivable Mortgage loans 85.10% 84.51% 84.80% Consumer loans 9.62% 9.92% 9.23% Ratio of allowance for loan losses to gross loans receivable at the end of period 0.51% 0.61% 0.59% Ratio of allowance for loan losses to non-performing loans at the end of period(1) 157.56 34.87 43.04 Ratio of net charge-offs to average gross loans during period 0.62% 0.10% 0.07% Average gross loans outstanding $78,341 $79,471 $76,240 Gross loans receivable at the end of period $73,896 $78,923 $78,116 - ------------------------------------------- (1) Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, and troubled debt restructurings.
17 The following table shows the Company's allowance for loan losses and the allocation to the various categories of loans held for investment at the dates indicated. Allocations to a particular category do not restrict the Company's ability to use such allowance in any other category. At March 31, ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------------------------------------------------------------------------
Loans In Loans In Loans In Category Category Category % of to Total % of to Total % of to Total total Out- total Out- total Out- Loans by standing Loans by standing Loans by standing Amount Category Loans Amount Category Loans Amount Category Loans (Dollars in thousands) Breakdown of allowance: Mortgage loans: One-to-four family $50 0.09% 73.38% $50 0.09% 73.64% $36 0.06% 71.14% Multi-family 1 0.16% 0.85% 1 0.19% 0.67% - 0.00% 1.19% Commercial/nonresidential 12 0.20% 8.04% 5 0.10% 6.67% 34 0.65% 8.25% Construction and land 2 0.10% 2.83% 2 0.07% 3.53% 1 0.04% 4.22% ------ ------- ------ -------- ------ -------- Total mortgage loans 65 85.10% 58 84.51% 71 84.80% Consumer loans 86 1.21% 9.62% 80 1.02% 9.92% 50 0.69% 9.23% ------- Commercial loans 224 5.75% 5.28% 346 7.87% 5.57% 340 7.29% 5.97% ------ ------- ------ -------- ------ -------- Total allowance for loan losses $375 100.00% $484 100.00% $461 100.00% ======= ======== ====== ======== ======= ========
18 Investment Activities General The investment policy of the Company, which is established by the Board of Directors and implemented by the Company's President, is designed to provide a required level of liquidity and minimize potential losses due to interest rate fluctuations without incurring undue credit risk. The Company is authorized by regulation to invest in various types of liquid assets, including United States Treasury obligations, securities issued by various federal agencies and state and municipal governments, deposits at the FHLB-Chicago, certain certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. The Company also invests in mortgage-backed and related securities, securities that are either of investment grade or issued or guaranteed by FHLMC, the FNMA or the Government National Mortgage Association ("GNMA"), and investment grade corporate debt. The Company categorizes the securities it purchases into a "Held-to-Maturity" or an "Available-For-Sale" portfolio as follows: 1. Securities Held-to-Maturity. The Company has the ability and intent to hold these assets to maturity. Upon acquisition, securities are classified as to the Company's intent and a sale would only be effected due to deteriorating investment quality. The investment portfolio is not used for speculative purposes and is carried at amortized cost. In the event the Company sells securities from this portfolio for other than credit quality reasons, all securities within the investment portfolio with matching characteristics may be reclassified as assets held for sale. 2. Securities Available-for-Sale. The Company does not intend to hold the assets to maturity and thus are carried at fair value, with the unrealized gains or losses, net of tax, reported as a separate component of the stockholders equity. This portion of the securities portfolio is designed to meet anticipated loan demand and deposit runoff or to take advantage of market opportunities. Effective April 1, 1993, the Company adopted SFAS No. 115 that requires that the Company classify investments in marketable equity securities with readily determinable fair value and all investments in debt securities as held-to-maturity, trading or available-for-sale. The Company classified the securities as of the date of adoption of SFAS 115 and subsequently at the time of purchase and reviews the appropriateness of the classification at each reporting date as follows: 1. Securities Held-to-Maturity. The Company has both the intent and ability to hold these debt securities to maturity. Securities in this category are carried at amortized cost. 2. Securities Classified as Trading. The Company acquires these securities with the intent to resell them in the near term and are held only for a short period of time. Securities in this category are carried at fair value, with unrealized holding gains and losses included in earnings. 3. Securities Available-for-Sale. This category includes all securities not classified as held-to-maturity or trading. Securities in this category are carried at fair value, with unrealized holding gains and losses reported, net of deferred income taxes, in a separate component of equity. These securities may be sold, for example, in response to changes in market interest rates, liquidity needs, availability of higher yielding instruments and changes in funding sources. The investment activities of the Company consist primarily of investments in mortgage-backed and related securities and other investment securities, consisting primarily of securities issued or guaranteed by the United States Government or agencies thereof. Typical investments include federally sponsored agency mortgage pass-throughs, and federally sponsored agency and mortgage related securities. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Company's investment policy. The Company performs analyses on mortgage related securities prior to purchase and on an ongoing basis to determine the impact on earnings and market value of various interest rate and prepayment conditions. 19 Mortgage-Backed Securities Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries (generally federal government-sponsored enterprises) that pool and repackage the participation interest in the form of securities to investors such as the Company. Such federal government-sponsored enterprises, which guarantee the payment of principal and interest to investors, include FHLMC, FNMA and GNMA. Mortgage-backed securities generally increase the quality of the Company's assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. FHLMC, and FNMA were established to provide support for low and middle-income housing. There are limits to the maximum size of loans that qualify for these programs. Mortgage-backed securities typically are issued with stated principal amounts and pools of mortgage loans with interest rates that are within a range and have varying maturities back the securities. The underlying pool of mortgage loans can be composed of either fixed rate mortgage or ARM loans. Mortgage-backed securities commonly are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgage loans, i.e., fixed rate or adjustable rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgage loans. The actual maturity of a mortgage-backed security varies, depending on when the mortgages repay or prepay the underlying mortgage loans. Prepayments of the underlying mortgage loans may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage-backed security. The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accreted over the estimated term of the securities using a level yield method. The prepayment assumption used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security and these assumptions are reviewed periodically to reflect the actual prepayment. The actual prepayment of the underlying mortgage loans depends on many factors, including type of mortgage loans, the coupon rate, the age of the mortgage loans, the geographical location of the real estate collateralizing the mortgage loans and general levels of market interest rates. The difference between the interest rates on the underlying mortgage loans and the prevailing mortgage interest rates is an important determinant in the rate of prepayments.. During periods of decreasing mortgage interest rates, prepayments generally increase. If the coupon rate of the underlying mortgage loans significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgage loans. Prepayment experience is more difficult to estimate for adjustable rate mortgage-backed securities. Investment Securities The Company invests in various types of liquid assets that are permissible investments for Wisconsin-chartered savings banks, including United States Treasury obligations and securities of various federal agencies. The Company also invests its assets in commercial paper and mutual funds, the assets of which conform to the investments that a Wisconsin-chartered savings bank is otherwise authorized to make directly. The Company's current investment policy only permits purchases of investments rated investment grade by a nationally recognized rating agency and does not permit purchases of securities of non-investment grade quality. Composition of Securities Held-to-Maturity At March 31, 1999, the Company held $9.4 million in its securities held-to-maturity portfolio, consisting of $6.0 million in mortgage-backed certificates issued by various federal agencies and $3.4 million in the investment securities portfolio, consisting of securities of various federal agencies. At March 31, 1999, the mortgage-backed securities portfolio represented 6.2% of the Company's total assets and the investment securities portfolio represented 3.5% of the Company's total assets. Composition of Securities Classified as Trading At March 31, 1999 and 1998, the Company did not have any investment securities or mortgage-related securities classified as trading. Composition of Securities Available for Sale At March 31, 1999, the Company did not have any investment securities or mortgage-related securities classified as available for sale. 20 The table below sets forth certain information regarding the carrying value, composition and market value of the Company's securities available for sale and mortgage-backed securities held-to-maturity at March 31, 1999, 1998, and 1997. At March 31, 1999 At March 31, 1998 At March 31, 1997 ----------------- ----------------- ----------------- Carrying % of Market Carrying % of Market Carrying % of Market Value Total Value Value Total Value Value Total Value ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands)
Securities available-for-sale: U.S. govt securities and other agency obligations FNMA $ - - $ - $ - - $ - $1,963 71.33% $1,963 FHLB - - - - - - 488 17.73% 488 FHLMC - - - - - - 300 10.90% 300 Money Market Mutual Fund - - - - - - 1 0.04% 1 ------- ------ ------ ------- ------- ------- ------- ------- ------ Total securities available-for-sale $ - - $ - $ - - $ - $2,752 100.00% $2,752 ======= ====== ====== ======= ======= ======= ======= ======= ====== Securities held-to-maturity Mortgage-backed securities FNMA $3,189 33.80% $3,224 $3,868 41.16% $3,926 $4,622 62.28% $4,523 FHLMC 1,214 12.86% 1,208 377 4.01% 384 434 5.85% 420 GNMA 1,634 17.32% 1,698 2,153 22.91% 2,236 2,365 31.87% 2,365 U.S. govt securities and other agency obligations FFCB - 0.00% - 500 5.32% 500 - - - FHLB 2,098 22.24% 2,083 1,700 18.09% 1,700 - - - FHLMC 800 8.48% 803 800 8.51% 799 - - - FNMA 500 5.30% 500 - - - ------- ------- ------- ------- ------- ------- ------- ------- ------ Total securities held-to-maturity $9,435 100.00% $9,516 $9,398 100.00% $9,545 $7,421 100.00% $7,308 ======= ======= ======= ======= ======= ======= ======= ======= ======
At March 31, 1999, the aggregate book value and the aggregate market value of securities issued by FNMA totaled $3.9 million and $3.9 million, respectively. At March 31, 1999, the aggregate book value and the aggregate market value of securities issued by GNMA totaled $1.6 million and $1.7 million, respectively. Both FNMA and GNMA securities exceed 10% of stockholder equity at March 31, 1999. 21 The following table shows the maturity or period to repricing of the Company's mortgage-backed securities portfolio held-to-maturity at March 31, 1999: At March 31, 1999 -------------------------------------- Adjustable Fixed Rate Rate Total Mortgage Mortgage Mortgage- Backed Backed backed Securities Securities Securities Amounts due or repricing: Within one year $450 - - $450 After one year: One to three years - - - - - - Five to ten years - - $995 $995 Ten to 20 years - - 1677 1677 Over 20 years - - 2,915 2,915 ------ ------- ------- Total due or repricing after one year - - 5,587 5,587 Total due or repricing 450 5,587 6,037 ------ ------- ------- Less: Unearned discounts and premiums, net - - - - - - ------- ------- ------- Mortgage-backed securities, net $450 $5,587 $6,037 ======= ======= ======= Sources of Funds General The Company's primary sources of funds for use in lending, investing and for other general purposes are deposits, proceeds from principal and interest payments on loans, mortgage-backed and related securities and investment securities, and to a lesser extent, FHLB-Chicago advances. Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan payments are significantly influenced by general market interest rates and economic conditions. Borrowings may be used on a short-term basis to compensate for seasonal or other reductions in normal sources of funds or for deposit inflows at less than projected levels. Borrowings also may be used on a longer-term basis to support expanded lending or investment activities. The Company primarily utilizes advances from the FHLB-Chicago as sources for its borrowings. At March 31, 1999, 1998 and 1997 the Company had advances from the FHLB-Chicago of $17.0 million or 17.4% of total assets, $19.1 million or 19.3% of total assets, and $17.6 million or 18.5% of total assets, respectively. Of the Company's outstanding FHLB-Chicago advances at March 31, 1999, $4.5 million will mature before March 31, 2000. The Company also had borrowings consisting of repurchase agreements of $5.6 million, $5.3 million and $4.5 million at March 31, 1999, 1998 and 1997, respectively. Deposits The Company offers a variety of deposit accounts having a range of interest rates and terms. The Company's deposits principally consist of core deposits (NOW, money market deposit and passbook accounts) and certificates of deposits. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. The Company's deposits are obtained primarily from the areas in which its branches are located, and the Company relies principally on customer service, marketing programs and long-standing relationships with customers to attract and retain these deposits. Various types of advertising and promotion to attract and retain deposit accounts also are used. The Company does not currently solicit or accept brokered deposits. Management monitors the Company's certificates of deposit and, based on historical experience, management believes it will retain a large portion of such accounts upon maturity. Management considers Company profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by competitors in considering its deposit offerings and promotions. The Company believes it has been competitive in the types of accounts and interest rates it has offered on its deposit products. The Company intends to continue its efforts to attract and retain deposits as a primary source of funds for supporting its lending and investing activities. 22 The following table presents the deposit activity of the Company for the periods indicated: Fiscal Year Ended March 31, 1999 1998 1997 ---- ---- ----
(In thousands) Net Deposits (Withdrawals) $(3,003) $(1,613) $1,627 Interest credited on deposits 2,728 2,334 2,674 -------- -------- ------- Total increase (decrease) in deposits $(275) $721 $4,301
At March 31, 1999, the Company had $3.6 million in certificates of deposit outstanding in amounts of $100,000 or more maturing as follows: Amount at March 31, 1999 (In thousands) Three months or less $ 358 Over three through six months 894 Over six through 12 months 1,257 Over 12 months 1,051 ----------------- Total $ 3,560 ================= 23 The following table sets forth the distribution of the Company's core deposits and certificate accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented: At March 31, ----------------------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------------- -------------------------------- ------------------------------ Weighted Weighted Weighted Percent Average Percent Average Percent Average of total Nominal of total Nominal of total Nominal Amount deposits Rate Amount deposits Rate Amount deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (Dollars in thousands)
Core Deposits: Non-interest bearing $3,590 5.79% - $3,823 6.14% - $2,792 4.54% - NOW accounts 6,346 10.23% 2.20% 5,910 9.49% 2.15% 5,989 9.73% 2.26% Money market 6,856 11.07% 4.59% 6,026 9.68% 4.87% 5,029 8.17% 4.61% Passbook 6,563 10.58% 2.15% 6,091 9.78% 2.31% 5,905 9.59% 2.16% -------- ------- ------ ------- ------- ------ ------- ------ ------ Total 23,355 37.67% 2.55% 21,850 35.08% 2.57% 19,715 32.03% 2.51% Certificates accounts (current term to maturity): One to six months 17,269 27.86% 5.61% 22,514 36.15% 5.69% 15,941 25.90% 5.43% six to 12 months 11,218 18.09% 5.48% 6,889 11.06% 5.75% 9,443 15.34% 5.71% 13 to 36 months 8,878 14.32% 5.63% 9,435 15.15% 6.05% 14,151 22.99% 6.07% 37 to 60 months 1,137 1.82% 5.76% 1,389 2.24% 6.08% 2,110 3.43% 6.11% 61 to 96 months 109 0.18% 6.70% 167 0.27% 6.54% 120 0.19% 6.33% 97 to 132 months 37 0.06% 6.35% 34 0.05% 6.35% 77 0 6.96% -------- ------ ------ ------- ------ ------ ------- ------ ------ Total certificates 38,648 62.33% 5.71% 40,428 64.92% 5.75% 41,842 67.97% 5.75% Total deposits $62,003 100.00% 4.49% $62,278 100.00% 4.62% $61,557 100.00% 4.71% ======= ======= ===== ======= ======= ====== ======= ======= ======
24 The following table presents, by various rate categories, the amount of certificates of deposit outstanding at March 31, 1998 and March 31, 1999: At March 31, 1999 1998 -------------- Certificates of Deposit: (In thousands) 2.00% to 2.99% 0 100 3.00% to 3.99% 122 - 4.00% to 4.99% 7,176 538 5.00% to 5.99% 24,893 22,861 6.00% to 6.99% 5,764 16,229 7.00% to 7.99% 663 670 8.00% to 8.99% 30 30 -------- -------- Total $38,648 $40,428 ======== ======== Borrowings and Other Financing Transactions Although deposits are the Company's primary source of funds, the Company's policy has been to utilize borrowings as part of its assets/liability management strategy. Borrowings are secured when management believes it can profitably re-invest those funds for the benefit of the Company. The Company's primary form of borrowing consists of advances from the FHLB-Chicago. These advances are collateralized by the capital stock of the FHLB-Chicago held by the Company and certain of its mortgage loans and mortgage-backed and related securities. Such advances are made pursuant to several different credit programs, each of which has it's own interest rate and range of maturities. The maximum amount the FHLB-Chicago will advance to member institutions, including the Company, for purposes other than meeting withdrawals fluctuates from time to time in accordance with policies the FHLB-Chicago. At March 31, 1999, the Company's FHLB-Chicago advances totaled $17.0 million, representing 19.9% of total liabilities. The Company intends to continue to leverage its capital base by utilizing FHLB borrowings to originate or purchase loans in fiscal 1999. The Company's borrowings from time to time include repurchase agreements. These agreements generally are entered into with local businesses and institutions that seek to deposit funds in excess of insurable limits. These transactions are treated as borrowings collateralized by the securities sold, which generally are mortgage-backed securities, and are therefore included as other borrowings in the Company's Consolidated Financial Statements. While increases in borrowings and changes in the collateralization levels due to market interest rate changes could require the Company to add collateral to secure its borrowings, the Company does not anticipate having a shortage of qualified collateral to pledge against its borrowings. At March 31, 1999, there were $5.6 million in repurchase agreements outstanding. 25 The following table sets forth certain information regarding the Company's FHLB-Chicago advances and repurchases agreements at or for the periods ended on the dates indicated. At or For the Fiscal Years Ended March 31, ------------------------------------------ 1999 1998 1997 ---- ---- ----
(Dollars in thousands) FHLB- Chicago advances: Average balance outstanding $17,488 $17,912 $15,751 Maximum amount outstanding at any month-end during the period 19,062 23,173 18,245 Balance outstanding at end of period 16,990 19,062 17,634 Weighted average interest rate during the period(1) 5.44% 5.88% 5.87% Weighted average interest rate at end of period 5.30% 5.49% 5.91% Repuchase agreements: Average balance outstanding $5,597 $4,937 $4,808 Maximum amount outstanding at any month-end during the period 6,473 6,501 5,761 Balance outstanding at end of period 5,625 5,258 4,463 Weighted average interest rate during the period 5.19% 6.00% 5.74% Weighted average interest rate at end of period 5.38% 6.08% 6.13% Total advances and repurchase agreements: Average balance outstanding $23,085 $22,850 $20,559 Maximum amount outstanding at any month-end during the period 25,535 29,674 24,006 Balance outstanding at end of period 22,615 24,320 22,097 Weighted average interest rate during the period 5.91% 5.91% 5.78% Weighted average interest rate at end of period 5.32% 5.62% 5.95% - ------------------------------- (1) Computed on the basis of average monthly balances.
Subsidiary Activities The Bank has two wholly owned subsidiaries, Amery Service Agency, Inc. ("ASA"), organized as a Wisconsin corporation in 1970 and Northwest Investments Inc. ("NWI") organized as a Nevada corporation in 1997. ASA engages in insurance agency activities permissible under state and federal law, including the sale of credit life and disability products, and maintenance of a third party brokerage relationship. The ASA and the Bank have received approval of the Wisconsin Department of Financial Institutions and the FDIC to engage in the insurance and brokerage activities. In January 1983, ASA formed the Pondhurst Condominium Association and developed 64 residential lots for condominium duplexes and four-plexes on land adjacent to a golf course in Amery, Wisconsin (the "Pondhurst Project"). As of March 31, 1999, all 64 residential lots had been sold. On May 8, 1998, ASA sold an adjacent undeveloped 7.5-acre parcel of land for $65,000. With the sale of the 7.5 acre parcel, the Bank and ASA has complied with a request by the Federal Reserve bank of Minneapolis that ASA divest its holdings in the Pondhurst Project by May 31, 2000. As of March 31, 1999, ASA had total assets of $48,000. On May 30, 1997, NWI was established as an investment subsidiary of Bank to manage a portion of its investments. The establishment and operation of a investment subsidiary through incorporation and operation in the state of 26 Nevada provides certain corporate tax advantages to the Bank. As of March 31, 1999, NWI had total assets of $23.9 million. Personnel At March 31, 1999, the Company had 32 full-time employees and 9 part-time employees. A collective bargaining unit does not represent the employees of the Company and the Company believes its relationship with its employees to be good. Federal Taxation General The following discussion of tax matters is intended to be a summary of the material tax rules applicable to the Bank and does not purport to be a comprehensive description of all applicable tax rules. The Bank and the Company report their income on a fiscal year basis using the accrual method of accounting. The Bank and the Company are, as a general matter, subject to the rules of federal income taxation applicable to corporations. Generally, the Internal Revenue Code requires that all corporations compute taxable income using the accrual method of accounting. The Company and its subsidiaries currently file a consolidated federal income tax return. For its taxable year ended March 31, 1999, the Bank was subject to a blended federal income tax rate of approximately 34%. Bad Debt Reserves Savings banks, such as the Bank, which meet certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts"), were permitted for tax years beginning prior to December 31, 1995 to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, be deducted in arriving at their taxable income. Such additions were computed using one of two allowable methods. Each year, the Bank has used the method that allows the largest addition, and thus, the greater deduction for tax purposes. The Small Business Job Protection Act of 1996 ("the Act") repealed the reserve method of accounting for bad debts by thrift institutions, effective for taxable years beginning after December 31, 1995. Thrift institutions such as the Bank with less than $500 million in assets are now required to use the experience method. The Act also grants partial relief from the bad debt reserve "recapture" which occurs in connection with the change in method of accounting. The pre-1988 reserves are not required to be included in income in connection with the change in method of accounting. In addition, the Act suspends recapture of post-1987 reserves for a period of two years, conditioned on the institution's compliance with certain residential loan requirements. Institutions can meet this residential loan requirement if the principal amount of residential loans made during a taxable year was not less than the "base amount" for such year. The base amount is determined on an institution-by-institution basis, and constitutes the average of the principal amounts of residential loans made by an institution during the six most recent taxable years. Notwithstanding the foregoing, institutions will be required to pay for recaptured post-1987 bad debt reserves ratably over a six-year period starting in 1998. Since provisions for deferred income tax have been provided for on post-1987 bad debt reserves, there will not be any additional income tax expense to the Bank on recapture. Earnings appropriated for bad debt reserves and deducted for federal income tax purposes cannot be used by the Bank to pay cash dividends or distributions to the Holding Company without the Bank including the amount in taxable income, together with an amount deemed necessary to pay the resulting income tax. Thus, any dividends to the Holding Company that would reduce amounts appropriated to the Bank's bad debt reserves and deducted for federal income tax purposes could create a tax liability for the Bank. The Bank does not intend to pay dividends that would result in a recapture of its bad debt reserves. Corporate Alternative Minimum Tax For taxable years beginning after December 31, 1986, the Internal Revenue Code imposes an alternative minimum tax ("AMT") of 20% on alternative minimum taxable income ("AMTI"). Only 90% of AMTI can be offset by net operating losses. For taxable years beginning after December 31, 1989, the adjustment to AMTI based on book income will be an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million was imposed on 27 corporations, including the Bank, whether or not AMT is paid. The Bank does not expect to be subject to AMT in the future, although no assurance can be made that it will not. Distributions To the extent that the Bank makes "non-dividend distributions" to shareholders that are considered to result in distributions from (i) the Bank's reserve for losses on qualifying real property loans that exceeds the amount that would have been allowed under an experience method or (ii) the supplemental reserve for losses on loans ("Excess Distributions"), then an amount equal to such Excess Distributions must be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. In contrast, distributions made from the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, rather than the Bank's bad debt reserves are generally considered dividends for federal income tax purposes and therefore would not be included in the Bank's taxable income. Further, under certain circumstances, such as tax-free reorganizations, non-dividend distributions may not be required to be included in the Bank's taxable income. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if after the Conversion, certain portions of the Bank's accumulated tax bad debt reserve are used for any purpose other than to absorb qualified bad debt loans, such as for the payment of dividends or other distributions with respect to the Bank's capital stock (including distributions upon redemption or liquidation) and such payment or other distribution is not otherwise excluded from the provisions generally applicable to Excess Distributions, approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state taxes). See "Regulation" and "Dividend Policy" for limits on the payment of dividends of the Bank. Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted on August 10, 1993, the maximum federal corporate income tax rate was increased from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed on taxable income over $15.0 million. State Taxation The State of Wisconsin imposes a tax on the Wisconsin taxable income of corporations, including savings banks, at the rate of 7.9%. Wisconsin taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, no deduction is allowed for state income taxes and net operating losses may be carried forward but not back. Wisconsin law does not provide for filing of consolidated state income tax returns. The Bank's investment subsidiary, Northwest Investments, Inc., is subject to taxation under Nevada state law. Nevada does not currently impose a corporate income or franchise tax. Regulation The following discussion is intended to be a summary of regulatory issues and not a comprehensive description of all applicable regulations. The Bank is a Wisconsin-chartered stock savings bank and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank is subject to extensive regulation by the Wisconsin Department of Financial Institutions ("WDFI"), as its chartering agency, and by the FDIC, as its deposit insurer and principal federal regulator. The lending and investment authority of the Bank is prescribed by Wisconsin law and regulations, as well as applicable federal law and regulations, and the Bank is prohibited from engaging in any activities not permitted by such law and regulations. The Company is a unitary bank holding company subject to regulatory oversight by the Board of Governors of the Federal Reserve System (the "FRB"), the WDFI the Securities and Exchange Commission ("SEC"). Wisconsin Savings Bank Regulation Regulations adopted by the WDFI govern various aspects of the activities and the operation of Wisconsin-chartered savings banks. Examinations and Assessments The Bank is required to file periodic reports with and is subject to periodic examinations by the WDFI. Savings banks are required to pay examination fees and annual assessments to fund the supervisory operations of the WDFI. On 28 June 23, 1998, the DFI assessed the Bank a $4,176.52 fee based the Bank's total assets of $99.4 million at December 31, 1997. On March 25, 1999, the DFI assessed the Bank a $12,989.25 examination charge and the Company a $2,484 examination charge. Loans and Investments The Bank is authorized to make, invest in, sell, purchase, participate or otherwise deal in mortgage loans or interests in mortgage loans without geographic restriction, including loans made on the security of residential and commercial property. Savings banks also may lend funds on a secured or unsecured basis for business, corporate commercial or agricultural purposes provided the total of all such loans do not exceed 10% of the Bank's total assets, unless the WDFI authorizes a greater amount. Loans are subject to certain limitations, including percentage restrictions based on the Bank's total assets. Under regulations established for state savings banks by the Savings Institutions Division of the WDFI and implemented by the Administrator of the WDFI, the Bank is limited in the amount of commercial real estate and commercial business loans it can hold in its loan portfolio. This limit is currently 20% of the Bank's total assets and may be increased with the approval of the WDFI. At March 31, 1999, the Bank had $9.8 million of such loans in its portfolio with a current limit based on the Bank's asset base of $97.6 million. The Bank does not anticipate exceeding regulatory limitations on such commercial lending in the foreseeable future. Savings banks may invest funds in certain types of debt and equity securities, including obligations of federal, state and local governments and agencies. Subject to the prior approval of the WDFI, compliance with capital requirements and certain other restrictions, savings banks may invest in residential housing development projects. Savings banks may invest in service corporations or subsidiaries with the prior approval of the WDFI, subject to certain restrictions. The lending and investment powers of Wisconsin savings banks also are limited by FDIC regulations and other federal laws and regulations. The Bank's subsidiary operations also are regulated by the FDIC and the FRB. See "-Federal Deposit Insurance Corporation Improvement Act" and "-Holding Company Regulation." At March 31, 1999, the Bank's subsidiary operations were not under any WDFI, FRB or FDIC order to divest or terminate any activity. The lending and investment powers of Wisconsin savings banks also are limited by FDIC regulations and other federal law and regulations. See "Federal Deposit Insurance Corporation Improvement Act of 1991 Restrictions on State-Chartered Banks." Loans to One Borrower Savings banks may make loans and extensions of credit, both direct and indirect, to one borrower in amounts up to 15% of capital plus an additional 10% for loans fully secured by readily marketable collateral. In addition, savings banks may make loans to one borrower for any purpose in an amount not to exceed $500,000, or to develop domestic residential housing units in an amount not to exceed the lesser of $30 million or 30% of capital, subject to certain conditions. At March 31, 1999, the Bank did not have any loans that exceeded the loans-to-one borrower limitations. Qualified Thrift Requirement The Bank must qualify for and maintain a level of qualified thrift investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. At March 31, 1999, the Bank maintained 92.1% of its assets in qualified thrift investments and therefore met the qualified thrift lender requirement. Dividend Limitations A savings bank that meets its regulatory capital requirement may declare dividends on capital stock based upon net profits, provided that its paid-in surplus equals its capital stock. If the paid-in surplus of the savings bank does not equal its capital stock, the board of directors may not declare a dividend unless at least 10% of the net profits of the preceding half year in the case of quarterly or semi-annual dividends, or 10% of the net profits of the preceding year in case of annual dividends, has been transferred to paid-in surplus. In addition, prior approval of the WDFI is required before dividends exceeding 50% of profits for any calendar year may be declared and before a dividend may be declared out of retained earnings. Under the WDFI's regulations, a savings bank which converted from mutual to stock form also would be prohibited from paying a dividend on its capital stock if the effect thereof would cause the regulatory capital of the savings bank to be reduced below the amount required for its liquidation account. 29 Liquidity Savings banks are required to maintain an average daily balance of liquid assets of not less than 8% of its average daily balance of net withdrawable accounts plus its short-term borrowings. Also required is a "primary liquid assets" ratio of at least 4% of average daily withdrawable accounts and short-term borrowings. Primary liquid assets is defined as primarily short-term liquid assets and U.S. government and U.S. government agency securities. At March 31, 1999, the Bank's daily liquidity ratio was 22.7%. Restrictions on Loans to and Transactions with Insiders and Affiliates FRB regulations limit the total amount a savings bank may lend to its executive officers, directors, principal shareholders, and their related interests. Generally, an affiliated person may borrow an aggregate amount not exceeding 15% of a savings bank's unimpaired capital and unimpaired surplus on an unsecured basis and an additional 10% on a secured basis. The regulations limit, with certain exceptions, the aggregate amount a depository institution may lend to affiliated persons as a class to an amount not exceeding the institution's unimpaired capital and unimpaired surplus. In addition, WDFI regulations place certain restrictions and limits on loans and other transactions with the Bank's affiliated persons to ensure that such loans and transactions are on terms which would be available to members of the general public for similar credit extensions. The Bank also must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with affiliates in the same manner and to the same extent as if the Bank were a Federal Reserve member bank. Generally, Sections 23A and 23B limit the extent to which an insured institution or its subsidiaries may engage in certain "covered transactions" with an affiliate to an amount equal to 10% of such institution's capital and surplus, plus an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and require that all transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, the purchase of assets, issuance of a guaranty and similar other types of transactions. The WDFI may, for safety and soundness reasons, impose more stringent restrictions on savings banks but may not exempt transactions from or otherwise abridge Sections 23A and 23B. Unless prior approval of the WDFI is obtained, a savings bank may not purchase, lease or acquire a site for an office building or an interest in real estate from an affiliated person, including a stockholder owning more than 10% of its capital stock, or from any firm, corporation, entity or family in which an affiliated person or 10% stockholder has a direct or indirect interest. The Bank has not been significantly affected by the applicable restrictions on loans to and transactions with affiliates. Insurance of Deposits The Bank's deposits are insured to applicable limits under the Savings Association Insurance Fund ("SAIF") of the FDIC. FDIC regulations assign institutions to a particular capital group based on the level of an institution's capital -- "well capitalized," "adequately capitalized," and "undercapitalized." These groups are each then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with reduced insurance rates paid by well capitalized, financially sound institutions and higher rates paid by undercapitalized institutions that pose a substantial risk of loss to the insurance fund unless effective corrective action is taken. The Bank is currently assessed deposit insurance premiums at the rate of $0.065 per one hundred dollars of deposits. The Bank's expense related to FDIC premiums was $38,000 and $39,000 for the fiscal year ended March 31, 1999 and 1998. Deposit premium levels are set in order to permit the SAIF to achieve a ratio of reserves to insured deposits of 1.25%, and the FDIC may adjust assessment rates in order to maintain the target ratio. While an increase in premiums for the Bank could have an adverse effect on earnings, a decrease in premiums could have a positive impact on earnings. The Bank does not anticipate any increase in the insurance premium in the foreseeable future. The FDIC insures commercial bank deposits through a separate fund, the Bank Insurance Fund ("BIF"). During 1995, BIF assessment rates were reduced and as a result, BIF member institutions were paying lower deposit insurance premiums than SAIF-member institutions. Legislation passed during 1996 addressed the BIF/SAIF premium disparity and other matters related to deposit insurance obligations. See " -Regulatory Legislation Affecting Deposit Insurance." 30 Under the FDIC Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Company does not know of any practice, condition or violation that might lead to the termination of deposit insurance for the Bank. Certain Federal Regulations Provisions of federal law address risk reduction and the promotion of standards of safety and soundness for insured depository institutions. Examinations and Audits Federal regulations require annual on-site examinations for all depository institutions except those well-capitalized institutions with assets of less than $100 million; annual audits by independent public accountants for all insured institutions with assets in excess of $500 million; the formation of independent audit committees of the boards of directors of insured depository institutions for institutions with assets equal to or in excess of $500 million; and management of depository institutions to prepare certain financial reports annually and to establish internal compliance procedures. Prompt Corrective Regulatory Action Federal bank regulators are required to take certain supervisory actions with respect to undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. The regulations provide that an insured institution that has a ratio of total capital to risk-based assets of less than 8.0%, core capital to risk-based assets of less than 4.0% or a leverage ratio that is less than 4.0%, would be considered "undercapitalized." An insured institution that has a ratio of total capital to risk-based assets of less than 6.0%, core capital to risk-based assets of less than 3.0% or a leverage ratio that is less than 3.0%, would be considered "significantly undercapitalized" and an insured institution that has tangible capital to assets ratio equal to or less than 2.0% would be deemed "critically undercapitalized." Subject to limited exceptions, insured institutions in any of the undercapitalized categories are prohibited from declaring dividends, making any other capital distribution or paying a management fee to a controlling person or entity. Undercapitalized and significantly undercapitalized institutions face more severe restrictions. The Bank currently exceeds all applicable regulatory capital requirements and, therefore, is not subject to prompt correctional action. Brokered Deposits FDIC regulations govern the acceptance of brokered deposits by insured depository institutions. The capital position of an institution determines whether and pursuant to what limitations an institution may accept brokered deposits. A "well-capitalized" institution (one that significantly exceeds specified capital ratios) may accept brokered deposits without restriction. "Undercapitalized" institutions (those that fail to meet minimum regulatory capital requirements) may not accept brokered deposits and "adequately capitalized" institutions (those that are not "well-capitalized" or "undercapitalized") may only accept such deposits with the consent of the FDIC. The definitions of "well-capitalized", "adequately capitalized" and "undercapitalized" governing the acceptance of brokered deposits conform to the definitions used in the regulations implementing the prompt corrective action provisions of the FDICIA. The Bank is a "well-capitalized" institution and therefore may accept brokered deposits without restriction. At March 31, 1999, the Bank had no brokered deposits. Uniform Lending Standards Savings institutions must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by federal bank regulators. The Bank has adopted and maintains such policies. Standards for Safety and Soundness On July 10, 1995, federal bank regulators adopted Interagency Guidelines Establishing Standards for Safety and Soundness (the "Guidelines") and also adopted a final rule establishing deadlines for submission and review of safety and soundness compliance plans and operational and managerial standards for all insured depository institutions relating to internal controls, information systems and audit systems; loan documentation; credit underwriting; interest rate risk 31 exposure; asset growth; and compensation fees and benefits. The compensation standards prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that would provide excessive compensation, fees or benefits or could lead to material financial loss. Federal bank regulators are authorized, but not required, to request a compliance plan for failure to satisfy the safety and soundness standards set out in the Guidelines. The Bank believes that its operational and managerial standards substantially comply with the standards set forth in the Guidelines and that compliance with the Guidelines will therefore not impose a significant burden on Bank operations. Restrictions upon State-Chartered Banks FDIC regulations governing Bank equity investments prohibit certain equity investments and generally limit equity investments to those permissible for federally-chartered banks and their subsidiaries. Institutions holding impermissible equity investments that do not receive FDIC approval must submit to the FDIC a plan for divesting such investments. At March 31, 1999, the Bank did not hold any impermissible equity investments. Under FDIC regulations, the Bank must obtain the FDIC's prior approval before directly, or indirectly through a majority-owned subsidiary, engaging "as principal" in any activity that is not permissible for a national bank unless certain exceptions apply. The activity regulations provide that state banks which meet applicable minimum capital requirements would be permitted to engage certain activities that are not permissible for national banks, including guaranteeing obligations of others, activities which the FRB has found to be closely related to banking and certain securities activities conducted through subsidiaries. The FDIC will not approve an activity that it determines presents a significant risk to the FDIC insurance funds. As a SAIF-insured, state-chartered savings bank which was formerly a state-chartered savings association, the Bank continues to be subject to certain restrictions which are imposed by federal law on state-chartered savings associations. The activities of the Bank and its subsidiaries are of a type permissible under applicable federal regulations. Capital Maintenance FDIC Regulation FDIC-insured institutions are required to follow certain capital adequacy guidelines which prescribe minimum levels of capital and require that institutions meet certain risk-based capital requirements. The Bank is required to meet the following capital standards to remain adequately capitalized and not be subject to corrective action: (i) "Tier 1 capital" in an amount not less than 3% of total assets; (ii) "Tier 1 capital" in an amount not less than 4% of risk-weighted assets; and (iii) "total capital" in an amount not less than 8% of risk-weighted assets. FDIC-insured institutions in the strongest financial and managerial condition (with a composite rating of "1" under the Uniform Financial Institutions Rating System established by the Federal Financial Institutions Examination Council) are also required to maintain "Tier 1 capital" equal to at least 3% of total assets (the "leverage capital" requirement). Tier 1 capital is defined to include the sum of common shareholders' equity, noncumulative perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, minus all intangible assets (with certain exceptions), identified losses, and qualifying investments in securities subsidiaries. An institution that fails to meet the minimum leverage limit requirement must file a capital restoration plan with the appropriate FDIC regional director. At March 31, 1999, the Bank's ratio of Tier 1 capital to total assets was 10.14%, or 7.14 percentage points in excess of the minimum leverage capital requirement, the Bank's Tier 1 capital to risk-weighted assets was 16.09%, or 12.09 percentage points in excess of the FDIC requirement, and the Bank's total capital to risk-weighted assets was 16.71%, or 8.71 percentage points in excess of the FDIC requirement. Wisconsin Regulation Wisconsin-chartered savings banks are required to maintain a minimum capital to assets ratio of 6% and must maintain total capital necessary to ensure the continuation of insurance of deposit accounts by the FDIC. If the WDFI determines that the financial condition, history, management or earning prospects of a savings bank are not adequate, the WDFI may require a higher minimum capital level for the savings bank. If a savings bank's capital ratio falls below the required level, the WDFI may direct the savings bank to adhere to a specific written plan established by the WDFI to correct the savings bank's capital deficiency, as well as a number of other restrictions on the savings bank's operations, including a prohibition on the declaration of dividends. At March 31, 1999, the Bank's total capital, as calculated under Wisconsin law, was $9.8million or 9.4% of total assets, which was 3.4% in excess of the required amount. 32 Community Reinvestment Act Under the Community Reinvestment Act of 1977, as amended (the "CRA"), as implemented by FDIC regulations, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The law requires public disclosure of an institution's CRA rating and also requires the primary regulator to provide a written evaluation of an institution's CRA performance. . The Bank had a CRA examination on February 12, 1998, and received a "Outstanding" CRA rating. Federal Reserve System The FRB's Regulation D imposes reserve requirements on all depository institutions which maintain transaction accounts or non-personal time deposits. Checking accounts, NOW accounts and certain other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits (including certain money market deposit accounts) at a savings institution. For 1997, a depository institution must maintain average daily reserves equal to 3% on the first $49.3 million of transaction accounts and an initial reserve of $1.5 million, plus 10% of that portion of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances (subject to adjustment by the FRB) are exempt from the reserve requirements. These percentages and threshold limits are subject to adjustment by the FRB. As of March 31, 1999, the Bank met its Regulation D reserve requirements. Thrift institutions also have authority to borrow from the Federal Reserve Bank "discount window," but FRB policy generally requires thrift institutions to exhaust all FHLB sources before borrowing from the Federal Reserve System. The Bank had no discount window borrowings as of March 31, 1999. Federal Home Loan Bank System The Federal Home Loan Bank System, consisting of twelve FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out their housing finance mission; ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets; and ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member of the FHLB-Chicago, is required to acquire and hold shares of capital stock in the FHLB-Chicago in an amount equal to the greater of (i) 1% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 0.3% of total assets. The Bank is in compliance with this requirement with an investment in FHLB-Chicago stock of $850,000at March 31, 1999. Among other benefits, the FHLBs provide a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB-Chicago. At March 31, 1999, the Bank had $17.0 million in advances from the FHLB-Chicago. Holding Company Regulation Federal Regulation The Company is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA"). As such, the Company is subject to examination, regulation and periodic reporting under the BHCA, as administered by the FRB. The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC for the Bank. Failure to meet the capital adequacy requirements may result in supervisory or enforcement action by the FRB. The Company's pro forma total and Tier 1 capital significantly exceed such capital adequacy requirements. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval is required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. The 33 BHCA also prohibits the acquisition by the Company of more than 5% of the voting shares, or substantially all the assets of a bank located outside the State of Wisconsin unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. FRB regulations govern a variety of bank holding company matters, including redemption of outstanding equity securities and a bank holding company engaging in non-banking activities. Pursuant to FRB policy, dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with its capital needs, asset quality and overall financial condition. The FRB policy also requires that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity. These policies could affect the ability of the Holding Company to pay cash dividends. Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and FRB regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the Company, any subsidiary of the Company and related interests of such persons. See " -Restrictions on Loans to and Transactions with Affiliates." Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the Company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services. The Company and its subsidiary, the Bank, are affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management of the Company to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company. State Savings Bank Holding Company Regulation In addition to the FRB bank holding company regulations, a bank holding company that owns or controls, directly or indirectly, more than 25% of the voting securities of a state savings bank also is subject to regulation as a savings bank holding company by the WDFI. The WDFI has not yet issued proposed regulations governing savings bank holding companies. Acquisition of the Company Under the Change in Bank Control Act of 1978, as amended (the "CBCA"), a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company's shares of common stock outstanding, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CBCA, the FRB has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer, the convenience and needs of the communities served by the Company and the Bank, and the anti-trust effects of the acquisition. Under the Bank Holding Capital Act ("BHCA"), any company would be required to obtain prior approval from the FRB before it may obtain "control" of the Company within the meaning of the BHCA. Control is generally defined to mean ownership or power to vote 25 percent or more of any class of voting securities of the Company or the ability to control in any manner the election of a majority of the Company's directors. In addition, the BHCA prohibits the acquisition of the Company by a bank holding company located outside the State of Wisconsin, unless such acquisition is specifically authorized by Wisconsin law. See "Holding Company Regulation." Federal Securities Laws The Company filed with the Commission a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), for the registration of the Common Stock issued pursuant to the Conversion. Upon completion of the Conversion, the Company's Common Stock was registered with the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. 34 The registration under the Securities Act of the shares of the Common Stock does not cover the resale of such shares. Shares of Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Holding Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Regulatory Legislation Affecting Deposit Insurance Deposits of the Bank currently are insured to applicable limits by the FDIC under the Savings Associations Insurance Fund ("SAIF"). The FDIC also insures commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium levels are set in order to permit the funds to be capitalized at a level equal to 1.25% of total fund deposits. Assessment rate changes made in 1995 created a deposit insurance premium disparity between the two funds; while most BIF members were paying only a nominal $2,000 annual premium, SAIF members were paying average rates of 23.4 basis points of deposits. The FDIC has established a permanent base assessment schedule for the SAIF and set assessment rates at a range of 4 to 31 basis points. Current regulations provide for an adjusted assessment schedule reducing these rates by 4 basis points to reflect current conditions, producing an effective SAIF assessment range of 0 to 27 basis points beginning October 1, 1996. This assessment range, which applies to all SAIF institutions other than SAIF member savings associations, is comparable to the current schedule for BIF- institutions. A special interim rate schedule ranging from 16 to 27 basis points applied to SAIF-member savings associations for the last quarter of 1996, reflecting the fact that assessments related to certain bond obligations of the Financial Corporation ("FICO"), which were issued to resolve the savings and loan crisis in the 1980's, will be included in the SAIF rates for these institutions during that period. Because the Bank is a "Sasser bank" (a bank that converted its charter from a savings association to a state savings bank charter, yet remains a SAIF member in accordance with the so-called "Sasser Amendment"), it was not assessed this interim rate and received a credit in January 1997 for its entire FDIC premium for the quarter ended December 31, 1996. Certain bond obligations of the Financial Corporation ("FICO"), which were issued to resolve the savings and loan crisis in the 1980's, are being shared by all insured depository institutions beginning after December 31, 1996. This obligation had previously been the sole responsibility of SAIF-insured institutions and had been funded through SAIF assessments. BIF-member institutions will pay one-fifth the rate to be paid by SAIF members, for the first three years. The annual FICO assessment is 1.3 and 6.5 basis points of deposits for BIF and SAIF members, respectively. After January 1, 2000, BIF and SAIF members will share the FICO payments on a pro-rata basis, which is assessed at 2.4 basis points, until the bonds mature in 2017. 35 ITEM 2. DESCRIPTION OF PROPERTY. Properties The Company conducts its business through three full-service office locations that are located in Polk, St. Croix and Burnett Counties, Wisconsin. The Company owns all of the properties on which its offices are located. Management believes the Company's current facilities are adequate to meet its present and immediately foreseeable needs. A list of the Company's offices is as follows: Net Book Value of Properties and Year Improvements at Office Location Opened March 31, 1999 - --------------- ------ --------------- Amery/Home Office 1936 $1,180,000 234 S Keller Avenue PO Box 46 Amery, WI 54001 New Richmond Office 1972 869,000 532 S. Knowles Avenue New Richmond, WI 54017 Siren Office 1975 127,000 -------------- 24082 Highway 35 N Siren, WI 54872 Net Book Value $2,176,000 ============== 36 ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which in the aggregate involve amounts that are believed by management to be material to the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of shareholders of the Company during the three months ended March 31, 1999. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information required by this item is included under the heading "Notes to Financial Statements of Northwest Equity Corp." and "Shareholder Information" in the Registrant's Annual Report to Shareholders for the fiscal year ended March 31, 1999, which has been filed separately pursuant to Rule 14a-3 under the Securities Exchange Act of 1934 as amended and in accordance with General Instruction E(2) to Form 10-KSB, and which sections are hereby incorporated herein by reference. The Board of Directors of the Registrant declared a dividend of $0.17 per share to shareholders of record on April 30, 1999. Future payments of dividends will be subject to determination and declaration by the Registrant's Board of Directors, which will take into account the Registrant's financial condition, results of operations, tax considerations, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Company. There can be no assurance that dividends will be paid on the shares of Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Information required by this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations of Northwest Equity Corp." in the Registrant's Annual Report to Shareholders for the fiscal year ended March 31, 1999, which has been filed with the Securities and Exchange Commission separately pursuant to Rule 14a-3 under the Securities Exchange Act of 1934 as amended and in accordance with General Instruction E(2) to Form 10-KSB, and which section is hereby incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS. Information required by this item is included under headings "Consolidated Financial Statements of Northwest Equity Corp." and "Notes to Consolidated Financial Statements of Northwest Equity Corp." in the Registrant's Annual Report to Shareholders for the fiscal year ended March 31, 1999, which has been filed with Securities and Exchange Commission separately pursuant to Rule 14a-3 under the Securities Exchange Act of 1934, as amended and in accordance with General Instruction E(2) to Form 10-KSB, and which sections are hereby incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 37 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Information required by this item with respect to directors is included under the heading "Matter 1. Election of Directors" in the Registrant's definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual Meeting of the Shareholders scheduled for August 17, 1999, which has been filed separately with the Securities and Exchange Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended and in accordance with General Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the Registrant's fiscal year, and which section is hereby incorporated herein by reference. The following information as to the business experience during the past five years is supplied with respect to executive officers of the Registrant who do not serve on the Registrant's Board of Directors. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected, nor are there any family relationships among them. James L. Moore has been Senior Vice President of the Bank since 1990. Mr. Moore joined the Bank in 1975 as an assistant branch manager and was promoted to Vice President in 1988. Information required by this item with respect to Item 405, Compliance with Section 16(a) of the Securities Exchange Act of 1934 as amended is included under the heading "Section 16 Compliance" in the Registrant's definitive Proxy Statement dated July 21, 1999 relating to the 1999 Annual Meeting of Shareholders scheduled for August 17, 1999, which has been filed separately with the Securities and Exchange Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended and in accordance with General Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the Registrant's fiscal year, and which section is hereby incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION. Information required by this item is included under the heading "Compensation of Executive Officers and Directors" in the Registrant's definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual Meeting of Shareholders scheduled for August 17, 1999. The Proxy Statement has been filed separately with the Securities and Exchange Commission pursuant to Rule 14a-6 under Securities Exchange Act of 1934, as amended and in accordance with General Instruction E (3) to Form 10-KSB. It was filed not later than 120 days after the end of the Registrant's fiscal year, and that section is hereby incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this item is included under the heading "Security Ownership of Certain Beneficial Owners" in the Registrant's definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual Meeting of Shareholders Scheduled for August 17, 1999, which has been filed separately with the Securities and Exchange Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended and in accordance with General Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the Registrant's fiscal year, and which section is hereby incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this item is included under the heading "Indebtedness of Management and Certain Transactions" in the Registrant's definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual Meeting of Shareholders scheduled for August 17, 1999, which has been filed separately with the Securities and Exchange Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended and in accordance with General Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the Registrant's fiscal year, and which section is hereby incorporated herein by reference. 38 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Required by Item 601: Page Number
2.1 Plan of Conversion of Northwest Savings Bank (as amended)(1) 3.1 Articles of Incorporation of Registrant (1) 3.2 By-Laws of Registrant (1) 3.3 Stock Articles of Incorporation of Northwest Savings Bank (1) 3.4 By-Laws of Northwest Savings Bank (1) 4.1 Specimen Stock Certificate of Registrant (1) 4.2 Specimen Stock Certificate of Northwest Savings Bank (1) 10.1 Northwest Savings Bank Money Purchase Pension Plan (1) 10.2 Northwest Savings Bank Employee Stock Ownership Plan (1) 10.3 Credit Agreement by and between Northwest Savings Bank Employee Stock Ownership Trust and Registrant (1) 10.4 Northwest Savings Bank Incentive Plan (as amended)(1) 10.5 1994 Northwest Equity Corp. Stock Option Plan (1) 10.6 Northwest Equity Corp. Incentive Plan (2) 10.7 Northwest Equity Corp. 1995 Stock Option Plan (2) 10.8 Employment Agreement - Mr. Brian L. Beadle (1) 10.9 Employment Agreement - Mr. James L. Moore (1) 11.1 Statement Regarding Computation of Per Share Earnings 42 13.1 1999 Annual Report to Shareholders 43 21.1 Subsidiaries of Registrant 44 23.1 Consent of Wipfli Ullrich Bertelson LLP 45 99.1 Proxy Statement for 1999 Annual Meeting of Shareholders 46 ---------------------------- (1) Incorporated by reference to exhibits filed with Registrant's Form SB-2 Registrant Statement declared effective on August 5,1994 (Registration Number 33-73264). (2) Incoporated by reference to exhibits filed with Registrant's Form S-8 Registration Statement declared effective on January 23, 1996 (Registration Number 333-878). (b) Reports on Form 8-K
A report on Form 8-K dated February 16, 1999, was filed by the Registrant during the three months ended March 31, 1999. Item 5. Other Events notified the SEC that the Registrant signed a Definitive Agreement and Plan of Reorganization that provides for the acquisition of the Registrant, and its wholly owned banking subsidiary, by Bremer Financial Corporation. Item 7. Financial Statements and Exhibits provided a copy of the February 17, 1999, press release. A report on Form 8-K dated February 16, 1999, was filed by the Registrant during the three months ended March 31, 1999. Item 5. Other Events notified the SEC that the Registrant signed a Definitive Agreement and Plan of Reorganization that provides for the acquisition of the Registrant, and its wholly owned banking subsidiary, by Bremer Financial Corporation. Item 7. Financial Statements and Exhibits provided a copy of the Agreement and Plan of Merger dated February 16, 1999. 39 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST EQUITY CORP. Dated: June 8, 1999 By___/s/Brian L. Beadle___ Brian L. Beadle, President (Principal Executive Officer and Principal Financial and Accounting Officer) In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date __/s/Brian L. Beadle___ President(Principal Executive Officer June 8, 1999 Brian L. Beadle and Principal Financial Accounting Officer) and Director __/s/Gerald J. Ahlin___ Director June 8, 1999 Gerald J. Ahlin __/s/Vern E. Albrecht__ Director June 8, 1999 Vern E. Albrecht __/s/Michael D. Jensen__ Director June 8, 1999 Michael D. Jensen __/s/Donald M. Michels__ Director June 8, 1999 Donald M. Michels __/s/Norman M. Osero__ Director June 8, 1999 Norman M. Osero 40 INDEX TO EXHIBITS Sequentially Numbered Page Exhibit Where Attached Number Exhibits are located 11.l Statement Regarding Computation of Per Share Earnings 42 13.1 1999 Annual Report to Shareholders 43 21.1 Subsidiaries of the Registrant 44 23.1 Consent of Wipfli Ullrich Bertelson LLP 45 99.1 Proxy Statement for 1999 Annual Meeting of Shareholder 46 41 EXHIBIT 11.1 STATEMENT REGARGDING COMPUTATION OF PER SHARE EARNINGS Earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding. The computation of net income per common share is as follows: For the twelve months For the twelve months ended March 31, 1999 ended March 31, 1998 ------------------------------ ----------------------------- Basic Diluted Basic Diluted ----- ------- ----- -------
Net income 1,130,000 1,130,000 1,120,000 1,120,000 Common shares issued 1,032,517 1,032,517 1,032,517 1,032,517 Net treasury shares 208,536 208,536 198,405 198,405 Unallocated ESOP shares 44,250 44,250 59,000 59,000 Ungranted shares in incentive plan 0 0 0 0 Weighted average common shares outstanding 779,731 779,731 775,112 775,112 Common stock equivalents based on the treasury stock method 0 48,119 0 39,603 Total weighted average common shares 779,731 827,850 775,112 814,715 and equivalents outstanding Earnings per share $1.45 $1.37 $1.44 $1.37
42 EXHIBIT 13.1 1999 ANNUAL REPORT TO SHAREHOLDERS 43 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT State of Subsidiary's Ownership Incorporation or Parent Subsidiary Percentage Organization
Northwest Equity Corp. Northwest Savings Bank 100% Wisconsin Northwest Savings Bank Amery Service Agency, Inc. 100% Wisconsin Northwest Savings Bank Northwest Investments, Inc. 100% Nevada
44 EXHIBIT 23.1 CONSENT OF WIPFLI ULLRICH BERTELSON LLP ACCOUNTANT'S CONSENT We consent to the use and/or incorporation by reference in the Annual Report and Form 10-KSB405 of Northwest Equity Corp. for the year ended March 31, 1999, of our report dated April 30, 1999, accompanying the financial statements and schedules of the Company contained, or incorporated by reference, in such Annual Report. /s/__Wipfli Ullrich Bertelson LLP__ Wipfli Ullrich Bertelson LLP Wisconsin Rapids, Wisconsin June 8, 1999 45 EXHIBIT 99.1 PROXY STATEMENT FOR 1999 ANNUAL MEETING OF SHAREHOLDERS 46 EX-13 2 ANNUAL REPORT FOR NORTHWEST EQUITY CORP. TABLE OF CONTENTS Page Company Profile......................................................... 1 Financial Highlights of Northwest Equity Corp........................... 2 Letter to Shareholders.................................................. 3 Financial Table of Contents............................................. 4 Selected Consolidated Financial and Other Data of Northwest Equity Corp. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations of Northwest Equity Corp.................... 7 Independent Auditor's Report............................................ 24 Consolidated Financial Statements of Northwest Equity Corp. Consolidated Balance Sheets of the Company at March 31, 1999 and 1998. 25 Consolidated Statements of Operations of the Company for the Years Ended March 31, 1999, 1998 and 1997...................................... 26 Consolidated Statements of Shareholders' Equity of the Company for the Years Ended March 31, 1999, 1998 and 1997........................... 27 Consolidated Statements of Cash Flows of the Company for the Years Ended March 31, 1999, 1998 and 1997....................................... 28 Notes to Consolidated Financial Statements of Northwest Equity Corp...... 30 Shareholder Information.................................................. 53 COMPANY PROFILE Northwest Equity Corp. is the holding company for Northwest Savings Bank. The Bank converted from a Wisconsin-chartered mutual savings bank to a Wisconsin-chartered stock savings bank on October 7, 1994 (the "Conversion"). In connection with the Conversion, Northwest Equity Corp. sold 1,032,517 shares of its Common Stock at $8.00 per share and used a portion of the net proceeds to purchase all of the issued and outstanding capital stock of the Bank. Northwest Savings Bank was established in 1936, and is regulated by the Wisconsin Department of Financial Institutions and the Federal Deposit Insurance Corporation. The Bank is a community-oriented, full-service financial institution offering a variety of retail financial services to meet the needs of the communities it serves. The Bank's principal business consists of attracting funds in the form of deposits and investing such funds primarily in residential real estate loans, mortgage-backed and related securities, and various types of commercial and consumer loans. The Bank has three full-service offices located in Polk, St. Croix and Burnett Counties, Wisconsin. At March 31, 1999, the Company had total assets of $97.6 million, total deposits of $62.0 million and shareholders' equity of $12.4 million. Northwest Equity Corp.'s common stock trades on The Nasdaq SmallCap Stock Market under the symbol "NWEQ." The Nasdaq Stock Market, which began operation in 1971, is the world's first electronic securities market and the fastest growing stock market in the U.S. Nasdaq utilizes today's information technologies--computers and telecommunications--to unite its participants in a screen-based market. It enables market participants to compete with each other for investor orders in each Nasdaq security and, through the use of Nasdaq Workstation II and other automated systems, facilitates the trading and surveillance of thousands of securities. This competitive marketplace, along with the many products and services available to issuers and their shareholders, attracts today's largest and fastest growing companies to Nasdaq. These include industry leaders in computers, pharmaceuticals, telecommunications, biotechnology, and financial services. More domestic and foreign companies list on Nasdaq than on all other U.S. stock markets combined. 1 FINANCIAL HIGHLIGHTS OF NORTHWEST EQUITY CORP. At or For the Fiscal Year Ended March 31, 1999 1998 1997 ---- ---- ---- (Dollars in thousands, except per share data and ratios)
Total Assets............................... 97,585 98,739 95,097 Loans Receivable, Net...................... 73,347 78,297 77,240 Securities held to maturity................ 9,435 9,398 10,173 Shareholders' Equity....................... 12,361 11,514 10,859 Net Interest Income After Provision for Loan Losses................ 3,353 3,420 3,339 Total Other Income......................... 736 608 531 Total General and Administrative Expenses.................. 2,465 2,298 2,643 Net Income................................. 1,133 1,120 710 Basic Earnings Per Share................... $1.45 $1.44 $0.84 Diluted Earnings Per Share................. $1.37 $1.37 $0.83 Return on Average Assets................... 1.15% 1.15% .76% Return on Average Equity................... 9.50% 9.85% 6.18% Interest Rate Spread....................... 3.50% 3.50% 3.51% Net Interest Margin........................ 4.08% 3.85% 3.88% Non-Performing Loans to Gross Loans........................... .32 1.76 1.37
2 LETTER TO SHAREHOLDERS The Board of Directors ("Board") and employees of Northwest Equity Corp. ("Company"), the holding company of Northwest Savings Bank, are proud to present the fifth annual report since the stock conversion consummated on October 7, 1994. On February 17, 1999, the Board announced that it had entered into a definitive agreement and plan of merger with Bremer Financial Corporation ("Bremer"), for Bremer to acquire Northwest stock in a transaction, which would be valued at $24.00 in cash for each share outstanding. "We're excited about the opportunity to serve the customers of Northwest Savings Bank," said Stan K. Dardis, Bremer Financial President and CEO. "The two organizations fit together naturally since both share a strong history of serving customers and the communities in which they live." I said, "The combining of our two institutions will merge similar customer bases and banking philosophies with the advantage of extending a greater variety of products, services and banking locations to the Northwest customer base. We believe the opportunity for enhanced financial services to be provided to our customers when combined with the financial terms offered to our shareholders offers a very attractive package." Bremer Financial Corporation, a privately held regional financial services company with $3.4 billion in assets, is the holding company for 86 banks in Minnesota, North Dakota and Wisconsin. The Otto Bremer Foundation and Bremer's more than 1500 employees own Bremer. Bremer is headquartered in Saint Paul, Minnesota. The Northwest Equity Corp.(the "Company") was incorporated on November 3, 1993, at the direction of the Bank to become a bank holding company and own all of the Bank's capital stock to be issued upon its conversion from mutual form to stock ownership (the "Conversion"). On October 7, 1994, the Bank completed the Conversion. On that date, the Company issued and sold 1,032,517 shares of its Common Stock at $8.00 per share. The gross proceeds from the sale of the shares of Common Stock were $8.3 million. Since that time the Company has repurchased 207,216 shares in various stock buy-back programs and reissued 647 shares under a stock option program. At $24.00 per share for 825,301 remaining shares, the gross proceeds from the sale to Bremer are $19.8 million. The transaction is expected to be completed by the fourth quarter of 1999, pending regulatory approval and approval of Northwest shareholders. Northwest stock has been very thinly traded, subject to wide spreads between the Bid and the Asked, and, consequently, subject to wide fluctuations in price. A special meeting will be held for the shareholders to vote on this proposal. The proxy statement for the special meeting will contain th edetails of the long and tedious process that was implemented to insure the shareholder received the highest possible price. The Board strongly recommends that shareholders vote to approve this transaction. /s/Brian L. Beadle Brian L. Beadle President and Chief Executive Officer 3 FINANCIAL TABLE OF CONTENTS Page Selected Consolidated Financial and Other Data of Northwest Equity Corp.. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations of Northwest Equity Corp.: General.......................................................... 7 Management Strategy.............................................. 8 Comparison of Operating Results for the Years Ended March 31, 1999 and March 31, 1998.............................. 10 Comparison of Operating Results for the Years Ended March 31, 1998 and March 31, 1997.............................. 13 Financial Condition.............................................. 15 Liquidity, Capital Resources and Regulatory Capital.............. 16 Impact of Inflation and Changing Prices.......................... 17 Current Accounting Developments.................................. 18 Asset/Liability Management....................................... 19 Average Balance Sheet............................................ 22 Rate/Volume Analysis............................................. 23 Independent Auditor's Report.............................................. 24 Consolidated Financial Statements of Northwest Equity Corp.: Consolidated Balance Sheets at March 31, 1999 and 1998........... 25 Consolidated Statements of Operations for the Years Ended March 31, 1999, 1998 and 1997................................. 26 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999, 1998 and 1997................................. 27 Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997................................. 28 Notes to Consolidated Financial Statements of Northwest Equity Corp....... 30 4 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF NORTHWEST EQUITY CORP. Set forth below are selected consolidated financial and other data of the Company. The financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and notes thereto that are presented elsewhere in this Annual Report. At March 31, --------------------------------------------------- 1999 1998 1997 --------------- -------------- --------------
(In thousands) Selected Financial Data: Total assets $97,585 $98,739 $95,097 Loans receivable, net 73,347 78,297 77,240 Loans held for sale 143 142 415 Cash and cash equivalents 10,470 6,047 2,980 Securities available-for-sale - - 2,752 Mortgage-backed and related securities 6,037 6,398 7,421 FHLB stock 850 1,159 912 Deposits 62,003 62,278 61,557 FHLB advances and other borrowings 22,615 24,320 22,097 Shareholder's Equity - substantially restricted 12,361 11,514 10,859 Fiscal Year Ended March 31, 1999 1998 1997 --------------- -------------- -------------- (In thousands) Selected Operating Data: Total interest income $7,781 $7,763 $7,492 Total interest expense 4,052 4,243 4,072 ------ ------ ------ Net interest income 3,729 3,520 3,420 Provision for loan losses 376 100 81 ------ ------ ------ Net interest income after provision for loan losses 3,353 3,420 3,339 Non-interest income: Mortgage servicing fees 94 77 77 Service charges on deposits 252 251 220 Loss on sale of investments - (24) - Gain on sale of mortgage loans 206 130 59 Other non-interest income 184 174 175 ------ ------ ------ Total other non-interest income 736 608 531 Total general and administrative expenses 2,465 2,298 2,643 Income before income tax expense 1,624 1,730 1,227 Income tax expense 491 610 517 ------ ------ ------ Net Income 1,133 1,120 710
5 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF NORTHWEST EQUITY CORP. (CONT.) Selected Financial Ratios and Other Data: At or For the Fiscal Year Ended March 31, --------------------------------------------------- Performance Ratios 1999 1998 1997 --------------- -------------- --------------
Return on average assets 1.15% 1.15% 0.76% Return on average equity 9.50% 9.85% 6.18% Interest rate spread during period(1) 3.50% 3.50% 3.51% Net interest margin(1) 4.08% 3.85% 3.88% Non-interest expense to average assets 2.89 2.47 2.84 Non-interest income to average assets 0.75 0.63 0.57 Average interest-earning assets to average interest-bearing liabilities 1.07x 1.07x 1.08x Asset Quality Ratios Non-performing loans to gross loans(2) 0.32% 1.76% 1.37% Non-performing assets to total assets(2) 0.31% 1.57% 1.13% Allowance for loan losses to non-performing loans(2) 157.56% 34.87% 43.04% Classified assets to total assets 0.66% 1.91% 1.40% Net charge-offs to average gross loans 0.62% 0.11% 0.07% Capital Ratios Average Equity to average assets 12.14% 11.51% 12.36% Equity to total assets at end of period 12.67% 11.66% 11.42% Other Data Number of deposit accounts 9,448 9,519 9,440 Number of real estate loans outstanding 1,464 1,652 1,670 Number of real estate loans serviced 2,146 2,318 2,206 Number of consumer loans outstanding 974 1,092 1,108 Mortgage loan originations (in thousands) $47,763 $29,720 $29,086 Full-service facilities 3 3 3 - ------------------------------- (1) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets. (2) Non-performing loans consist of non-accrual loans. Non-performing assets consist of non-performing loans and foreclosed properties.
6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NORTHWEST EQUITY CORP. General Northwest Equity Corp., a Wisconsin corporation (the "Company"), is a holding company that owns all of the issued and outstanding stock of Northwest Savings Bank, a Wisconsin-chartered stock savings bank (the "Bank"). In this discussion and analysis, reference to the operations and financial condition of the Company includes the operations and financial condition of the Bank. The Company was incorporated on November 3, 1993, at the direction of the Bank to become a bank holding company and own all of the Bank's capital stock to be issued upon its conversion from mutual form to stock ownership (the "Conversion"). On October 7, 1994, the Bank completed the Conversion. On that date, the Company issued and sold 1,032,517 shares of its Common Stock at $8.00 per share. The gross proceeds from the sale of the shares of Common Stock were $8.3 million. Net proceeds to the Company were $6.9 million, after deduction of Conversion expenses of $0.6 million and after lending $0.8 million to the Bank's Employee Stock Ownership Plan. The Company used $3.4 million of the net proceeds to acquire all of the issued and outstanding stock of the Bank. The Company's business currently consists of the business of the Bank. The Bank is a community-oriented, full-service financial institution offering a variety of retail financial services to meet the needs of the communities it serves. The Bank's principal business consists of attracting funds in the form of deposits and other borrowings and investing such funds primarily in residential real estate loans, mortgage-backed securities, mortgage related securities, including collateralized mortgage obligations, and various types of commercial and consumer loans. The Bank's primary sources of funds are deposits, repayment on loans and mortgage-backed and related securities, and advances from the Federal Home Loan Bank of Chicago ("FHLB-Chicago"). The Bank utilizes these funds to invest primarily in mortgage loans secured by one-to-four family properties, and to a lesser extent, consumer, commercial and other loans, and to invest in mortgage-backed and related securities and other investment securities. The Bank is regulated by the Wisconsin Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"), and its deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"). The Bank also is a member of the Federal Home Loan Bank System. The earnings of the Company depend primarily on its level of net interest income. Net interest income is the difference between interest earned on interest-earning assets, consisting primarily of mortgage loans, mortgage-backed and related securities and other investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits and advances from the FHLB-Chicago. Net interest income is a function of the Company's "interest rate spread," which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, as well as a function of the average balance of interest-earning assets as compared to interest bearing-liabilities. Many of the Company's assets, including mortgage loans and mortgage-backed and related securities, are subject to reinvestment risk. During periods of falling interest rates, higher yielding loans and mortgage-backed securities are more likely to prepay, and the Company may not be able to reinvest the proceeds from prepayments in loans or securities with yields similar to those prepaying. The Company's operating results also are affected to a lesser extent by the amount of its non-interest income, including loan servicing and loan related fees, gains on sales of mortgage loans, as well as transactional and other fee income. Additionally, gains or losses on the sale of investment securities and mortgage-backed and related securities may affect net income. The Company's non-interest expense consists principally of employee compensation, occupancy expenses, federal deposit insurance premiums and other general and administrative expenses. General economic conditions and the monetary, fiscal and regulatory policies of governmental agencies significantly affect the Company's operating results. The demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds influence lending activities. Deposit flows and prevailing market rates of interest on competing investment alternatives, account maturities and the levels of personal income and savings in the Company's market areas likewise heavily influences the costs of funds. 7 Regulatory Developments Related to Deposit Insurance The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. Two separated insurance funds, the Bank Insurance Fund ("BIF") and the Savings Associations Insurance Fund ("SAIF") are maintained and administered by the FDIC. The Bank is a member of SAIF and the FDIC has examination authority over the Bank. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to it target level within a reasonable time and may decrease such assessment rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments are set within a range, based on the risk the institution poses to its deposit insurance fund. This risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Management Strategy Management's strategy has focused on managing the Company's interest rate risk and maintaining credit quality by emphasizing residential lending, primarily loans secured by one-to-four family, owner-occupied dwellings. Residential Mortgage Lending Emphasis: The Company's primary investing activity is the origination of one-to-four family residential mortgage loans secured by owner-occupied properties. At March 31, 1999, $54.1 million or 73.4% of gross loans consisted of such loans. Mortgage loan originations totaled $47.8 million, $29.3 million and $29.0 million for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. The Company generally originates ARM loans for retention in its loan portfolio and generally sells all fixed rate loans originated to the secondary markets. Management of Interest Rate Risk: The Company has attempted to reduce its interest rate risk by emphasizing the origination of ARM loans for retention in its loan portfolio and by selling substantially all of its fixed rate loans originated. At March 31, 1999, $59.7 million or 81.4% of net loans receivable were ARM loans. Management believes this strategy has reduced income due to lower initial yields on these investments in comparison to longer-term fixed rate investments. However, management believes reducing its exposure to interest rate fluctuations tends to reduce the volatility of the Company's net interest income over the long-term. To maintain the Company's net interest margin, satisfy certain liquidity requirements by the Department of Financial Institutions ("DFI") and manage interest rate risk, the Company has maintained a portfolio of mortgage-backed and related securities held-to-maturity. The Company's mortgage-backed securities held-to-maturity at March 31, 1999, were $6.0 million or 6.1% of total assets, and at March 31, 1998, were $6.4 million or 6.5% of total assets. Management has adopted a strategy designed to achieve acceptable levels of matching of its assets and liabilities and their repricing characteristics. The primary elements of this strategy involve emphasizing the origination and purchase of adjustable-rate assets, and utilizing FHLB-Chicago advances to purchase participation interests in loans with similar terms to maturities and higher yields. Over the last five fiscal years, the Company has emphasized the matching of interest rate sensitivities through the sale of fixed rate mortgage loans originated, the origination of ARM loans, the repayment of fixed rate mortgage assets, and the purchase of short-term and adjustable-rate mortgage-backed and related securities. At March 31, 1999, the Company's one-year interest rate sensitivity gap as a percentage of total assets was a negative 4.43%. During periods of rising interest rates, a negative rate sensitivity gap would tend to negatively affect net interest income; however, during periods of falling interest rates, a negative interest rate sensitivity gap would tend to positively affect net interest income. In fiscal 1999, the Company leveraged its capital base by using the proceeds of borrowings from the FHLB-Chicago and deposits to originate additional loans. FHLB advances decreased to $17.0 million at March 31, 1999, compared to $19.1 million at March 31, 1998. The Company intends to continue to leverage its capital base by using FHLB-advances. Asset Quality: The Company emphasizes high asset quality in both its investment portfolio and lending activities. Non-performing assets have ranged between .31% and 1.57% of total assets during the last three years and were .31% of total assets at March 31, 1999. During the fiscal years ended March 31, 1999, 1998 and 1997, the Company recorded provisions for loan losses of $376,000, $100,000, and $81,000, respectively, to its allowance for 8 loan losses and had net charge-offs of $485,000, $77,000, $53,000, respectively. The Company's allowance for loan losses at March 31, 1999, totaled $375,000 or 61.0% of cumulative net charge-offs during the last three fiscal years. The allowance for loan losses is determined by multiplying the average balance of real estate loans, installment and credit card loans, and commercial and other loans by the percentage of actual loss experience for the last three years for each category of loans, plus 15% for any substandard loans in each category of loans. Substandard loans are evaluated individually and actual loss percentage to the average balance of each category of loans as a group. Any unallocated portion of the allowance is applied to the category with the highest percentage of loss experience for the prior three years. A self-correcting mechanism to reduce differences between estimated and actual observed losses is not necessary since the allowance is determined by actual observed losses. The average balance of each category of loans reflects changes in loan concentration. Loan quality is reflected in the 15% allowance for any substandard loan. As the allowance is based on actual loss experience and the current level of substandard loans, no elimination methods and assumptions are used in determining the allowance. A change in substandard loans and the average balance of the categories of loans will be immediately reflected in the allowance. The level of the allowance is equal to historical net loss experience plus the 15% allowance for the current level of substandard assets. The ratio of allowance for loan losses to gross loans receivable was 0.51% at March 31, 1999. Management and Development of Customer Base: The Company has focused on managing deposits to maintain its capital ratios and improve the stability of its deposit base. In this regard, management has emphasized an increased level of service to its customers to retain and attract core deposits. In 1988, the Bank built and opened a new home office and implemented a strategy to expand the services it offers beyond those services traditionally offered by thrift institutions. These services include checking accounts, ATMs, night depositories, safe deposit boxes, drive-through banking, and investment products through its subsidiary, in order to create broad banking relationships with its customers. This expansion of services continued with the grand opening of the remodeled and expanded branch office in New Richmond, Wisconsin in June 1996. Comparison of Operating Results for the Fiscal Years Ended March 31, 1999 and March 31, 1998 General Net income for the fiscal year ended March 31, 1999, increased $13,000 or 1.2% to $1,133,000 from $1,120,000 for the fiscal year ended March 31, 1998. The increase in net income was primarily due to an increase in net interest income of $209,000 from $3.5 million for the fiscal year ended March 31, 1998, to $3.7 million for the fiscal year ended March 31, 1999, and a $128,000 increase in total other income to $736,000 for the fiscal year ended March 31, 1999, from $608,000 for the fiscal year ended March 31, 1998. These increases was offset by a $276,000 increase in the provision for loan losses to $376,000 for the fiscal year ended March 31, 1999, from $100,000 for the for the fiscal year ended March 31, 1998. The increase in the provision for loan losses reflects the settlement of the case first reported under Part II, Item 1. Legal Proceedings in the Form 10QSB dated September 30, 1996, and in subsequent 10QSB and 10KSB reports. Return on average assets increased 1.16 % for the fiscal year ended March 31, 1999, from 1.15% for the prior year and return on average equity decreased 9.59 % from 9.85% for the same years. General and administrative expenses for the fiscal year ended March 31, 1999, increased $167,000 or 7.3% to $2.5 million from $2.3 million for the prior fiscal year. This increase was partially offset by a reduction of $119,000 in provision for income taxes from $610,000 for the fiscal year ended March 31, 1998, to $491,000 for the fiscal year ended March 31, 1999. Net Interest Income Net interest income for the fiscal year ended March 31, 1999, increased $209,000 or 5.9% to $3.7 million from $3.5 million for the fiscal year ended March 31, 1998. The increase in net interest income is a result of an increase in interest income of $18,000 to $7,781,000 for the fiscal year ended March 31, 1999, compared to $7,763,000 for the fiscal year ended March 31, 1999; combined with a decrease in interest expense of $191,000 to $4,052,000 for the fiscal year ended March 31, 1999, from $4,243,000 for the fiscal year ended March 31, 1998. Interest Income Interest income increased $18,000 or 0.23% to $7.78 million for the fiscal year ended March 31, 1999 from $7.76 million for the fiscal year ended March 31, 1998. Interest income on loans decreased $12,000 from $6.97 million for the fiscal year ended March 31, 1998, to $6.96 million for the fiscal year ended March 31, 1999. The 9 decrease in interest income on loans results from a decrease of $1.13 million in the average outstanding balance of total loans to $78.3 million for the fiscal year ended March 31, 1999 from $79.5 million for the fiscal year ended March 31, 1998. Interest on mortgage-backed securities decreased $64,000 to $430,000 for the fiscal year ended March 31,1999, from $494,000 for the fiscal year ended March 31 ,1998. This decrease was due to a decrease in the average outstanding balance of mortgage backed securities from $6.9 million for the fiscal year ended March 31, 1998, to an average outstanding balance of $6.2 million for the fiscal year ended March 31, 1999. Interest on investments increased $94,000 to $394,000 for the fiscal year ended March 31,1999, compared to $300,000 for the fiscal year ended March 31,1998. The increase was due to an increase in the average outstanding balances of interest-bearing deposits in other financial institutions, investment securities, and Federal Home Loan Bank ("FHLB") stock of $1.9 million from $5.0 million for the fiscal year ended March 31,1998, to $6.9 million for the fiscal year ended March 31,1999. Interest Expense Interest expense decreased $191,000 or 4.5% to $4.05 million for the fiscal year ended March 31, 1999, from $4.24 million for the fiscal year ended March 31, 1998. The decrease is due to the decrease in the average rate paid on interest-bearing liabilities decreased of 0.26% from 4.99% for the fiscal year ended March 31, 1998, to 4.73% for the fiscal year ended March 31, 1999. The average outstanding balance of interest-bearing liabilities increased $0.6 million from $85.1 million for the fiscal year ended March 31, 1998 to $85.7 million for the fiscal year ended March 31, 1999.. Interest on savings decreased $84,000 or 2.9% to $2.8 million for the fiscal year ended March 31, 1999, from $2.9 million for the fiscal year ended March 31, 1998. The decrease in interest expense was the result of a decrease of 0.16% from 4.65% in the average yield/rate during the fiscal year ended March 31, 1998, to 4.49% during the fiscal year ended March 31, 1999. The average outstanding balance of deposits increased $339,000 to $62.6 million for the fiscal year ended March 31, 1999, from $62.3 million for the fiscal year ended March 31, 1998. Interest on borrowings decreased $107,000 or 7.9% to $1.24 million for the fiscal year ended March 31, 1999, from $1.35 million for the fiscal year ended March 31, 1998. The decrease in interest on borrowings was the result of an decrease in the average rate on advances and other borrowings to 5.38% for the fiscal year ended March 31, 1999, from 5.91% for the fiscal year ended March 31, 1998. The decrease in the average rate was the result of lower interest rates offered by the FHLB during the fiscal year. The average balance of advances and other borrowings increased $236,000 from $22.8 million for the fiscal year ended March 31, 1998, to $23.1 million for the fiscal year ended March 31, 1999. Provision for Loan Losses The provision for loan losses increased $276,000 to $376,000 for the fiscal year ended March 31, 1999, compared to $100,000 for the fiscal year ended March 31, 1998. The increase provides for the settlement of a loan reported in the Legal Proceedings and Provision for Loan Losses sections of 10QSB and 10KSB reports since September 30, 1996. The allowance for loan losses totaled $375,000 at March 31, 1999, compared to $484,000 at March 31, 1998, and represented 0.50 % and 0.61% of gross loans and 157.6% and 34.9% of non-performing loans, respectively. The allowance for loan losses calculation is based on a three year actual loss average, and the current allowance calculation incorporates the effect of the loan provided for in the provision for loan losses mentioned above. Other Income Total other income increased $128,000 or 21.1% to $736,000 for the fiscal year ended March 31, 1999, from $608,000 for the fiscal year ended March 31, 1998. The increase is primarily due to an increase in gain on sale of mortgage loans of $76,000 from $130,000 for the fiscal year ended March 31, 1998, to $206,000 for the fiscal year ended March 31, 1999. The increase in gain on sale of mortgage loans is due to the general decline of mortgage interest rates over the two comparable periods which enhances the bank's ability to generate gains on sale of mortgages. The increase is also partially due to absence of a loss on sale of investments in the fiscal year ended March 31, 1999, compared to ($24,000) for the fiscal year ended March 31, 1998. Mortgage servicing fees increased $17,000 from $77,000 for the fiscal year ended March 31, 1998, to $94,000 for the fiscal year ended March 31, 1999. Again this is a reflection of the general decline of mortgage interest rates over the two comparable periods, which encouraged loan-refinancing activity into fixed rates loans that are sold on the secondary market and thus increase mortgage-servicing fees. Other income increased $10,000 from $174,000 for the fiscal year ended March 31,1998, to $184,000 for the fiscal year ended March 31,1999. The increase is partially due to an increase of $17,000 in brokerage commissions in the bank's subsidiary to $71,000 for the fiscal year ended March 31,1999, from 10 $54,000 for the fiscal year ended March 31,1998. This increase was offset by a decrease of $11,000 in the profit on sale of real estate held in the Bank's subsidiary to $50,000 for the fiscal year ended March 31,1999, compared to $61,000 for the fiscal year ended March 31, 1998. With the transaction consummated in the quarter ending June 30, 1998, the Bank's subsidiary divested all of its real estate holdings. General and Administrative Expenses General and administrative expenses increased $167,000 or 7.3% to $2.5 million for the fiscal year ended March 31,1999, compared to $2.3 million for the fiscal year ended March 31,1998. The increase was primarily due to an increase of $118,000 in salaries and employee benefits from $1.2 million for the fiscal year ended March 31,1998, to $1.3 million for the fiscal year ended March 31,1999. The increase was due to adjustments in employee salaries in response to intense wage competition for employees in the marketplace. Data processing expenses increased $33,000 from $135,000 for the fiscal year ended March 31,1998, to $168,000 for the fiscal year ended March 31,1999. The increase was due to a scheduled contractual increase in the fee based on transaction volumes and a $20,000 fee for testing the data processing system for Year 2000 compliance. Net occupancy expense increased $15,000 from $350,000 for the fiscal year ended March 31,1998, to $365,000 for the fiscal year ended March 31,1999, and reflects some extraordinary maintenance items occurring during the current period. Income Tax Expense Income tax expense decreased $119,000 or 19.5% from $610,000 for the fiscal year ended March 31,1998, to $491,000 for the fiscal year ended March 31,1999. The decrease in income tax expense is the direct result of a decrease in income before taxes of $106,000 from $1,730,000 for the fiscal year ended March 31,1998, to $1,624,000 for the fiscal year ended March 31,1999. The effective tax rate for the fiscal year ended March 31,1998, was 35.3% compared to 30.2% for the fiscal year ended March 31,1999. The decrease is the effective rate was due to tax accounting related to the restricted stock plan award. Comparison of Operating Results for the Fiscal Years Ended March 31, 1998 and March 31, 1997 General Net income for the fiscal year ended March 31, 1998, increased $410,000 or 57.7% to $1.1 million from $710,000 for the fiscal year ended March 31, 1997. Return on average assets increased to 1.15% for the fiscal year ended March 31, 1998, from 0.76% for the prior year and return on average equity increased to 9.85% from 6.18% for the same years. The increase in the return on average assets was primarily due to the $389,000 decrease in federal insurance premiums from $428,000 for the fiscal year ended March 31, 1997 to $39,000 for the fiscal year ended March 31, 1998. The decrease resulted from the absence in the current fiscal year of the one-time $350,000 special assessment to recapitalize the SAIF insurance fund paid to the FDIC in the quarter ended September 30, 1997. Net interest income before provision for loan losses increased $100,000 or 2.9% to $3.5 million for the fiscal year ended March 31, 1998, from $3.4 million for the fiscal year ended March 31, 1997. This increase was primarily due to an increase in interest income of $271,000, partially offset by an increase in interest expense of $171,000. Provision for loan losses increased 23.5% to $100,000 for the fiscal year ended March 31, 1998, from $81,000 for the fiscal year ended March 31, 1997. The increase reflects a full fiscal year's provisions for a large commercial loan discussed previously under Asset Quality. Total other income increased by $77,000 to $608,000 for the fiscal year ended March 31, 1998, from $531,000 for the fiscal year ended March 31, 1997. This was primarily due to an increase gain on sale of mortgage loans of $71,000 from $59,000 for the fiscal year ended March 31, 1997, to $130,000 for the fiscal year ended March 31, 1998. General and administrative expenses for the fiscal year ended March 31, 1998, decreased $345,000 or 13.1% to $2.3 million from $2.6 million for the prior fiscal year. The decrease was due to a $389,000 decrease federal insurance premiums that was offset by an increase of $10,000 in salaries and employee benefits, and a $14,000 increase in net occupancy expense and a $16,000 increase in other expense. Net Interest Income Net interest income for the fiscal year ended March 31, 1998, increased $100,000 or 2.9% to $3.5 million from $3.4 million for the prior year. The increase was due to an increase in interest income of $271,000, partially offset by an increase in interest expense of $171,000. The improvement in net interest income primarily reflects an increase in the average outstanding balance of total interest-earning assets to $91.4 million for the fiscal year ended March 31, 1998 compared to $88.1 million for the prior fiscal year. The increase in the Company's net earning asset 11 position was attributable primarily to an increase in the average outstanding balance of total loans funded by the increase in total deposits and advances and other borrowings. Interest Income Interest income increased $271,000 or 3.6% to $7.8 million for the fiscal year ended March 31, 1998 from $7.5 million for the fiscal year ended March 31, 1997. The increase is partially due to a $267,000 increase in interest income on loans from $6.7 million for the fiscal year ended March 31, 1997, to $7.0 million for the fiscal year ended March 31, 1998. The increase in interest income on loans results from an increase of $2.9 million in the average outstanding balance of mortgage loans to $67.1 million for the fiscal year ended March 31, 1998 from $64.2 million for the fiscal year ended March 31, 1997. Interest on commercial loans decreased $46,000 from $417,000 for the fiscal year ended March 31, 1997, to $371,000 for the fiscal year ended March 31, 1998. The decrease is due to the non-accrual status of the large commercial loan discussed under Asset Quality. As a result, the average yield on commercial loans decreased from 9.19% for the fiscal year ended March 31, 1997, to 7.80% for the fiscal year ended March 31, 1998. Interest on consumer loans increased $18,000 from $731,000 for the fiscal year ended March 31, 1997, to $749,000 for the fiscal year ended March 31, 1998. The increase results from an increase in the average outstanding balance of consumer loans to $7.7 million during the fiscal year ended March 31, 1998, from $7.5 million during the fiscal year ended March 31, 1997. Interest on mortgage-backed and related securities decreased $62,000 to $494,000 for the fiscal year ended March 31, 1998, from $556,000 for the prior fiscal year. The decrease is the result of the decrease in the average balance of mortgage-backed and related securities from $7.6 million for the fiscal year ended March 31, 1997, to $6.9 million for the fiscal year ended March 31, 1998. The decrease in mortgage-backed securities was due to scheduled principal payments and prepayments. Interest on interest bearing deposits in other financial institutions increased $52,000 from $23,000 for the fiscal year ended March 31, 1997, to $75,000 for the fiscal year ended March 31, 1998. The average outstanding balance of interest bearing deposits in other financial institutions increased from $461,000 during the fiscal year ended March 31, 1997 to $818,000 during the fiscal year ended March 31, 1998. The increase reflects the larger cash balances held as a result of the establishment of the Nevada investment subsidiary. Interest and dividends on investments increased $66,000 to $300,000 for the fiscal year ended March 31, 1998, from $234,000 for the fiscal year ended March 31, 1997. The increase was partially due to a increase in the average yield of investment securities to 5.95% for the fiscal year ended March 31, 1998 from 5.53% for the fiscal year ended March 31, 1997. This increase resulted from the restructuring of the investment portfolio, which created a $24,000 loss on the sale of investments, but acted to increase the current yield of the remaining investments. Dividends on Federal Home Loan Bank stock increased $14,000 to $68,000 for the fiscal year ended March 31, 1998, from $54,000 for the fiscal year ended March 31, 1997. The increase was due to an increase of the average outstanding balance of Federal Home Loan Bank stock from $837,000 during the fiscal year ended March 31, 1997, to $996,000 during the fiscal year ended March 31, 1998. The increase in the stock balance was a requirement of the Federal Home Loan Bank due to the increase in advances during the fiscal year ended March 31, 1998. The average yield on all of the Company's total interest-earning assets of 8.50% for the fiscal year ended March 31, 1998, remained relatively unchanged from the 8.51% for the fiscal year ended March 31, 1997. The increase in average balances of loans and mortgage-backed and related securities were principally funded by increases in deposits and advances from the FHLB-Chicago. Interest Expense Interest expense increased $171,000 or 4.2% to $4.2 million for the fiscal year ended March 31, 1998, from $4.1 million for the fiscal year ended March 31, 1997. The increase is due to the increase in the average outstanding balance of interest-bearing liabilities of $3.7 million from $81.4 million for the fiscal year ended March 31, 1997 to $85.1 million for the fiscal year ended March 31, 1998. The average rate paid on interest-bearing liabilities decreased slightly from 5.00% for the fiscal year ended March 31, 1997, to 4.99% for the fiscal year ended March 31, 1998. Interest on savings increased $9,000 or 0.31% to $2.9 million for the fiscal year ended March 31, 1998, from $2.9 million for the fiscal year ended March 31, 1997. The increase in interest expense on deposits was the result of an increase in average deposits to $62.3 million for the fiscal year ended March 31, 1998, from $60.8 million for the fiscal year ended March 31, 1997. The increase in interest on the increased savings balances was offset by an almost identical decrease in interest expense due to the average yield during the fiscal year ended March 31, 1997, decreasing from 4.74% to 4.65% during the fiscal year ended March 31, 1998. Interest on borrowings increased $162,000 or 13.5% to $1.4 million for the fiscal year ended March 31, 1998, from $1.2 million for the fiscal year ended March 31, 1997. The increase in interest on borrowings was the result of an increase in the average balances of advances from $20.6 million for the fiscal year ended March 31, 1997, to $22.8 million for the fiscal year ended March 31, 1998. The increase was also due to an increase in the average rate on advances and other borrowings to 12 5.91% for the fiscal year ended March 31, 1998, from 5.78% for the fiscal year ended March 31, 1997. The increase in the average rate was the result higher interest rates offered by FHLB during the fiscal year. Provision for Loan Losses The provision for loan losses increased $19,000 or 23.5% to $100,000 for the fiscal year ended March 31, 1998, from $81,000 for the fiscal year ended March 31, 1997. The desired level of allowance for loan losses is determined by the Company's historical loan loss experience, the condition and composition of the Company's loan portfolio and general conditions. The higher provisions during the fiscal year ended March 31, 1998, reflects provisions for a large commercial loan discussed previously under Asset Quality. The allowance for loan losses totaled $461,000 at March 31, 1997 and $484,000 at March 31, 1998, and represented 0.59% and 0.61% of gross loans and 43.0% and 34.9% of non-performing loans, respectively. Management currently believes the allowance for loan losses is at an adequate level to provide for potential loan losses and that future provisions for loan losses will be remain at $25,000 per quarter until the status of the above-mentioned commercial loan is determined. Other Income Total other income increased $77,000 or 14.5% to $608,000 for the fiscal year ended March 31, 1998, from $531,000 for the fiscal year ended March 31, 1997. The increase is partially due to an increase in gain on sale of mortgage loans of $71,000 from $59,000 for the fiscal year ended March 31, 1997, to $130,000 for the fiscal year ended March 31, 1998. The decrease in the market level of mortgage interest during the fiscal year acts to generate gains on sale of mortgage loans. An increase in service charges on deposits of $31,000 from $220,000 for the fiscal year ended March 31, 1997 to $251,000 for the fiscal year ended March 31, 1998, was offset by a $24,000 increase in loss on sale of investments from $0 for the fiscal year ended March 31, 1997, to $24,000 for the fiscal year ended March 31, 1998. The losses were incurred while restructuring the investment portfolio to eliminate assets classified as "available-for-sale" to investments classified as "held-to-maturity". General and Administrative Expenses General and administrative expenses decreased $345,000 or 13.3% to $2.3 million for the fiscal year ended March 31, 1998, from $2.6 million for the prior fiscal year. The decrease is due to an decrease of $389,000 in federal insurance premiums from $428,000 for the fiscal year ended March 31, 1997, to $39,000 for the fiscal year ended March 31, 1998. The decrease resulted from the absence in the current fiscal year of the one-time $350,000 special assessment to recapitalize the SAIF insurance fund paid to the FDIC in the quarter ended September 30, 1997. The increase in salaries and employee benefit expense due to cost of living salary increases, additional personnel, and the initiation of a loan production incentive program to enhance loan officer salaries. This was almost exactly offset by a decrease in expense from accounting for Company's stock incentive plan of $115,000 to $89,000 for the fiscal year ended March 31, 1998, from $204,000 for the fiscal year ended March 31, 1997. Applicable accounting standards required that 61.1% of the three-year cost be amortized in the first year, 27.8% in the second year and 11.1% in the third year. The accounting for this expense began with the approval of the Company's stock incentive plan in October 1995, and will be fully expensed the in the quarter ending September 30, 1998. The expense associated with the Bank's Employee Stock Ownership Plan (`ESOP') increased $28,000 from $141,000 for the fiscal year ended March 31, 1997, to $169,000 for the fiscal year ended March 31, 1998. The expense for the ESOP reflects the ESOP loan payments made by the Bank to the Company, which vary each year and also reflect the application of dividends of the ESOP stock to the balance of the note. Dividends on the ESOP stock increased $0.14 per share from $0.40 per share for the fiscal year ended March 31, 1997, to $0.54 per share for the fiscal year ended March 31, 1998. Net occupancy expense increased $14,000 or 4.2% from $336,000 for the fiscal year ended March 31, 1997, to $350,000 for the fiscal year ended March 31, 1998. Other expense increased $16,000 or 2.8% to $581,000 for the fiscal year ended March 31, 1998, from $565,000 for the fiscal year ended March 31, 1997. General and administrative expenses as a ratio of average assets decreased to 2.36% for the fiscal year ended March 31, 1998, compared to 2.84% for the fiscal year ended March 31, 1997, due to the decrease in Federal insurance premiums over the period. Income Tax Expense Income tax expense increased $93,000 or 18.0% to $610,000 for the fiscal year ended March 31, 1998, from $517,000 for the fiscal year ended March 31, 1997. The increase reflects the increase in income before taxes of $503,000 from $1.2 million for the fiscal year ended March 31, 1997, to $1.7 million for the fiscal year ended March 31, 1998. The effective tax rates were 35.3% and 42.1% for the fiscal years ended March 31, 1998, and 1997, 13 respectively. The decrease in effective rate is due to the establishment of a Nevada investment subsidiary of the Bank, which acts to eliminate the Wisconsin state income tax obligation of 7.9% of net income. Because state income tax is deductible for federal income tax purposes, the state income tax savings is reduced by about the federal tax rate of 34% or an effective state tax rate savings of 5.2% Financial Condition The following table summarizes certain information relating to the Company's consolidated balance sheets at the dates indicated. At March 31, 1999 1998 ---- ---- (dollars in thousands) Assets Cash and cash equivalents 10,470 6,047 Mortgage-backed securities 6,037 6,398 FHLB stock 850 1,159 Loans receivable, net 73,347 78,297 Liabilities Deposits 62,003 62,278 Advances and other borrowings 22,615 24,320 Equity, substantially restricted 12,361 11,514 Cash and cash equivalents increased $4.5 million to $10.5 million at March 31, 1999 from $6.0 million at March 31, 1998. The increase reflects the general trend of lower long-term mortgage interest rates over the two comparable periods than encourages the Bank's loan customers to refinance adjustable rate mortgages which are held in house to fixed rate loan which are sold on the secondary market. This trend then acts to increase cash balances and decrease mortgage loan receivable balances. Securities held-to-maturity remained at $9.4 million at March 31, 1999, and at March 31, 1998. Some mortgage-backed securities are used to provide collateral for deposits in excess of the $100,000 insurance limit through the retail repurchase agreements program found under Other Borrowed Money and others are used meet the DFI's liquidity requirements for savings banks. Net loans receivable decreased $5.0 million from $78.3 million at March 31, 1998, to $73.3 million at March 31, 1999. One to four family real estate loans decreased $0.9 million from $55.6 million at March 31, 1998, to $54.1 million at March 31, 1999. Consumer loans decreased to $7.1million at March 31, 1999, from $7.8 million at March 31, 1998. Deposits were $62.0 million and $62.3 million at March 31, 1999 and 1998, respectively. Deposits are the Company's primary source of externally generated funds. The level of deposits is heavily influenced by factors such as the general level of short- and long-term interest rates as well as alternative yields that investors may obtain on competing investment instruments such as money market mutual funds. Non-certificate of deposit average outstanding balances totaled $ 23.7million and $21.1 million at March 31, 1999 and 1998, respectively and reflect the Company's marketing efforts to build multiple relationships with its customers through an emphasis on checking accounts. The average outstanding balance of certificates of deposit balances totaled $38.9 million and $41.2 million, at March 31, 1999 and 1998, respectively. The Company attempts to maintain relationships with customers withdrawing certificates of deposit by providing brokerage services for alternative investments through its subsidiary. Advances from the Federal Home Loan Bank and other borrowings decreased to $22.6 million at March 31, 1999 from $24.3 million at March 31, 1998, and the average rate decreased 53 basis points to 5.38% at March 31, 1999, from 5.91% at March 31, 1998. The Company uses FHLB-Chicago advances as a funding source in periods when market rates on certificates of deposit exceed those offered by the FHLB-Chicago or when the growth in the loan portfolio exceeds the ability of the Bank to attract deposits. FHLB-Chicago advances generally are fixed-rate and short-term with maturities of less than 10 years. The Open Line of Credit Program at the FHLB-Chicago adjusts 14 the rate on a daily basis, so in a rising interest rate environment such borrowings may present the risk that the interest rates of these borrowings will increase. The Company also uses borrowings from the FHLB-Chicago to manage the total asset/liability portfolio of the Company. In future periods, the Company intends to continue to leverage its capital base by using the proceeds from additional FHLB-Chicago advances to originate additional loans. Shareholders' equity increased to $12.4 million at March 31, 1999, compared to $11.5 million at March 31, 1998. The increase from March 31, 1998 to March 31, 1999 results from net income of $1.1 million for the fiscal year ended March 31, 1999. This increase was offset by the payment of dividends to shareholders of $552,000 for the fiscal year ended March 31, 1999. The balance of the unearned restricted stock plan award increased $26,000 from $(26,000) as of March 31, 1998, to $0 as of March 31, 1999. The balance of the unearned Employee Stock Ownership Plan compensation increased $234,000 from $(389,000) as of March 31, 1998, to $(155,000) as of March 31, 1999. Liquidity, Capital Resources and Regulatory Capital The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans, principal and interest payments on mortgage-backed and related securities and FHLB-Chicago advances. Although maturity and scheduled amortization of loans are predictable sources of funds, deposit flows, mortgage prepayments and prepayments on mortgage-backed and related securities are influenced significantly by general interest rates, economic conditions and competition. Principal collected on long-term loans for the fiscal year ended March 31, 1999 increased to $45.2 million from $28.0 million for the fiscal year ended March 31, 1998. Principal collected on mortgage-backed securities for the year ended March 31, 1999 increased to $3.0million from $1.0 million for the fiscal year ended March 31, 1998. The primary investing activity of the Company is the origination of mortgage loans. For the fiscal years ended March 31, 1999 and 1998, the Company originated or acquired long-term loans in the amount of $48.3 million and $29.6 million, respectively. The Company purchased $2.6 million of mortgage-backed securities and $0 during the fiscal years ended March 31, 1999 and 1998, respectively. For the fiscal years ended March 31, 1999 and 1998, these activities were funded primarily by principal repayments on long-term loans and mortgage backed securities of $48.2 million and $29.1 million, respectively. The Company is required to maintain minimum levels of liquid assets under the DFI's regulations for state-chartered mutual savings banks. Savings banks are required to maintain an average daily balance of liquid assets of not less than 8% of its average daily balance of net withdrawal accounts plus short-term borrowings. These assets include cash, certain time deposits, certain bankers' acceptances, certain corporate debt securities and highly rated commercial paper, securities of certain mutual funds and specified United States government, state or federal agency obligations. The Company's liquidity ratios were 22.7% and 15.2 % at March 31, 1999 and 1998, respectively. The Company adjusts its liquidity levels to meet various funding needs and to meet its asset and liability management objectives. The Company's most liquid assets are cash and cash equivalents, which include investments in highly liquid, short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At March 31, 1999 and 1998, cash and cash equivalents were $10.5 million and $6.0 million, respectively. The increase in cash and cash equivalents was due to general interest rate market conditions that encouraged the Bank's loan customers to refinance into fixed rate loans that are sold on the secondary market from adjustable rate loans that are held in the Bank's portfolio. This acts to increase cash and decrease loans receivable. Liquidity management for the Company is both an ongoing and long-term function of the Company's asset/liability management strategy. Excess funds are generally invested in short-term investments such as a cash management account or overnight deposits at the FHLB-Chicago. Whenever the Company requires funds beyond its ability to generate them internally, additional sources of funds are available and obtained from borrowings from the FHLB-Chicago. The Company utilizes its borrowing capabilities on a regular basis. At March 31, 1999, FHLB-Chicago advances were $17.0 million or 19.9% of total liabilities and at March 31, 1998, FHLB-Chicago advances were $19.1 million or 21.9% of total liabilities. The Company also had other borrowings consisting of repurchase agreements amounting to $5.6 million and $5.3 million at March 31, 1999 and 1998, respectively. The Company did not have any reverse repurchase agreements outstanding at any of the aforementioned periods. In a rising interest 15 rate environment, such short-term borrowings present the risk that upon maturity, the borrowings will have to be replaced with higher rate borrowings. At March 31, 1999, the Company had outstanding loan commitments of $5.7 million. The Company had no commitments to purchase mortgage-backed and related securities at that date. The Company anticipates it will have sufficient funds available to meet its current loan commitments, including loan applications received and in process prior to the issuance of firm commitments. Certificates of deposit that are scheduled to mature in one year or less at March 31, 1999 are $28.5 million. Based on its historical experience, management believes that a significant portion of such deposits will remain with the Company. Effective June 30, 1993, the Bank, as a Wisconsin chartered mutual savings bank, is subject to regulation by the FDIC and the DFI. Applicable FDIC regulations require institutions to meet three capital standards: (i) "Tier 1 capital" in an amount not less than 3% of total assets, (ii) "Tier 1 capital" in an amount not less than 4% of risk-weighted assets, and (iii) "total capital" in an amount not less than 8% of risk-weighted assets. Wisconsin chartered savings banks also are required to maintain a minimum capital to assets ratio of 6%. The percentage of assets for Wisconsin regulatory capital purposes is based on total unconsolidated assets. Note 15 of the Notes to the Company's Audited Consolidated Financial Statements contains a summary of the Bank's compliance with its regulatory capital standards at March 31, 1999. Impact of Inflation and Changing Prices The Company's Consolidated Financial Statements and Notes thereto have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Current Accounting Developments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. A special accounting for qualifying hedges typically allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. Statement 133 is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any quarter after issuance. Statement 133 cannot be applied retroactively. Statement 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantially modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The statement could increase volatility in earnings and other comprehensive income. The Company believes that based on their existing derivative instruments, the impact of adopting Statement 133 on its financial statements will not be material. The Company has not determined the timing or method of adoption. Forward-Looking Statements The discussion in this Annual Report may include certain forward-looking statements based on current management expectations. Factors which could cause future results to differ from these expectations include the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the cost of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; 16 and changes in the quality or composition of the Company's loan and investment portfolios. Additional factors are described in the Company's other reports filed with the Securities and Exchange Commission. Disclosures Involving Year 2000 Issues Issues related to the century date change and the impact on computer systems and business operations are receiving prominent publicity and attention. Depositors, business partners, investors, and the general public are specifically interested in the effect on the financial condition of each depository institution. The FDIC has advised state savings banks that safe and sound banking practices require them to address Year 2000 issues. The Securities and Exchange Commission (SEC) issued a revised Staff Legal Bulletin NO. 5 to provide specific guidance on disclosure associated with Year 2000 obligations for companies registered under federal securities laws. Computer programs generally abbreviated dates by eliminating the century digits of the year. Many resources, such as software; hardware; telephones; voicemail; heating; ventilating and air conditioning; alarms, etc. ("Systems") are affected. These Systems were designed to assume a century value of "19" to save memory and disk space within their programs. In addition, many Systems use a value of "99" in a year or "99/99/99" in a date to indicate "no date"or "any date" or even a default expiration date. As the year 2000 approaches, this abbreviated date mechanism within Systems threatens to disrupt the function of computer software at nearly every business which relies heavily on computer systems for account and other recordkeeping functions. If the millennium issue is ignored, system failures or miscalculations could occur, causing disruptions of operations and a temporary inability to process business transactions. The Bank has an inventory of personal computers that access a data processing system provided by EDS in Des Moines, Iowa. If the personal computers and data processing systems fail to process the century date change, it may impair the Bank's ability to process loan payments, accept deposits, and address other operational issues. The Bank's customers, suppliers, other constituents may also be impaired to meet their contractual obligations with the Bank. The Bank has developed a Year 2000 Plan (the "Plan"). The Bank's Plan attempts to identify the systems, assess the risk, and conduct inventories as necessary to assure compliance with the Plan. The Plan calls for identifying all systems in need of remediation by June 30, 1999, and remedying all systems in need of remediation by September 30, 1999. As of March 31, 1999, the Bank estimates it will have to purchase hardware and equipment in the amount of $17,000 (pre-tax) to address the Y2K issues. The expenditures would be amortized over a 5-year period, and would add approximately $3,400 in furniture and fixture expense per year for the next 5 years. In addition, the Bank paid in the quarter ended December 31, 1998, a one-time fee of $20,000 by EDS to support the FFIEC's testing guidance regarding Year 2000 efforts of financial institutions as outlined in the April 10, 1998, Interagency Statement. These amounts are not considered to be material. On February 24, 1998, the FDIC conducted an on-site visitation of the Bank's Year 2000 process. The examiner followed guidelines and recommendations contained in the FFIEC Interagency Statement on Year 2000 Project Management Awareness, dated May 5, 1997, and subsequent publications. In a letter dated March 17, 1998, the FDIC stated that the Bank's Year 2000 Committee is adequately monitoring Year 2000 compliance. In a letter dated September 8, 1998, The FDIC reported to the Board of Directors that the Federal Reserve Bank of Dallas had conducted an examination of Electronic Data Systems, Inc.,(EDS) Plano, Texas, the Bank's data processor. The Board of Directors reviewed the Exam at its September 18, 1998, meeting and the record of this action was entered into the minutes. The results of the examination are deemed to be confidential by the FDIC. On October 9, 1998, the Bank received an extensive Y2k Contingency Plan from EDS. On February 4, 1999, the FDIC conducted an on-site Year 2000 readiness examination. Again, the FDIC mandates that the results of that examination be held confidential. In a letter dated April 30, 1999, EDS reported that the overall product line remediation was now 100% complete. Asset/Liability Management The Company's profitability, like that of most financial institutions, depends to a large extent upon its net interest income, which is the difference between interest earned on interest-earning assets, such as loans and investments, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is significantly affected by changes in market interest rates. During periods of rising interest rates, the Company is required to pay higher rates to attract deposits. That can result in a decline in net interest income if the Company is 17 unable to increase the yield on its interest-earning assets sufficiently to compensate for the increase in its cost of funds. Conversely, during periods of declining interest rates, the Company may experience prepayments of its fixed rate earning assets and downward adjustments on its adjustable rate assets. That can result in a decrease in net interest income if the Company is unable to lower its cost of funds sufficiently to compensate for the decrease in its asset yields. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it matures or reprices within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. An interest rate sensitivity gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities that mature or reprice within a specified time period. An interest rate sensitivity gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets that mature or reprice within a specified time period. In an attempt to manage vulnerability to interest rate changes, management closely monitors the Company's interest rate risk. The Company has established an investment strategy through its Asset/Liability Committee. Management continually reviews the Company's interest rate risk position, maturing securities and borrowings, interest rates and programs for raising deposits and originating loans, and develops policies regarding these issues. The Board of Directors reviews quarterly asset/liability management and investment strategy reports prepared by management. The Company utilizes basic strategies in managing its assets and liabilities by managing or maximizing the net interest income under various interest rate scenarios. More complex techniques such as hedging through the use of options, financial futures, and interest rate swaps are not utilized. In addition to monitoring interest rate risk on a continual basis, the Company reviews deposit rates weekly. The emphasis has been on prudent pricing as opposed to increasing market share, and the Company has supplemented and substituted deposits using FHLB-Chicago advances in past periods when advance rates are more attractive than those obtainable on retail deposits. Generally, the Company utilizes the following strategies to manage its interest rate risk: (i) the Company sells substantially all of its fixed rate loans originated; (ii) the Company seeks to originate and retain ARM loans and mortgage-backed and related securities with short- to medium-term periods to re-pricing; (iii) the Company attempts to extend the maturities of deposits when deemed cost effective through the pricing and promotion of certificates of deposit with longer terms, and periodically utilizes deposit marketing programs offering maturity and repricing terms structured to complement the repricing and maturity characteristics of the existing asset/liability mix; and (iv) the Company utilizes longer-term borrowings from the FHLB-Chicago to manage its assets and liabilities and enhance earnings. One of the Company's asset/liability management techniques involves borrowing from the FHLB-Chicago and utilizing proceeds thereof to invest in assets that mature at the same time or close to the same time as the advances are due. This use of FHLB-Chicago advances is part of the overall interest rate risk management strategy of the company. At March 31, 1999, FHLB-Chicago advances were $17.0 million or 17.4% of total assets, compared to $19.1 million or 19.3 % of total assets at March 31, 1997. Originating ARM rate loans and investing in adjustable-rate mortgage-backed and related security has enabled the Company to reduce interest rate risk by more closely matching the terms and repricing characteristics of its assets and liabilities. In addition, because of the relative liquidity of mortgage-backed and related securities, the Company can restructure its interest-earning asset portfolios more quickly and effectively in a changing interest rate environment. The Company's ARM loans and ARM mortgage-backed and related securities typically have annual and lifetime interest rate caps that reduce their ability to protect the Company against a prolonged and significant increase in interest rates. Further, mortgage-backed and related securities are subject to reinvestment risk. For example, during periods of decreasing interest rates, mortgage-backed and related securities are more likely to prepay, and the Company may not be able to reinvest the proceeds from prepayments in securities or other assets with yields similar to those of the prepaying mortgage-backed and related securities. However, mortgage-backed and related securities also are subject to extension risk, which is the risk that the effective maturity of the security may increase in a rising interest rate environment. The market value of a security with a longer maturity typically is more 18 sensitive to changes in market rates of interest, and rising interest rates may have a more pronounced adverse effect on the market value of mortgage-backed and related securities than on other types of investment securities. At March 31, 1999, total interest-bearing liabilities repricing within one year exceeded total interest-bearing assets repricing in the same period by $4.4million, representing a negative cumulative one-year interest rate sensitivity gap equal to 4.48% of total assets. During periods of rising interest rates, a positive interest rate sensitivity gap would tend to positively affect net interest income while a negative interest rate sensitivity gap would tend to negatively affect net interest income. Notwithstanding the negative effect on net interest income anticipated as a result of falling interest rates due to the Company's one-year gap position, the Company could experience substantial prepayments of its fixed rate mortgage loans during periods of falling interest rates. That may result in the reinvestment of such proceeds at market rates that are lower than current rates. 19 The following table sets forth at March 31, 1999 the amounts of interest-earning assets and interest-bearing liabilities maturing or repricing within the time periods indicated, based on the information and assumptions set forth in the notes thereto. Amount Maturing or Repricing as of March 31, 1999 ------------------------------------------------------------------------------------- More Than More Than Within Four to One Year Three years Three Twelve to Three to Five Over five Months Months Years Years Years Total
(Dollars in thousands) Interest-earning assets(1) Mortgage loans: Fixed rate $159 $489 $1,726 $1,762 $2,716 $6,852 Adjustable rate 9,694 21,408 22,755 2,036 0 55,893 Consumer loans 635 488 2,509 3,277 200 7,109 Commercial loans 1,442 1,118 419 52 868 3,899 Mortgage-backed securities: Fixed rate - - - - 5,587 5,587 Adjustable rate 285 165 - - - 450 Interest bearing deposits 5,721 - - - - 5,721 Investment securities - - - 3,398 850 4,248 ------- -------- -------- ------- -------- ------- Total interest-earning assets $17,936 $23,668 $27,409 $10,525 $10,221 $89,759 ======== ======== ======== ======== ======== ======== Interest-bearing liabilities: Deposits(2): Certificates of deposit 9,486 19,001 8,878 1,137 146 38,648 Money market 686 2,057 1,645 1,950 518 6,856 NOW accounts 994 2,980 2,385 2,826 751 9,936 Passbook savings 591 2,034 1,575 1,867 496 6,563 Borrowings(3) 5,584 2,562 2,346 7,000 5,121 22,613 ------- ------- -------- -------- -------- -------- Total interest-bearing liabilities $17,341 $28,634 $16,829 $14,780 $7,032 $84,616 ======== ======== ======== ======== ======== ======== Excess (deficiency) of interest-earning assets over interest-bearing liabilities $595 $(4,966) $10,580 $(4,255) $3,189 $5,143 ======== ======== ======== ======== ======== ======== Cumulative excess (deficiency) of interest- earning assets over interest-bearing liabilities $595 $(4,371) $6,209 $1,954 $5,143 $5,143 ======== ======== ======== ======== ======== ======== Cumulative excess (deficiency) of interest- earning assets over interest-bearing liabilities as a percent of total assets 0.61% -4.48% 6.36% 2.00% 5.27% 5.27% ======== ======== ======== ======== ======= ======== (1) Adjustable and floating rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed rate assets are included in the periods in which they are scheduled to be repaid based on scheduled amortization. (2) Although the Company's negotiable order of withdrawal ("NOW") accounts and passbook savings accounts generally are subject to immediate withdrawal, management considers a certain historical amount of such accounts to be core deposits. These deposits have significantly longer effective maturities and times to repricing based on the Company's historical retention of such deposits in changing interest rate environments. Money market, NOW accounts, and passbook savings accounts are assumed to be withdrawn at annual rates of 40%, 40% and 79%, respectively, of the declining balance of such accounts during the period shown. The withdrawal rates used are higher than the Company's historical rates but are considered by management to be more indicative of expected withdrawal rates currently. Much of the recent growth in these deposit accounts is assumed to be the result of low interest rates and it is assumed that the accounts are more susceptible to withdrawal than in the past. If all of the Company's NOW accounts, passbook savings accounts and money market deposit accounts had been assumed to be subject to repricing within one year, the one-year cumulative deficiency of interest-earning assets over interest-bearing liabilities would have been $13.4 million or 13.6% of total assets. (3) Adjustable and floating rate borrowings are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which they are due.
20 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans and mortgage-backed and related securities, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of ARM loans and mortgage-backed and related securities in the Company's portfolios could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable rate debt may decrease in the event of an interest rate increase. Average Balance Sheet The following table sets forth certain information relating to the Company's consolidated average balance sheets and the consolidated statements of operations at and for the fiscal years ended March 31, 1999, 1998 and 1997. It reflects the average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated. Dividing income or expense derives yields and rates by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. Average balances are derived principally from average monthly balances and include non-accruing loans. Interest income on non-accrual loans is reflected in the period it is collected and not in the period it is earned. Such amounts are not material to net interest income or net change in net interest income in any period. Non-accruing loans are included in the average balances and do not have a material effect on the average yield. 21 MANAGEMENT' S DISCUSSION(CONT.) Fiscal Years Ended March 31, --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate Assets Interest-earning assets: Mortgage loans $66,333 $5,837 8.80% $67,052 $5,849 8.72% $64,208 $5,554 8.65% Commercial loans 4,331 370 8.54 4,754 371 7.80 4,539 417 9.19 Consumer loans 7,677 751 9.78 7,665 749 9.77 7,493 731 9.76 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total loans 78,341 6,957 8.88 79,471 6,969 8.77% 76,240 6,702 8.79% Mortgage-backed securities 6,164 430 6.98 6,938 494 7.12 7,603 556 7.31 Interest bearing deposits in other financial institutions 3,058 153 5.02 1,377 76 5.52 461 23 5.06 Investment securities 2,950 180 6.10 2,665 156 5.87 2,938 157 5.33 Federal Home Loan Bank stock 937 61 6.51 996 68 6.77 837 54 6.46 --------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-earning assets 91,450 7,781 8.51% 91,448 $7,763 8.49% 88,079 $7,492 8.51% Non-interest earning assets 6,765 5,681 4,976 --------- -------- -------- Total assets $98,215 $97,128 $93,055 ========= ======== ======== Liabilities and retained earnings: Deposits: NOW accounts(1) 10,592 140 1.32% 9,491 138 1.45% $8,934 $149 1.66% Money market deposit accounts 6,823 313 4.59 5,552 260 4.68 4,109 194 4.72 Passbook 6,252 134 2.15 6,013 129 2.15 6,440 147 2.28 Certificates of deposit 38,922 2,222 5.71 41,194 2,366 5.74 41,314 2,395 5.80 --------- ------- ------ -------- ------- ------ -------- ------- ------ Total deposits 62,589 2,809 4.49 62,250 2,893 4.65 60,797 2,884 4.74 Advances and other borrowings 23,084 1,243 5.38 22,849 1,350 5.91 20,559 1,188 5.78 --------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities 85,673 4,052 4.73% 85,099 4,243 4.99% 81,356 4,072 5.00% Non-interest bearing liabilities 615 655 202 Equity 11,927 11,374 11,497 --------- -------- -------- Total liabilities and retained earnings $98,215 $97,128 $93,055 ========= ======== ======== Net interest income/interest rate spread(2) $3,729 3.50% $3,520 3.50% $3,420 3.51% ======= ====== ======= ====== ======= ====== Net earning assets/net interest margin(3) $5,777 4.08% $6,348 3.85% $6,723 3.88% ========= ====== ======== ====== ======= ======= Average interest-earning assets to average interest-bearing liabilities 1.07 1.07 1.08 ========= ======== ======= ________________________ (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.
22 Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (change in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Fiscal Year Ended March 31, 1999 Fiscal Year Ended March 31, 1998 Compared to Compared to Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997 Increase(Decrease) Increase(Decrease) Due to Due to --------------------------------- -------------------------------- --------------------------------- -------------------------------- Rate Volume Total Rate Volume Total --------------------------------- --------------------------------
(In thousands) (In thousands) Interest-earning assets: Loans $87 (99) $(12) $(15) 282 $267 Mortgage-backed securities (10) (54) (64) (14) (48) (62) Deposits (7) 84 77 2 51 53 Securities 6 18 24 16 (17) (1) FHLB stock (3) (4) (7) 3 11 14 ----- ----- ------ ------ ----- ----- Total 73 (55) 18 (8) 279 271 ----- ----- ------ ------ ----- ----- Interest-bearing liabilities: Deposits (100) 16 (84) (57) 66 9 Borrowings (121) 14 (107) 27 135 162 ----- ----- ------ ------ ----- ----- Total (221) 30 (191) (30) 201 171 ------ ----- ------ ------ ----- ----- Net change in net interest income $294 $(85) $209 $22 $78 $100 ====== ===== ====== ====== ===== =====
23 INDEPENDENT AUDITORS' REPORT Board of Directors Northwest Equity Corp. We have audited the accompanying consolidated balance sheets of Northwest Equity Corp. and Subsidiary as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwest Equity Corp. and Subsidiary at March 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years ended March 31, 1999 in conformity with generally accepted accounting principles. __/s/Wipfli Ullrich Bertelson LlP__ Wipfli Ullrich Bertelson LLP Wisconsin Rapids, Wisconsin April 30, 1999 24 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 1999 and 1998 (In Thousands) - ------------------------------------------------------------------------------------------------------------------------ ASSETS
1999 1998 ------------- ------------- Cash and due from banks $4,749 $2,642 Interest-bearing deposits with financial institutions 5,721 3,405 Securities held to maturity 9,435 9,398 Investment in Federal Home Loan Bank stock 850 1,159 Loans held for sale 143 142 Loans receivable - net of allowance for loan losses of $375 and $484 in 1999 and 1998, respectively 73,347 78,297 Foreclosed properties and properties subject to foreclosure 63 159 Accrued interest receivable 556 578 Premises and equipment 2,176 2,250 Prepaid expenses and other assets 545 709 --------- --------- TOTAL ASSETS $97,585 $98,739 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ------------- ------------- Liabilities: Deposits: Demand and NOW deposits $9,936 $9,733 Savings and money market deposits 13,419 12,117 Certificates of deposit 38,648 40,428 ---------- --------- Total deposits 62,003 62,278 Advances from Federal Home Loan Bank 16,990 19,062 Borrowed funds 5,625 5,258 Accounts payable and accrued expenses 606 627 --------- --------- Total liabilities 85,224 87,225 --------- --------- Stockholders' equity: Preferred stock - $1 par value; 2,000,000 shares authorized; none issued - - - - Common stock - $1 par value; 4,000,000 shares authorized; 1,032,517 shares issued; 825,301 shares outstanding at March 31, 1999 and 824,654 shares outstanding at March 31, 1998 1,033 1,033 Additional paid-in capital 6,582 6,584 Less unearned restricted stock plan award - - (26) Less unearned Employee Stock Ownership Plan (155) (389) Less treasury stock - at cost (2,549) (2,557) Retained earnings - substantially restricted 7,450 6,869 --------- --------- Total stockholders' equity 12,361 11,514 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,585 $98,739 ========= ========= See accompanying Notes to Consolidated Financial Statements
25 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended March 31, 1999, 1998 and 1997 (In Thousands except for per share amounts) - -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 ------------- ------------- ------------- Interest income: Interest and fees on loans $6,957 $6,969 $6,702 Interest on mortgage-backed and related securities 430 494 556 Interest and dividends on investments 394 300 234 ------------- ------------- ------------- Total interest income 7,781 7,763 7,492 ------------- ------------- ------------- Interest expense: Interest on deposits 2,809 2,893 2,884 Interest on borrowings 1,243 1,350 1,188 ------------- ------------- ------------- Total interest expense 4,052 4,243 4,072 ------------- ------------- ------------- Net interest income 3,729 3,520 3,420 Provision for loan losses 376 100 81 ------------- ------------- ------------- Net interest income after provision for loan losses 3,353 3,420 3,339 ------------- ------------- ------------- Noninterest income (deductions): Mortgage servicing fees 94 77 77 Service charges on deposits 252 251 220 Loss on sale of investments - - (24) - - Gain on sale of mortgage loans 206 130 59 Other 184 174 175 ------------- ------------- ------------- Total noninterest income 736 608 531 ------------- ------------- ------------- General and administrative expenses: Salaries and employee benefits 1,311 1,193 1,183 Net occupancy expense 365 350 336 Data processing 168 135 131 Federal insurance premiums 38 39 428 Other 583 581 565 ------------- ------------- ------------- Total general and administrative expense 2,465 2,298 2,643 ------------- ------------- ------------- Income before provision for income taxes 1,624 1,730 1,227 Provision for income taxes 491 610 517 ------------- ------------- ------------- Net income $1,133 $1,120 $710 ============= ============= ============= Basic earnings per share $1.45 $1.44 $0.84 ============= ============= ============= Diluted earnings per share $1.37 $1.37 $0.83 ============= ============= ============= See accompanying Notes to Consolidated Financial Statements
26 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 1999, 1998 and 1997 (In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------- Unearned Accumulated Additional Unearned ESOP Other Common Paid-In Restricted Compen- Treasury Retained Comprehensive Stock Capital Stock sation Stock Earnings Income Total ----------------------------------------------------------------------------- Balance - March 31, 1996 $1,033 $6,584 $(319) $(699) $(561) $5,860 $(34) $11,864 Comprehensive income: Net income - - - - - - - - - - 710 - - 710 Other comprehensive income-unrealized gain on securities available for sale net of deferred taxes of $48 - - - - - - - - - - - - 5 5 Total comprehensive income 715 Amortization of unearned ESOP and restriced stock award - - - - 204 141 - - - - - - 345 Purchase of treasury stock - 51,625 shares - - - - - - - - (1,695) - - - - (1,695) Cash dividends - $.33 per share - - - - - - - - - - (370) - - (370) -------- ------- ------- ------ ------- ------- ------ -------- Balance - March 31, 1997 1,033 6,584 (115) (558) (2,256) 6,200 (29) 10,859 Comprehensive income: Net income - - - - - - - - - - 1,120 - - 1,120 Other comprehensive income - unrealized gain on securities available for sale, net of deferred taxes of $2 - - - - - - - - - - - - 29 29 Total comprehensive income 1,149 Amortization of unearned ESOP and restricted stock award - - - - 89 169 - - - - - - 258 Purchase of treasury stock - 142,138 shares - - - - - - - - (301) - - - - (301) Cash dividends - $.40 per share - - - - - - - - - - (451) - - (451) -------- ------- ------- ------ ------- ------- ------ -------- Balance - March 31, 1998 1,033 6,584 (26) (389) (2,557) 6,869 - - 11,514 Comprehensive income: Net income - - - - - - - - - - 1,133 - - 1,133 Amortization of unearned ESOP and restricted stock award - - - - 26 234 - - - - - - 260 Exercise of incentive stock options - 647 shares - - (2) - - - - 8 - - - - 6 Cash dividends - $.67 per share - - - - - - - - - - (552) - - (552) -------- ------- ------- ------ ------- ------- ------ -------- Balance - March 31, 1999 $1,033 $6,582 $- - $(155) $(2,549) $7,450 $- - $12,361 ======== ======= ======= ====== ======= ======= ====== ======== See accompanying Notes to Consolidated Financial Statements
27 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, 1999, 1998 and 1997 (In Thousands) - ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 ------------- ------------- ------------- Cash flows from operating activities: Net income $1,133 $1,120 $710 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation 143 145 152 Provision for loan losses 376 100 81 Loss on sale of investments - - 24 - - Provision for deferred income taxes 109 68 (43) Amortization of ESOP and restricted stock awards 260 258 345 Proceeds from sales of mortgage loans 19,131 11,216 4,533 Loans originated for sale (19,132) (10,813) (4,172) Changes in operating assets and liabilities: Accrued interest receivable 22 78 (54) Prepaid expenses and other assets 211 (329) (80) Accrued interest payable (86) 83 (92) Accrued income taxes payable (101) (112) 97 Other accrued liabilities 10 53 256 ------------- ------------- ------------- Net cash provided by operating activities 2,076 1,891 1,733 ------------- ------------- ------------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with financial institutions (2,316) (1,684) 744 Proceeds from sales of available for sale securities - - 2,776 - - Proceeds from sales of Federal Home Loan Bank stock 309 - - - - Proceeds from maturities of held to maturity securities 1,699 - - 114 Proceeds from sale of foreclosed property 350 - - - - Purchase of held to maturity securities (2,098) (3,286) (127) Purchase of mortgage backed securities (2,601) - - (2,772) Principle collected on mortgage-backed securities 2,963 1,023 724 Net (increase) decrease in loans 4,320 (1,475) (7,231) Purchase of office properties and equipment (69) (54) (294) ------------- ------------- ------------- Net cash (used in) investing activities 2,557 (2,700) (8,842) ============= ============= ============= See accompanying Notes to Consolidated Financial Statements
28 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued Years Ended March 31, 1999, 1998 and 1997 (In Thousands) - --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 ------------- ------------- ------------- Cash flows from financing activities: Net increase (decrease) in deposits (275) 721 4,301 Net increase (decrease) in short-term borrowings (1,853) 795 (1,543) Net increase in long-term borrowings 148 1,428 6,728 Purchases of treasury stock - - (301) (1,695) Proceeds from exercise of stock options 6 - - - - Dividends paid (552) (451) (370) ------------- ------------- ------------- Net cash provided by financing activities (2,526) 2,192 7,421 ------------- ------------- ------------- Increase in cash and due from banks 2,107 1,383 312 Cash and due from banks at beginning 2,642 1,259 947 ------------- ------------- ------------- Cash and due from banks at end $4,749 $2,642 $1,259 ============= ============= ============= Supplemental disclosures of cash flow information: Loans receivable transferred to foreclosed properties and properties subject to foreclosure $254 $159 $72 Loans charged off 500 87 62 Interest paid 4,138 4,160 4,164 Income taxes paid 578 739 517 See accompanying Notes to Consolidated Financial Statements
29 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies: The accounting policies of Northwest Equity Corp. and Subsidiary (the Company) conform to generally accepted accounting principles and prevailing practices within the banking industry. A summary of the more significant accounting policies follows: Nature of Operations Northwest Equity Corp. is the holding company for Northwest Savings Bank (the "Bank"), a Wisconsin state-chartered savings bank. The Company provides a wide range of financial services to individual customers through the Bank with Wisconsin locations in Polk, St. Croix and Burnett Counties. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Bank holds a variety of securities through it's wholly owned Subsidiary, Northwest Investments, Inc., a Nevada investment corporation. Principles of Consolidation The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its wholly- owned subsidiary, Northwest Savings Bank, and its wholly-owned subsidiaries, Amery Service Agency, Inc. and Northwest Investments, Inc. Significant intercompany accounts and transactions have been eliminated. Use of Estimates in Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates. Cash and Cash Equivalents: Cash and cash equivalents consist of cash and investments with initial maturities of three months or less. For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the statement of financial condition caption "cash and due from banks." 30 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies - Continued: Securities: Investment securities are assigned an appropriate classification at the time of purchase in accordance with management's intent. Securities held to maturity represent those securities for which the Bank has the positive intent and ability to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premium and accretion of discount calculated using the effective yield method. Unrealized gains and losses on securities held to maturity are not recognized in the financial statements. Trading securities include those securities bought and held principally for the purpose of selling them in the near future. The Bank has no trading securities. Securities not classified either as securities held to maturity or trading securities are considered available for sale and reported at fair value determined from estimates of brokers or other sources. Unrealized gains and losses are excluded from earnings but are reported as a separate component of net worth, net of income tax effects. Any gains and losses on sales of securities are recognized at the time of sale using the specific identification method. Loans Held for Sale: Loans held for sale in the secondary market are recorded at lower of aggregate cost or market and generally consist of current production of fixed-rate mortgage loans. Fees received from the borrower are deferred and recorded as an adjustment of the sales price. A gain or loss is recognized at the time of sale reflecting the present value of the difference between the contractual interest rate of the loans sold and the yield to the investor. Loans Receivable: Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, and net of deferred loan origination fees and discounts. Interest income is recognized using methods which approximate a level yield on principal amounts outstanding. Accrual of interest is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. At that time, any accrued but uncollected interest is reversed, and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured. 31 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies - Continued: Allowance for Loan Losses: The allowance for credit losses is maintained at a level which management believes is adequate to provide for possible credit losses. Management periodically evaluates the adequacy of the allowance using the Company's past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. Foreclosed Properties and Properties Subject to Foreclosure: Real estate owned which was acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at the lower of cost or fair value less estimated costs to sell at date of foreclosure. Costs related to the development and improvement of property are capitalized, whereas costs related to holding property are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value less estimated costs to sell. Real estate in judgment and subject to redemption is carried at cost less an allowance for estimated losses. Loan Fees: Certain loan origination fees, commitment fees and direct loan origination costs are being deferred and the net amounts amortized as an adjustment of the related loan's yield. The Bank is amortizing these amounts into interest income, using the level yield method, over the contractual life of the related loan. The other origination and commitment fees not required to be recognized as a yield adjustment are included in loan fees and service charges. Premises and Equipment: Premises and equipment are stated at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is computed on the straight-line method and is based on the estimated useful lives of the assets which range from three to thirty-five years. 32 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies - Continued: Income Taxes: The Company and its subsidiary file a consolidated federal income tax return and separate state income tax returns. Financial statement provisions are made in the income tax expense accounts for deferred taxes applicable to income and expense items reported in different periods than for income tax purposes. The Company accounts for income taxes on the liability method. Deferred income tax assets and liabilities are adjusted regularly to amounts estimated to be receivable or payable based on current tax law. Advertising: The Company expenses advertising costs as incurred. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securitites available for sale which are recognized as a seperate component of equity, accumulated other comprehensive income. Change In Accounting Principles: In February 1997, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 128, which became effective for the Company for reporting periods ending after December 15, 1998. Under the provisions of SFAS No. 128, primary and fully-diluted earnings per share were replaced with basic and diluted earnings per share in an effort to simplify the computation of these measures and align them more closely with the methodology used internationally. Basic earnings per share is arrived at by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is arrived at by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options. For purposes of comparability, all prior-period earnings per share data have been restated. 33 Note 1. Summary of Significant Accounting Policies - Continued: Change In Accounting Principles - Continued: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement requires that an enterprise display an amount representing total comprehensive income for the period in a financial statement, but does not require a specific format for that financial statement. This statement also requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the consolidated balance sheet. The statement is effective for fiscal years beginning after December 15, 1997. Reclassification of consolidated financial statements for earlier periods provided for comparative purposes is required. The adoption of SFAS No. 130 did not have an impact on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It also amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. The statement is effective for fiscal years beginning after December 15, 1998. In the initial year of application, comparative information for earlier years is to be restated. The adoption of SFAS No. 131 did not have an impact on the Company's financial position or results of operations. Reclassifications: Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to the 1999 reporting classification. 34 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 2. Securities Held to Maturity: Securities held to maturity consist of the following at March 31: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------
(In Thousands) 1999 ---------------------------- U.S. Treasury and agency obligations $3,398 $3 $15 $3,386 -------- ---- ----- -------- Mortgage backed securities: FNMA certificates 3,189 35 - - 3,224 GNMA certificates 1,634 64 - - 1,698 FHLMC certificates 1,214 6 12 1,208 -------- ---- ----- -------- Total mortgage backed securities 6,037 105 12 6,130 -------- ---- ----- -------- Total securities held to maturity $9,435 $108 $27 $9,516 ======== ==== ===== ======== 1998 ---------------------------- U.S. Treasury and agency obligations $3,000 $- - $1 $2,999 -------- ----- ------ -------- Mortgage backed securities: FNMA certificates 3,868 59 1 3,926 GNMA certificates 2,153 83 - - 2,236 FHLMC certificates 377 7 - - 384 -------- ----- ------ -------- Total mortgage backed securities 6,398 149 1 6,546 -------- ----- ------ -------- Total securities held to maturity $9,398 $149 $2 $9,545 ======== ===== ====== ========
There were no sales of securities held to maturity during the years ended March 31, 1999 and 1998. Investment securities with an amortized cost of $4,898,000 and estimated fair value of $4,959,000 were pledged to secure other borrowing as of March 31, 1999 During the year ended March 31, 1998, the Company sold securities available for sale for total proceeds of $2,776,000 resulting in realized gains of $2,000 and realized losses of $26,000. There were no sales of securities available for sale during the years ended March 31, 1999. 35 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 2. Securities Held to Maturity - Continued: The amortized cost and estimated fair value of securities held to maturity at March 31, 1999 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value ------------ ----------- Investment securities: Due in one year or less $1,100 $1,103 Due after one year through five years 2,298 2,283 ------------ ----------- Total investment securities 3,398 3,386 Mortgage backed securities 6,037 6,130 ------------ ----------- Totals $9,435 $9,516 ============ =========== Note 3. Investment in Federal Home Loan Bank Stock: As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on asset size. The stock is recorded at cost which approximates fair value. Transfer of the stock is substantially restricted. Note 4. Loans Receivable: Loans receivable are summarized as follows as of March 31: 1999 1998 ------------- ------------- Real estate mortgage loans: (In Thousands) One to four families $54,049 $57,975 Other 8,665 8,582 Commercial loans 3,899 4,397 Consumer loans 7,109 7,827 ------------- ------------- Totals 73,722 78,781 Less: Allowance for losses (375) (484) ------------- ------------- Total loans receivable $73,347 $78,297 ============= ============= The following is an analysis of the allowance for loan losses for the years ended March 31: 1999 1998 1997 ------- ------ ------- (In Thousands) Balance at beginning $484 $461 $433 Provision charged to income 376 100 81 Loans charged off - Net of recoveries (485) (77) (53) ----- ------ ----- Balance at end $375 $484 $461 ====== ====== ===== 36 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 4. Loans Receivable - Continued: Loans serviced for others are not included in the above amounts. They totaled $46,290,000, $30,691,000 and $25,250,000 at March 31, 1999, 1998 and 1997, respectively. The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired and which fall within the scope of SFAS No. 114. A loan is impaired when, based on current information, it is probable that the Bank will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan's initial effective interest rate or the fair value of the collateral if the loan is collateral dependent. There were no loans considered impaired as of March 31, 1999. Impaired loans at March 31, 1998 consisted of: Impaired loans - nonaccrual $685,000 Less - allowance for credit losses 90,000 ------------- Net investment in impaired loans $595,000 ============= The average recorded investment in impaired loans during 1999 and 1998 was $397,000 and $595,000, respectively. There was no interest income recognized on the impaired loans during the years ended March 31, 1999, 1998 and 1997. The Bank, in the ordinary course of business, grants loans to the Company's executive officers and directors, including their families at terms comparable to transactions with other customers. In the opinion of management, such loans do not involve more than the normal risk of collectibility or present other unfavorable features. Activity in related party loans during the years ended March 31, 1999 and 1998 is summarized below: 1999 1998 ------------ ------------- Loans outstanding at beginning $39,485 $132,915 New loans 99,000 - - Repayments (28,583) (93,430) ------------- ------------- Loans outstanding at end $109,902 $39,485 ============= ============= 37 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 5. Premises and Equipment: Premises and equipment are summarized by major classification as follows at March 31: 1999 1998 ------------- ------------- (In Thousands) Land and improvements $569 $569 Buildings and improvements 1,543 1,543 Furniture, fixtures and equipment 1,090 1,043 ------------- ------------- Total 3,202 3,155 Less - Accumulated depreciation 1,026 905 ------------- ------------- $2,176 $2,250 ============= ============= Depreciation charged to operations totaled $143,000, $145,000 and $152,000 for the years ended March 31, 1999, 1998 and 1997, respectively. Note 6. Foreclosed Properties and Properties Subject to Foreclosure: Properties subject to foreclosure were $63,000 and $159,000 at March 31, 1999 and 1998, respectively. There were no foreclosed properties at March 31, 1999 and 1998. Note 7. Accrued Interest Receivable: Accrued interest receivable is comprised of the following at March 31: 1999 1998 ------------- ------------- (In Thousands) Loans receivable $456 $493 Mortgage backed obligations 34 39 Investments 66 46 ------------- ------------- Totals $556 $578 ============= ============= The Bank has provided an allowance for uncollected interest on loans at March 31, 1999 and 1998 of $6,000 and $17,000, respectively. 38 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 8. Savings Accounts: Savings accounts are summarized as follows at March 31: 1999 1998 ---------------------------- ---------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------- ------------- ------------- ------------- (In Thousands)
Noninterest bearing demand deposit $3,590 $3,823 ------------- ------------- Interest bearing deposits NOW accounts 6,346 2.17% 5,910 2.31% Passbook rates 6,563 2.13% 6,091 2.15% Money market accounts 6,856 4.48% 6,026 4.87% Certificates of deposit 38,648 5.71% 40,428 5.73% ------------- ------------- ------------- ------------- Total interest bearing deposits 58,413 4.79% 58,455 4.95% ------------- ============= ------------- ============= Total deposits $62,003 $62,278 ============= =============
Certificates of deposit have scheduled maturity dates as follows at March 31, 1999 (in thousands): 2000 $28,487 2001 7,167 2002 1,711 2003 775 2004 and thereafter 508 The total amount of certificates of deposits with balances in excess of $100,000 was $3,560,000 and $3,243,000 at March 31, 1999 and 1998, respectively. Deposits from Company directors, executive officers, and related firms in which they are principal owners totaled $358,000 and $302,000 at March 31, 1999 and 1998, respectively. Interest on savings deposits is summarized as follows for the years ended March 31: 1999 1998 1997 ------------- ------------- ------------- (In Thousands) MMDA and NOW accounts $454 $398 $343 Savings deposits 133 130 132 Certificates of deposit 2,222 2,365 2,409 ------------- ------------- ------------- Total $2,809 $2,893 $2,884 ============= ============= ============= 39 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 9. Advances From Federal Home Loan Bank: Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"), advances are secured by all stock in the FHLB and qualifying first mortgage loans aggregating 170% of the amount of outstanding advances. The following is a summary of these advances at March 31: 1999 1998 ------------- ------------- (In Thousands) Advances due in the following years with rates from 4.00% to 8.31% 1999 $2,750 $5,050 2000 1,700 4,450 2001 419 419 2003 7,000 7,000 2005 2,121 2,143 2008 3,000 - - ------------- ------------ $16,990 $19,062 ============= ============ The Bank can borrow up to 35 percent of total assets through FHLB advances. At March 31, 1999 and 1998, the amount of unused credit available to the Bank was approximately $19,648,000 and $16,631,000, respectively. Note 10. Other Borrowed Money: Other borrowed money is summarized as follows at March 31: 1999 1998 ------------- ------------- (In Thousands) Retail security repurchase agreements with weighted-average interest rates of 5.57% and 6.08% at March 31, 1999 and 1998, respectively. $5,625 $5,258 The retail repurchase agreements are generally for terms of less than one year and are collateralized by investments and loans with carrying values of $8,056,000 and $6,780,000 at March 31, 1999 and 1998, respectively. The following information relates to securities sold under repurchase agreements for the years ended March 31: 1999 1998 1997 ------------- ------------- ------------- (In Thousands) For the year: Highest month-end balance $6,473 $6,501 $5,761 Daily average balance $5,597 $4,937 $4,808 Weighted average rate 5.19% 6.00% 5.74% 40 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 11. Income Taxes: The provision for income taxes differs from that computed at the federal and state statutory corporate rates as follows for the years ended March 31: 1999 1998 1997 -------- -------- -------- (In Thousands) Tax at federal statutory rate (34%) $552 $588 $417 Increases (decreases) in taxes: State income taxes net of federal benefit 4 25 68 Tax benefit of incentive stock options (90) (63) Other 25 60 125 -------- -------- -------- Federal and state income taxes $491 $610 $517 ======== ======== ======== The provision for income taxes consists of the following for the years ended March 31: 1999 1998 1997 -------- -------- -------- (In Thousands) Current $382 $542 $560 Deferred 109 68 (43) -------- -------- -------- $491 $610 $517 ======== ======== ======== For income tax purposes, the Company has state net operating loss carryforwards of $392,000 which expire in 2014. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are summarized as follows at March 31: 1999 1998 ------ ------ (In Thousands) Allowance for loan losses $88 $102 Accrued compensation 18 22 Deferred compensation 24 56 Stock incentive plan - - 43 State net operating loss carryforward 31 - - ------ ------ Total deferred tax assets 161 223 ------ ------ Premises and equipment (152) (137) Dividends on ESOP Plan (84) (52) FHLB common stock dividends (17) (17) ------ ------ Total deferred tax liabilities (253) (206) ------ ------ $(92) $17 ======= ====== 41 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 12. Financial Instruments With Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit. Commitments to extend credit involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amount reflects the extent of involvement the Company has in this particular financial instrument. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. As some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates the creditworthiness of each customer on a case by case basis. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company generally extends credit only on a secured basis. Collateral obtained varies, but consists primarily of one-to-four family residences located in Northwestern Wisconsin. Commitments to sell mortgage loans represent commitments to sell mortgage loans to other entities at a future date and at a specified price. Commitments to sell mortgage loans and commitments to extend credit are generally exercised and fulfilled within ninety days. The fair value of mortgage loans held for sale plus the commitments to extend credit generally offset the commitments to sell mortgage loans. Both the commitments to extend credit and the commitments to sell mortgage loans are at current market rates. At March 31, 1999, the Company was committed to originate approximately $1,069,000 of first mortgage loans. In addition, the undisbursed portion of other credit lines were $4,665,000 at March 31, 1999. The Company originates and holds adjustable rate loans with variable rates of interest. The rate of interest on these loans is capped over the life of the loan. At March 31, 1999, none of the approximately $55,351,000 of variable rate loans had reached the interest rate cap. Note 13. Employee Benefit Plans: The Company has a qualified defined contribution plan covering substantially all full-time employees who have completed one year of service and are at least 21 years old. During the years ended March 31, 1999, 1998 and 1997, the Bank contributed $25,000, $53,000 and $39,000, respectively, to this plan. 42 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 13. Employee Benefit Plans - Continued: On April 1, 1994, the Company established an Employee Stock Ownership Plan ("ESOP") for substantially all of its full-time employees. As part of the stock conversion, the ESOP borrowed $826,000 from the Company and purchased 103,250 shares of the Company's common stock. The debt bears interest at 8% and is collateralized by the shares of common stock held by the ESOP. The Bank is committed to make cash payments to the ESOP in amounts sufficient for it to meet the debt service requirements over a seven year term. Cash dividends on common stock held by the ESOP are applied to debt principal and interest. The unpaid balance of the ESOP loan has been eliminated in consolidation and the amount of unearned ESOP compensation expense is shown as a reduction of stockholders' equity. ESOP expense for the year ended March 31, 1999 , 1998 and 1997 totaled $208,000, $163,000 and $160,000, respectively. At March 31, 1999 the number of shares allocated, committed to be released and suspense shares were 44,250, 14,750 and 44,250, respectively. The fair value of unearned shares at March 31, 1999 was $1,313,000. The Bank established an employee stock incentive plan on October 10, 1995. The Bank purchased 41,300 shares for $459,000 and awarded them to officers and employees of the Bank. The shares awarded vest 33.33% per year commencing October, 1997. The aggregate purchase price of the shares is being amortized to compensation expense as the participants become vested. The unamortized cost is being reflected as a reduction of shareholders' equity as unearned restricted stock. Compensation expense of $25,000, $89,000 and $204,000 was recognized for the years ended March 31, 1999, 1998 and 1997, respectively. During the year ended March 31, 1997, the Bank established a deferred compensation agreement with it's President to defer the amounts due until his retirement. Amounts deferred under the deferred compensation plan were $79,000 for the year ended March 31, 1997. Note 14. Stock Options: On October 10, 1995, the Company adopted a Stock Option Plan and granted options for 103,251 shares of common stock for a non-qualified stock option plan for directors and a qualified incentive stock option plan for employees. All such options are currently exercisable at $10.44 per share and expire in October 2005. A summary of the status of the stock option plan as of March 31, 1999 and 1998 is as follows: 1999 1998 ------------- ------------- Options outstanding - April 1, 101,627 103,251 Granted - - - - Exercised (647) (542) Forfeited - - (1,082) ------------- ------------- Options outstanding - March 31, 100,980 101,627 ============= ============= 43 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 14. Stock Options - Continued: The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 ------------- ------------- Net income (In Thousands) $1,066 $656 Basic earnings per share $1.38 $0.77 Diluted earnings per share $1.31 $0.76 The stock option plans were fully vested in 1999, and accordingly, there is no pro forma effect on the Company's net income and earnings per share. Note 15. Capital Requirements: The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in regulations) to risk-weighted assets (as defined), and of Tier 1 captial (as defined) to average assets (as defined). Management believes, as of September 30, 1998 and 1997, the Company meets all capital adequacy requirements to which it is subject. As of March 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since notification that management believes have changed the institution's category. 44 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 15. Capital Requirements - Continued: The Company's and Bank's actual capital amounts and ratios are presented in the following tables: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------- --------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio -------- ------- -------- ------- -------- -------
As of March 31, 1999: Total capital (to risk weighted assets) Consolidated $14,407 22.84% $5,047 > 8.00% N/A - Subsidiary Bank $10,161 16.71% $4,864 > 8.00% $6,080 > 10.00% - - Tier 1 capital (to risk weighted assets) Consolidated $14,032 22.24% $2,524 > 4.00% N/A - Subsidiary Bank $9,786 16.09% $2,432 > 4.00% $3,648 > 6.00% - - Tier 1 capital (to average assets) Consolidated $14,032 14.29% $3,926 > 4.00% N/A - Subsidiary Bank $9,786 10.07% $3,888 > 4.00% $4,861 > 5.00% - - As of March 31, 1998: Total captial (to risk weighted assets) Consolidated $13,937 22.12% $5,041 > 8.00% N/A - Subsidiary Bank $9,236 14.74% $5,012 > 8.00% $6,264 > 10.00% - - Tier 1 capital (to risk weighted assets) Consolidated $13,453 21.35% $2,521 > 4.00% N/A - Subsidiary Bank $8,752 13.97% $2,506 > 4.00% $3,759 > 6.00% - - Tier 1 capital (to average assets) Consolidated $13,453 13.88% $3,877 > 4.00% N/A - Subsidiary Bank $8,752 9.21% $3,803 > 4.00% $4,753 > 5.00% - -
45 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 15. Capital Requirements - Continued: As a state chartered savings bank, the Company is also subject to the minimum regulatory captial requirements of the state of Wisconsin. At March 31, 1999, the Company's regulatory capital exceeded the state regulatory capital requirement of $6,281,000. Note 16. Restrictions on Retained Earnings: The Company has qualified under the provisions of the Internal Revenue Code which permit as a deduction from taxable income an allowance for bad debts which differs from the provision for such losses charged to income. Accordingly, retained earning at March 31, 1999, includes approximately $1,295,000 representing the Company's federal bad debt deduction in excess of actual losses for which no provision for income taxes has been made. If in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes may be imposed at the then applicable rates. Note 17. Fair Values of Financial Instruments: The following methods and assumptions were used by the Bank in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets fair values. Securities: Fair values for investments and mortgage-backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable-rate mortgage loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for residential mortgage loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for commercial real estate loans, rental property mortgage loans and consumer and other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. 46 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 17. Fair Values of Financial Instruments - Continued: Deposits: The fair values disclosed for interest and noninterest checking accounts, passbook accounts and money market accounts are, by definition, equal to the amount payable on demand at the reporting date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. Federal Home Loan Bank Advances: The Bank's long-term borrowings are estimated using the discounted cash flow analysis, based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Bank's financial instruments consisted of the following at March 31: 1999 1998 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------- ------------- ------------- -------------
Financial assets: Cash and cash equivalents $10,470 $10,470 $ 6,047 $ 6,047 Securities 4,248 4,236 4,159 4,158 Mortgage-backed securities 6,037 6,130 6,398 6,546 Loans receivable: Real estate - one-to-four family 54,192 54,441 58,117 58,617 Real estate - other 8,665 8,705 8,582 8,656 Other loans 11,008 11,064 12,224 12,228 ------------- ------------- ------------- ------------- $84,150 $84,576 $89,480 $90,205 ============= ============= ============= ============= 1999 1998 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------- ------------- ------------- ------------- Financial liabilities: Savings deposits and checking accounts $19,765 $19,765 $18,027 $18,027 Certificates of deposit 38,648 38,259 40,428 40,395 Federal Home Loan Bank Advances 16,990 16,511 19,062 18,616 Other borrowed money 5,625 5,620 5,258 5,251 ------------- ------------- ------------- ------------- $81,028 $80,155 $82,775 $82,289 ============= ============= ============= =============
47 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 18. Earnings Per Share: Earnings per share are based upon the weighted average number of shares outstanding. The following shows the computation of the basic and diluted earnings per share. Weighted Average Earnings Net Number of Per Income Shares Share --------- ----------- ---------- Year Ended March 31, 1999: Earnings Per Share - Basic $1,133 779,731 $1.45 ========== Effect of Stock Options - - 48,119 --------- ----------- Earnings Per Share - Diluted $1,133 827,850 $1.37 ========= =========== ========== Year Ended March 31, 1998: Earnings Per Share - Basic $1,120 775,112 $1.44 ========== Effect of Stock Options - - 39,603 --------- ----------- Earnings Per Share - Diluted $1,120 814,715 $1.37 ========= =========== ========== Year Ended March 31, 1997: Earnings Per Share - Basic $710 847,090 $0.84 ========== Effect of Stock Options - - 11,198 --------- ----------- Earnings Per Share - Diluted $710 858,288 $ 0.83 ========= =========== ========== Note 19. Condensed Parent Company Only Financial Information: Balance Sheets - at March 31: 1999 1998 ------------- ------------- (In Thousands) Assets: Cash and cash equivalents $2,414 $2,653 Investment in subsidiary 9,787 8,752 Deferred income tax assets 32 93 Other current assets 281 161 ------------- ------------- $12,514 $11,659 ============= ============= Liabilities $ 153 $ 145 Stockholders' Equity 12,361 11,514 ------------ ------------- $12,514 $11,659 ============ ============= 48 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 19. Condensed Parent Company Only Financial Information - Continued: Statements of Operations - for the years ended March 31: 1999 1998 1997 ------ ------ ------ (In Thousands)
Income: Interest from affiliate $155 $197 $271 Expense: Compensation 25 89 204 Other expense 57 59 69 ------- ------- ------ Total expense 82 148 273 Income (loss) before for income taxes and equity in undistributed net income of affiliates 73 49 (2) Provision for income taxes (26) 21 - - -------- ------- ------- Income (loss) before equity in undistributed net income of affiliates 99 28 (2) Equity is undistributed net income of affiliate 1,034 1,092 712 -------- ------- ------- Net income $1,133 $1,120 $710 ======== ======= =======
Statements of Cash Flows - for the years ended March 31: 1999 1998 1997 -------- ------ ------- (In Thousands)
Cash flows from operating activities: Net income $1,133 $1,120 $710 -------- ------ ------- Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiary (1,034) (1,092) (712) Deferred income taxes 61 19 (57) Amortization of ESOP and restricted stock awards 260 258 345 Change in operating assets and liabilities: Other current assets (121) (79) (74) Other liabilities 8 3 120 -------- ------ ------- Net cash provided by operating activities 307 229 332 -------- ------ ------- Cash flows from investment activities: Cash dividends from subsidiary - - - - 2,670 -------- ------ ------- Net cash provided by investment activities - - - - 2,670 -------- ------ ------- Cash flows from financing activities: Purchase of common stock for the treasury - - (301) (1,695) Proceeds from exercise of stock options 6 - - - - Cash dividends (552) (451) (370) -------- ------ ------- Net cash used in financing activities (546) (752) (2,065) -------- ------ ------- Net increase (decrease) in cash (239) (523) 937 Cash and cash equivalents at beginning 2,653 3,176 2,239 -------- ------ ------- Cash and cash equivalents at end $2,414 $2,653 $3,176 ======== ====== =======
49 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 20. Quarterly Consolidated Financial Information (Unaudited): 1998 1999 ------------------------------------------- ------------- June 30, Sept. 30, Dec. 31, March 31, ------------- ------------- ------------- ------------- (In Thousands)
Interest and dividend income $1,957 $1,969 $1,957 $1,898 Interest expense 1,046 1,034 1,008 964 ------------- ------------- ------------- ------------- Net interest income 911 935 949 934 Provision for loan losses 25 25 323 3 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 886 910 626 931 Non-interest income 204 184 198 150 Non-interest expense 601 617 615 632 ------------- ------------- ------------- ------------- Income before income taxes 489 477 209 449 Income taxes 167 167 60 97 ------------- ------------- ------------- ------------- Net income $322 $310 $149 $352 ============= ============= ============= ============= Earnings per share $0.42 $0.40 $0.19 $0.45 Dividends $0.16 $0.17 $0.17 $0.17 Market information: Trading range - high $22.00 $20.50 $25.00 $23.00 low $19.50 $15.63 $15.75 $18.50 close $20.25 $18.75 $22.00 $22.25 1997 1998 ------------------------------------------- ------------- June 30, Sept. 30, Dec. 31, March 31, ------------- ------------- ------------- ------------- (In Thousands) Interest and dividend income $1,911 $1,928 $1,959 $1,965 Interest expense 1,050 1,066 1,075 1,052 ------------- ------------- ------------- ------------- Net interest income 861 862 884 913 Provision for loan losses 25 25 25 25 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 836 837 859 888 Non-interest income 130 136 135 207 Non-interest expense 561 582 560 595 ------------- ------------- ------------- ------------- Income before income taxes 405 391 434 500 Income taxes 153 135 149 173 ------------- ------------- ------------- ------------- Net income $252 $256 $285 $327 ============= ============= ============= =============
50 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 20. Quarterly Consolidated Financial Information (Unaudited) - Continued: 1997 1998 ------------------------------------------- ------------- June 30, Sept. 30, Dec. 31, March 31, ------------- ------------- ------------- ------------- (In Thousands)
Earnings per share $0.33 $0.33 $0.37 $0.42 Dividends $0.12 $0.13 $0.14 $0.15 Market information: Trading range - high $13.63 $16.75 $20.75 $22.25 low $15.00 $14.63 $16.13 $20.75 close $15.00 $16.13 $20.75 $21.13 1996 1997 ------------------------------------------- ------------- June 30, Sept. 30, Dec. 31, March 31, ------------- ------------- ------------- ------------- (In Thousands) Interest and dividend income $1,802 $1,868 $1,903 $1,919 Interest expense 972 1,010 1,052 1,038 ------------- ------------- ------------- ------------- Net interest income 830 858 851 881 Provision for loan losses 6 25 25 25 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 824 833 826 856 Non-interest income 140 141 146 104 Non-interest expense 577 954 547 565 ------------- ------------- ------------- ------------- Income before income taxes 387 20 425 395 Income taxes 164 8 177 168 ------------- ------------- ------------- ------------- Net income $223 $12 $248 $227 ============= ============= ============= ============= Earnings per share $0.25 $0.01 $0.29 $0.29 Dividends $0.09 $0.10 $0.10 $0.11 Market information: Trading range - high $10.38 $11.25 $12.50 $14.50 low $10.25 $10.25 $11.25 $13.50 close $10.38 $11.25 $12.13 $14.13
51 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 21. Concentration of Credit Risk: The Bank grants residential, commercial and consumer loan primarily in Northwestern Wisconsin. The ability of its debtors to honor their contracts is dependent on the performance of the local economy. Note 22. Contingencies: In the normal course of business, various legal proceedings involving the Company are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Note 23. Pending Transaction: On February 17, 1999, the board announced that it had entered into a definitive agreement and plan of merger with Bremer Financial Corporation ("Bremer"), for Bremer to acquire Northwest Equity Corp. in a stock transaction. The agreement is subject to final regulatory and shareholder approval. 52 SHAREHOLDER INFORMATION Board of Directors of Northwest Equity Corp. and Northwest Savings Bank Brian L. Beadle President, Chief Executive Officer, Chief Financial Officer and Director of the Company; President, Chief Executive Officer, Chief Financial Officer and Director of the Bank since 1976. Gerald J. Ahlin Director of the Company; Director of the Bank since 1985; prior to his retirement in 1992, business and economics teacher at Amery Public Schools, Amery, Wisconsin. Vern E. Albrecht Director of the Company; Director of the Bank since 1989; prior to his retirement in 1991, President and principal owner of Nova Tran Corporation, an electronics and medical manufacturing company, Clear Lake, Wisconsin. Michael D. Jensen Director of the Company; Director of the Bank since 1986; President of Amery Telcom, Inc., a communications company. Donald M. Michels Director of the Company; Director of the Bank since 1987; prior to his retirement in 1991, President of Holy Family Hospital, New Richmond, Wisconsin . Norman M. Osero Director of the Company; Director of the Bank since 1992; President of Dynatronix, Inc., Amery, Wisconsin, an electronic manufacturing company, and Vice President of Amery Technical Products, Inc., Amery, Wisconsin, a subcontractor manufacturing company. Executive Officers of Northwest Equity Corp. and Northwest Savings Bank Brian L. Beadle President, Chief Executive Officer, Chief Financial Officer and Director of the Company; President, Chief Executive Officer, Chief Financial Officer and Director of the Bank since 1976. James L. Moore Vice President and Secretary of the Company; Senior Vice President and Secretary of the Bank since 1990. Headquarters Northwest Equity Corp. 234 Keller Avenue South Amery, Wisconsin 54001 (715) 268-7105 Northwest Savings Bank 234 Keller Avenue South Amery, Wisconsin 54001 (715) 268-7105 Northwest Savings Bank- Bank Office Locations Home Office: 234 Keller Avenue South Amery, Wisconsin 54001 (715) 268-7105 Branch Offices: New Richmond Office 532 Knowles Avenue South New Richmond, Wisconsin 54017 Siren Office 24082 Highway 35 North Siren, Wisconsin 54872 Shareholder/Media Relations Shareholders, investors, analysts, the news media and others interested in additional information may contact Brian L. Beadle, President and Chief Executive Officer of the Company, at the Company's headquarters. Annual Report on Form 10-KSB A copy of Northwest Equity Corp.'s Form 10-KSB filed with the Securities and Exchange Commission is available without charge by writing: Brian L. Beadle, President Northwest Equity Corp. 234 Keller Avenue South Amery, Wisconsin 54001 Annual Meeting The fifth annual meeting of shareholders of Northwest Equity Corp. will be held at 2:00 p.m., Amery time, August 17, 1999, at Centennial Hall, 608 Harriman Ave. South, Amery, Wisconsin 54001 Auditors Wipfli Ullrich Bertelson LLP 400 Daly Avenue, Suite 200 Wisconsin Rapids, WI 54495 Legal Counsel Mallery & Zimmerman, S.C. 731 North Jackson Street, Suite 804 Milwaukee, Wisconsin 53202-4601 Transfer Agent Firstar Trust Co. 615 East Michigan Avenue Milwaukee, Wisconsin 53201 Telephone: (414) 276-3737 Toll-Free: (800) 637-7549 Stock Listing Information Northwest Savings Bank converted from a mutual to a stock company, effective October 7, 1994, at which time Northwest Equity Corp. consummated the sale of 1,032,517 shares of its Common Stock to the public. The shares of Common Stock of Northwest Equity Corp. are publicly traded in the National Association of Securities Dealers, Inc. Automated Quotation "Small-Cap" Market under the symbol "NWEQ." Stock Price Information Share Pricing 1999 1998 Quarter Ended Low High Low High March 31 18.50 23.00 20.63 22.25 June 30 19.50 22.00 September 30 15.63 20.50 December 31 15.75 25.00 NWEQ completed its initial public offering of shares in October 1994 Shareholders and Shares Outstanding As of May 31, 1999, there were 163 registered shareholders of record and 286 estimated additional beneficial shareholders for an approximate total of 449. Shares outstanding at May 31, 1999 were 825,301. 53 EX-27 3 EX 27-FINANCIAL DATA SCEDULE
9 1000 YEAR MAR-31-1999 MAR-31-1999 4,749 5,721 0 0 0 9,435 9,516 73,490 375 97,585 62,003 8,148 606 14,467 0 0 1,033 11,328 97,585 6,957 824 0 7,781 2,809 4,052 3,729 376 0 2,465 1,624 1,133 0 0 1,133 1.45 1.37 3.50 229 0 9 238 484 499 14 375 0 0 0
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