-----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, GWypmUHTQDeYjN2Cj4uR2qYh8JaIdbs4p5Hyd4d7hUQvU1XV+RTbdgmsXb7tUfsa uhlCyX6Yuh3EE9hufcrvFw== 0000916527-96-000006.txt : 19960808 0000916527-96-000006.hdr.sgml : 19960808 ACCESSION NUMBER: 0000916527-96-000006 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST EQUITY CORP CENTRAL INDEX KEY: 0000916527 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 391772981 STATE OF INCORPORATION: WI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24606 FILM NUMBER: 96604832 BUSINESS ADDRESS: STREET 1: 234 KELLER AVE SOUTH CITY: AMERY STATE: WI ZIP: 54001 BUSINESS PHONE: 7152687105 MAIL ADDRESS: STREET 1: 234 S KELLER AVE STREET 2: PO BOX 46 CITY: AMERY STATE: WI ZIP: 54001 10QSB 1 QUARTERLY REPORT FOR NORTHWEST EQUITY CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON , D.C. 20549 --------------------- FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1996 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 54001 Amery, Wisconsin (Zip code) (Address of principal executive offices) (715) 268-7105 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes __x__ No_____ (2) Yes __x__ No_____ The number of shares outstanding of the issuer's common stock, $1.00 par value per share, was 945,392 at June 30, 1996. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST EQUITY CORP. Dated:___7/24/96_____________ By: __/s/_Brian L. Beadle___________ (Brian L. Beadle, President Principal Executive Officer and Principal Financial and Accounting Officer) 1 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Item 2. Management's Discussion and Analysis or Plan of Operation. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Neither the Registrant nor the Bank is involved in any pending legal proceedings involving amounts in the aggregate which management believes are material to the financial condition and results of operations of the Registrant and the Bank. Item 2. Changes in Securities. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-k. a. No reports on Form 8-K were filed during the quarter for which this report was filed. 2 CONSOLIDATED BALANCE SHEETS (In Thousands) June 30, 1996 March 31, ASSETS (unaudited) 1996 --------- --------- Cash - including interest bearing deposits of $1,977 at June 30, 1996 and $2,465 at March 31, 1996 $2,979 $3,412 Securities available- for- sale - fair value 3,120 2,859 Mortgage backed securities - market value of $7,757 at June 30, 1996 and $5,386 at March 31, 1996 7,950 5,373 Loans held for sale - at market 1,039 717 Loans receivable - net 72,490 69,963 Foreclosed properties and properties subject to foreclosure 143 127 Investment in Federal Home Loan Bank stock at cost - which approximates fair value 803 803 Premises and equipment 2,415 2,199 Accrued interest receivable 590 602 Prepaid expenses and other assets 275 300 ------- ------- TOTAL ASSETS $91,804 $86,355 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Savings accounts $59,835 $57,256 Advances from Federal Home Loan Bank 15,756 12,556 Other borrowed money 3,998 4,356 Accounts payable and accrued expenses 344 308 Accrued income taxes 151 15 ------ ------ Total liabilities 80,084 74,491 ------ ------ 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 and outstanding 1,033 1,033 Additional paid-in capital 6,584 6,584 Net unrealized loss on securities available for sale (44) (34) Less unearned restricted stock plan award (249) (319) Less unearned Employee Stock Ownership Plan compensation (665) (699) Less treasury stock - at cost - 87,125 shares (934) (561) Retained earnings - substantially restricted 5,995 5,860 ------- ------ Total stockholders' equity 11,720 11,864 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,804 $86,355 ======= ======= See accompanying Notes to Consolidated Financial Statements 3 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In Thousands except for per share amounts) Three Months Ended June 30, ---------------------- 1996 1995 -------- ------- Interest income: Interest and fees on loans $1,598 $1,353 Interest on mortgage-backed and related securities 140 62 Interest and dividends on investments 64 54 ----- ----- Total interest income 1,802 1,469 ----- ----- Interest expense: Interest on savings 695 594 Interest on borrowings 277 113 ---- ---- Total interest expense 972 707 ---- ---- Net interest income 830 762 Provision for loan losses 6 6 ---- ---- Net interest income after provision for loan losses 824 756 ---- ---- Other income: Mortgage servicing fees 19 18 Service charges on deposits 58 60 Gain on sale of mortgage loans 15 8 Other 48 26 ---- ---- Total other income 140 112 ---- ---- General and administrative expenses: Salaries and employee benefits 307 231 Net occupancy expense 67 60 Data processing 37 34 Federal insurance premiums 35 31 Other 131 124 ---- ---- Total general and administrative expense 577 480 ---- ---- Income before income taxes 387 388 ` Income taxes 164 154 ---- ---- Net income $223 $234 ==== ==== Earnings per share: $0.25 $0.25 ----- ----- See accompanying Notes to Consolidated Financial Statements 4 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) (In Thousands)
Unrealized Gain(Loss) Unearned Additional On Securities Unearned ESOP Common Paid-in Available Restricted Compen- Treasury Retained Stock Capital For Sale Stock sation Stock Earnings Total ------ ------- -------- ----- --- ---------------- ------------ Three Months Ended June 30, 1995 Balance - March 31, 1995 $1,033 $6,584 (107) - - (826) - - 5354 12,038 Net income - - - - - - - - - - - - 234 234 Adjustment of carrying value of securities available for sale, net of deferred taxes of $39 - - - - 61 - - - - - - - - 61 Amortization of unearned ESOP and restricted stock award - - - - - - - - 23 - - - - 23 Purchase of Treasury Stock - - - - - - - - - - - - - - - - Cash dividends - $.10 per share - - - - - - - - - - - - (72) (72) Balance - June 30, 1995 $1,033 $6,584 ($46) - - ($803) - - $5,516 $12,284 ====== ====== === ==== ==== ==== ====== ======= Three Months Ended June 30, 1996 Balance - March 31, 1996 $1,033 $6,584 ($34) ($319) ($699) ($561) 5860 11,864 Net income - - - - - - $223 - - - - - - 223 Adjustment of carrying value of securities available for sale, net of deferred taxes of $xx - - - - (10) - - - - - - - - (10) Amortization of unearned ESOP and restricted stock award - - - - - - 70 34 - - - - 104 Purchase of Treasury Stock - - - - - - - - - - (373) - - (373) Cash dividends - $.10 per share - - - - - - - - - - - - (88) (88) Balance - June 30, 1996 $1,033 $6,584 ($44) ($249) ($665) ($934) $5,995 $11,720 ====== ====== === ==== ==== ==== ===== ======= See accompanying Notes to Consolidated Financial Statements
5 CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended June 30, ------------------ 1996 1995 ---- ---- Cash provided by operating activities: Net income $223 $234 Adjustments to reconcile net income to net cash provided by operations: Depreciation 24 25 Provision for loan losses 6 6 Amortization of ESOP and restricted stock awards 104 - - Proceeds from sales of mortgage loans 1,501 898 Loans originated for sale (1,486) (890) Decrease (increase) accrued interest receivable 16 11 Decrease(increase) prepaid expenses and other assets 21 (166) Increase (decrease) accrued interest payable (19) (11) Increase(decrease) accrued income taxes payable 136 28 Increase(decrease) other accrued liabilities 55 51 ---- ---- Net cash provided by operating activities 581 186 ---- ---- Cash provided by investing activities: Principal collected on long-term loans 9,486 4,400 Long-term loans originated or acquired (12,425) (7,872) Purchases of mortgage-backed securities (2,766) (1,933) Principal collected on mortgage-backed securities 189 206 Proceeds from sale of foreclosed property 43 - - Purchase of office properties and equipment (240) (29) Purchase of investments (261) (304) ----- ----- Net cash provided by (used in) investing activities (5,974) (5,532) ----- ----- Cash provided by financing activities: Net increase (decrease) in savings accounts $2,579 2430 Net increase(decrease) in short term borrowings (378) 2545 Repayments of long-term financing (13) - - Proceeds from long-term financing 3,233 - - Purchases of treasury stock (373) - - Dividends paid (88) - - ----- ----- Net cash provided by (used in) financing activities 4,960 4,975 ----- ----- Increase (decrease) in cash and equivalents (433) (371) Cash and equivalents - beginning 3,412 3,086 ------ ------ Cash and equivalents - ending $2,979 $2,715 ====== ====== Supplemental disclosures of cash flow information: Loans receivable transferred to foreclosed properties and properties subject to foreclosure $ 59 $ 42 Properties subject to foreclosure transferred to loans receivable $ - - $ - - See accompanying Notes to Consolidated Financial Statements 6 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies: The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with the accounting policies described in the Bank's audited financial statements for the year ended March 31, 1996 and should be read in conjunction with the financial statements and notes which appear in that report. These statements do not include all the information and disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Note 2. Subsequent Events: none 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NORTHWEST EQUITY CORP. Comparison of Operating Results for the Three Months Ended June 30, 1995 and June 30, 1996 Net Income Net income for the three months ended June 30, 1996, decreased $11,000 or 4.7% to $223,000 compared to $234,000 for the three months ended June 30, 1995. The decrease in net income was primarily due to an increase in salaries and employee benefits of $76,000 from $231,000 for the three months ended June 30, 1995 to $307,000 for the three months ended June 30, 1996. The increase reflects $70,000 for the three months ended June 30, 1996, in expense from accounting for the Company's stock incentive plan that requires under applicable accounting standards that 61.1% of the three-year cost be amortized in the first year. The accounting for this expense did not begin until the approval of the Company's stock incentive plan in October 1995; and therefore no expense was taken for the three months ended June 30, 1995. This increase in expense was partially offset by an increase of $68,000 in net interest income from $762,000 for the three months ended June 30, 1995, to $830,000 for the three months ended June 30, 1996, and an increase of $28,000 in total other income from $112,000 for the three months ended June 30, 1995, to $140,000 for the three months ended June 30, 1996 Net Interest Income Net interest income increased by $68,000 from $762,000 for the three months ended June 30, 1995, to $830,000 for the three months ended June 30, 1996. Interest income increased $333,000 to $1.8 million for the three months ended June 30, 1996, compared to $1.5 million for the three months ended June 30, 1995, while interest expense increased only $265,000 to $972,000 for the three months ended June 30, 1996, from $707,000 for the three months ended June 30, 1995. The improvement in net interest income primarily reflects an increase in average interest-earning assets of 17.2 million from 67.8 million for the three months ended June 30, 1995 compared to $85.0 million for the three months ended June 30, 1996. Interest Income Interest income increased $333,000 or 22.7% to $1.8 million for the three months ended June 30, 1996, compared to $1.5 million for the three months ended June 30, 1995. The increase was due to the increase in average net loans receivable to $72.7 million for the three months ended June 30, 1996, compared to $60.2 million for the three months ended June 30, 1995. The increase in loans receivable was the result of the general increase in mortgage interest rates over the comparable periods which encouraged the bank's customers to seek adjustable rate loans which are held in house as opposed to fixed-rate loans which are sold on the secondary market. Interest on mortgage-backed and related securities increased $78,000 to $140,000 for the three months ended June 30, 1996, from $62,000 for the three months ended June 30, 1995, due primarily to an increase in the average balance of mortgage backed and related securities from $3.5 million for the three months ended June 30, 1995, to an average balance of $7.7 million for the three months ended June 30, 1996, that was the result of the purchase of $2.8 million of additional securities. Interest on investments increased $10,000 to $64,000 for the three months ended June 30, 1996, compared to $54,000 for the three months ended June 30, 1995, as a result of an increase in the average outstanding balance of such investments from $4.0 million for the three months ended June 30, l995, to $4.6 million for the three months ended June 30, 1996. 8 MANAGEMENT'S DISCUSSION(CONT.) Interest Expense Interest expense increased $265,000 or 37.5% to $972,000 for the three months ended June 30, 1996, compared to $707,000 for the three months ended June 30, 1995. Interest on savings increased $101,000 or 17.0% from $594,000 for the three months ended June 30, 1995 to $695,000 for the three months ended June 30, 1996. The increase reflects an increase in the average interest earning deposits to $59.1 million for the three months ended June 30, 1996, from an average balance of $51.3 million for the three months ended June 30, 1995, and an increase in rates paid. Interest on borrowings increased $164,000 or 145.1% from $113,000 for the three months ended June 30, 1995, to $277,000 for the three months ended June 30, 1996. The increase reflects an increase in average advances and other borrowings from $7.2 million for the three months ended June 30, 1995, to $19.0 million for the three months ended June 30, 1996. The increase in advances and other borrowings was used to fund the increase in assets between the periods. Provision for Loan Losses The provision for loan losses remained at $6,000 for the three months ended June 30, 1996, compared to $6,000 for the three months ended June 30, 1995. The allowance for loan losses totalled $435,000 at June 30, 1996, compared to $439,000 at June 30, 1995, and represented .59% and .71% of gross loans and 62.59% and 106.30% 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 at levels necessary to cover only charge-offs and general increases in gross loans. The non-performing assets to total assets ratio was .92% at June 30, 1996, compared to .61% at June 30, 1995. Other Income Total other income increased 25.0% or $28,000 to $140,000 for the three months ended June 30, 1996, compared to $112,000 for the three months ended June 30, 1995. The increase includes a $7,000 increase in gain on sale of mortgage loans to $15,000 for the three months ended June 30, 1996 compared, to $8,000 for the three months ended June 30, 1995. Other income increased $22,000 from $26,000 for the three months ended June 30. 1995 to $48,000 for the three months ended June 30, 1996, and reflects real estate lot sales in the bank's subsidiary of $20,000 for the three months ended June 30, 1996, compared to none for the three months ended June 30, 1995. General and Administrative Expenses General and administrative expenses increased $97,000 or 20.2% to $577,000 for the three months ended June 30, 1996, compared to $480,000 for the three months ended June 30, 1995. Salaries and employee benefits increased $76,000 from $231,000 for the three months ended June 30, 1995, to $307,000 for the three months ended June 30, 1996. The increase reflects $70,000 for the three months ended June 30, 1996, in expense from accounting for the Company's stock incentive plan that requires under applicable accounting standards that 61.1% of the three-year cost be amortized in the first year. The accounting for this expense did not begin until the approval of the Company's stock incentive plan in October 1995; and therefore no expense was taken for the three months ended June 30, 1995. Net occupany expense increased $7,000 from $60,000 for the three months ended June 30, 1995, to $67,000 for the three months ended June 30, 1996. Other expenses increased $7,000 from $124,000 for the three months ended June 30, 1995, to $131,000 for the three months ended June 30, 1996. 9 MANAGEMENT'S DISCUSSION(CONT.) Income Tax Expense Income tax expense increased $10,000 or 6.5% from $154,000 for the three months ended June 30, 1995, to $164,000 for the three months ended June 30, 1996. The effective tax rate for the three months ended June 30, 1996, was 42.4% compared to 39.7% for the three months ended June 30, 1995. The increase in income tax expense is the direct result of an increase in the effective rate, as income before taxes decreased $1,000 from $388,000 for the three months ended June 30, 1995, to $387,000 for the three months ended June 30, 1996. The increase in effective rate is the result on an accounting change to accomodate a slight underaccrual of taxes for the previous fiscal year. Financial Condition Total assets increased $5.4 million or 6.3% to $91.8 million at June 30, 1996, compared to $86.4 million at March 31, 1996. The increase is a result of a $2.5 million or 3.6% increase in net loans receivable to $72.5 million at June 30, 1996, compared to $70.0 million at March 31, 1996. The increase in net loans receivable was the result of the expected seasonal increase of loan activity during the spring and summer months. Cash decreased $433,000 from $3.4 million at March 31, 1996, to $3.0 million at June 30, 1996, and was used to partially fund the increase in net loans receivable. Securities available for sale increased $261,000 from $2.9 million at March 31, 1996, to $3.1 million at June 30, 1996, as the result of the purchase of an additional money market mutual funds. Mortgage backed and related securities increased $2.6 million from $5.4 million on March 31, 1996, to $8.0 million at June 30, 1996, as the net result of the purchase of an $2.8 million of additional securities and principle repayments. The additional securities were purchased to meet an increase in the liquity requirement imposed by the Offfice of the Commissioner of Savings and Loan from 5% to 8% of selected liabilities. Savings accounts increased $2.5 million from $57.3 million at March 31, 1996, to $59.8 million at June 30, 1996. Outstanding advances from the Federal Home Loan Bank increased $3.2 million from $12.6 million at March 31, 1996 to $15.8 million at June 30, 1996. The increase in advances were used to fund the purchase the additional mortgage backed and related securities required by the increase in the Office of Savings and Loan's liquity requirement Shareholders Equity decreased $144,000 from $11.9 million at March 31, 1996, to $11.7 million at June 30, 1996, as a result of net income for the three months ended June 30, 1996, and the amortization of the common stock purchased by the employee stock ownership plan of $34,000 from ($699,000) on March 31, 1996 to ($665,000) on June 30, 1996; the amortization of the unearned restricted stock plan award of $70,000 from ($319,000) at March 31, 1996, to ($249,000) at June 30, 1996; a decrease in the fair value of securities held for sale, net of related deferred taxes, of $10,000; and the purchase of an additional $373,000 in treasury stock that changed the treasury stock balance from ($561000) at March 31, 1996, to ($934,000) at June 30, 1996. Current Developments Deposits of the Bank currently are insured to applicable limits by the FDIC under the Savings Association Insurance Fund ("SAIF"). The FDIC also insures commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium levels are set for each fund to facilitate the fund achieving its designated reserve ratio. As the funds reach their designated rations, the FDIC has authority to lower fund premium assessments to rates sufficient to maintain the designated reserve ration. In May 1995, the BIF achieved its designated ration and the FDIC lowered BIF premium rates for most BIF-insured institutions. In November 1995, the FDIC reduced assessment rates by four cents per $100 of deposits for all institutions, producing a premium rate schedule ranging from 0% (i.e. whereby such institutions will be subject only to a $2,000 minimum annual premium) to 0.27% of deposits depending on the institution's risk-based premium category. 10 MANAGEMENT'S DISCUSSION (CONT.) Based on these assessment rate modifications, the majority of BIF members now pay only a $2,000 minimum annual premium and, therefore, BIF-insured institutions pay, on average, 0.43 cents per $100 of deposits. The SAIF has not achieved its designated reserve ration and is not anticipated to do so prior to the year 2001. Therefore, SAIF premium rates for SAIF-insured members continue to be set at an average of 23.7 cents per $100 of deposits. As a result of the new assessment rate provisions, SAIF member institutions have been placed at a competitive disadvantage based on higher deposit insurance premium obligations. Congress is currently evaluating various proposals and bills concerning the premium differential between the FDIC's BIF and SAIF funds and related matters. The current proposal calls for a one-time assessment of approximately 85 to 90 basis points per $100 of SAIF deposits as of March 31, 1995. Both funds would then, going forward, have the same lower deposit premiums. If the special assessment were imposed at 85 basis points per $100 of insurable deposits, the amount of the assessment to the Bank would be approximately $430,000. The special assessment will have the effect of reducing the Bank's earnings and capital by the after-tax amount of the assessment as of the date of enactment, which is estimated to be $252,000 or $0.26 per share. FDIC premium expense would then be reduced in future periods. Proposals under consideration also address related issues, including (i) providing that certain bond obligations be borne by all insured depository institutions (rather than solely by the SAIF); (ii) the merger of the SAIF and BIF by January 1, 1998 (provided no FDIC-insured depository institution is a savings association on that date); and (iii) repealing the bad debt reserve accounting method currently available to thrift savings associations such as the Bank, with certain provisions for deferred recapture. The Bank is unable to predict when or whether any of the foregoing legislation will be enacted, the amount or applicable retroactive date of any one-time assessment, or the rates that might subsequently apply to assessable SAIF deposits; however, management anticipates that the Bank, after consideration of the one-time assessment, would continue to exceed all regulatory minimum capital levels. Further, management does not anticipate that any of the legislative proposals, if enacted, would have a material impact on the Company's financial condition in future periods. Under the FDI 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 operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Commissioner. Management of the Bank does not know of any practice, condition or violation that might lead to the termination of deposit insurance. On October 5, 1994, the FDIC issued an "Advanced Notice of Proposed Rulemaking" pursuant to which the FDIC is soliciting comments on whether the deposit-insurance assessment base currently provided for in the FDIC's assessment regulations should be redefined. As a result of the recent transition to a risk-based deposit insurance system, effective January 1, 1994, the assessment base, which had been determined by statute pursuant to the FDI Act, is now determined by the FDIC by regulation. At present, however, the FDIC's assessment base regulations continue to be based on the statutory provisions under the FDI Act. Under current law, insurance premiums paid to the FDIC are calculated by multiplying the institution's assessment base (which equals total domestic deposits, as adjusted for certain elements) by its assessment rate. Based on the change to the new deposit insurance system, developments in the financial services industry, changes in the activities of depository institutions and other factors, the FDIC seeks comments on whether the assessment base should be redefined.The FDIC has stated that review of the definition of "assessment base" does not signal any intent to enhance the total dollar amount of assessments collected, but that such redefinition may impact the assessments paid on an institution-by-institution basis. Until final regulations are adopted affecting the definition of an institution's assessment base, the Bank cannot predict what impact such regulation may have on Bank operations. 11 MANAGEMENT'S DISCUSSION (CONT.) Asset/Liability Management Asset/liability management is an ongoing process of matching asset and liability maturities to reduce interest rate risk. Management attempts to control this risk through pricing of assets and liabilities and maintaining specific levels of maturities. In recent periods, management's strategy has been to (1) sell substantially all new originations of long-term, fixed-rate single family mortgage loans in the secondary market, (2) invest in various adjustable-rate and short-term mortgage-backed and related securities, (3) invest in adjustable-rate, single family mortgage loans, and (4) encourage medium and longer-term certificates of deposit. The Company's estimated cumulative one-year gap between assets and liabilities was a negative 4.26% of total assets, at the latest available reporting date of March 31, 1996. A negative gap occurs when a greater dollar amount of interest-earning liabilities than interest-bearing assets are repricing or maturing during a given time period. The Bank's three-year cumulative gap as of March 31, 1996, was a negative 1.82%. During periods of rising interest rates, a negative interest rate sensitivity gap will tend to negatively affect net interest income. During periods of falling interest rates, a negative interest rate sensitivity gap will tend to postively affect the net interest income. Management believes that its asset/liability management strategies have reduced the potential effects of changes in interest rates on its operations. Increases in interest rates may increase net interest income because interest-earning assets will reprice more quickly than interest-bearing liabilities. The Company's analysis of the maturity and repricing of assets and liabilities incorporates certain assumptions concerning the amortization and prepayment of such assets and liabilities. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. Management Strategy Asset Quality Total non-performing assets increased to $845,000 at June 30, 1996 from $455,000 at June 30, 1995. As a percentage of assets, non-performing assets increased to .92% at June 30, 1996, compared to .61% at June 30, 1995. Selected Financial Ratios and Other Data: At or For the Three months ended June 30, Performance Ratios 1996 1995 ---- ---- Return on average assets 0.99% 1.31% Return on average equity 7.56% 7.69% 12 MANAGEMENT' S DISCUSSION(CONT.) Three Months Ended June 30, -------------------------------------------------------------------- 1996 1995 --------------------------------------------------------------------
Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Assets Interest-earning assets: Mortgage loans $60,988 $1,300 8.53% $51,398 $1,120 8.72% Commerical loans 4,401 120 10.92 3,895 112 11.50 Consumer loans 7,293 178 9.74 4,908 121 9.86 ------ ----- ----- ------ ----- ----- Total loans 72,682 1,598 8.79 60,201 1,353 8.99 Mortgage-backed and related securities 7,741 140 7.25 3,546 62 6.99 Interest bearing deposits in other financial institutions 804 11 5.41 730 10 5.48 Investment securities 2,974 39 5.29 2,855 38 5.32 Federal Home Loan Bank stock 803 14 6.72 442 6 5.43 ------ ----- ----- ------ ------ ---- Total interest-earning assets 85,004 $1,802 8.48% 67,774 $1,469 8.67% ------ ------ Non-interest earning assets 5,020 3,654 ------ ------ Total assets $90,024 $71,428 ======== ======= Liabilities and retained earnings: Deposits: NOW accounts $ 8,918 $ 39 1.75% $ 8,743 $ 38 1.74% Money market deposit accounts 2,941 35 4.76% 97 1 4.12 Passbook 7,230 41 2.26% 6,924 43 2.48 Certificates of deposit 40,038 580 5.80% 35,577 512 5.76 ------ --- ----- ------ --- ---- Total deposits 59,127 695 4.70% 51,341 594 4.63 Advances and other borrowings 19,004 277 5.83% 7,232 113 6.25 ------ --- ----- ------ --- ---- Total interest-bearing liabilities 78,131 972 4.98% 58,573 707 4.83% Non-interest bearing liabilities 101 690 Equity 11,792 12,165 ------- ------ Total liabilities and retained earnings $90,024 $71,428 ======= ======= Net interest income/interest rate spread $ 830 3.50% $ 762 3.84% ====== ==== ======= ==== Net earning assets/net interest margin $ 6,873 3.90% $ 9,201 4.50% ======= ==== ======= ==== Average interest-earning assets to average interest-bearing liabilities 1.09x 1.16x ==== ==== ________________________ (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.
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