-----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, M+W2SH894FY264cuy+l3d3wPEnjYb+NBHU8gvDsFEKRMalo2DK3daRsXKAQNntjy LptwdSxgT0GrclJWq8Yi8w== 0000916527-98-000014.txt : 19980812 0000916527-98-000014.hdr.sgml : 19980812 ACCESSION NUMBER: 0000916527-98-000014 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980810 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: SEC FILE NUMBER: 000-24606 FILM NUMBER: 98681429 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, 1998 Commission file number 0-24606 NORTHWEST EQUITY CORP. (exact name of small business issuer as specified in its charter) Wisconsin 39-1772981 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 234 Keller Avenue South Amery, Wisconsin 54001 (Address of principal executive offices) (Zip code) (715) 268-7105 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes __x__ No_____ (2) Yes __x__ No_____ The number of shares outstanding of the issuer's common stock, $1.00 par value per share, was 825,301 at June 30, 1998. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST EQUITY CORP. Dated:____8/7/98______________ 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 The Registrant is not involved in legal proceedings involving amounts in the aggregate which management believes are material to the financial condition and results of operations of the Registrant. (Materiality is defined for accounting purposes as $250,000 or more) On October 16, 1996, the Bank learned that a Minnesota Bank had commenced a repleven lawsuit against a borrower of the Bank that involves several parties claiming interests in collateral secured by a General Business Security Agreement of the Bank. On November 20, 1996, the Bank filed its answer and a third party complaint seeking repleven of its collateral and money judgments against its borrowers, the guarantors, and other interested parties. Repleven judgment was entered in favor of the Bank on January 15, 1997. A money judgment was filed against a guarantor on December 30, 1996. One of the guarantors has since filed personal bankruptcy and the Bank was awarded a non-dischargeable judgment against the guarantor in the amount of $80,000. Depending upon the non-exempt assets of the parties involved, the Bank's legal counsel believes the Bank should have sufficient legal grounds to expect recovery from the Bank's collateral, personal guarantees, and the other parties involved. The Board of Directors at its meeting October 8, 1996, decided to increase the quarterly loss allowance to $25,000 until more information is available to make a reasonable estimate of any losses that may occur. The Board continued this policy at its meeting held December 10, 1996, and subsequent meetings because a reasonable estimate cannot be determined until the legal issues are resolved. As soon as the Board can identify and quantify the amount of the loss, it will book the loss. An auction of the business inventory and equipment was held March 26, 1998. Proceeds of the auction and the recovery of other equipment total $220,435 and will be held by the court appointed receiver. Of that amount, approximately $72,000 is from the sale of property that is not disputed by any third parties and should be recovered by the Bank. The remaining $148,000 will continue to be held by the receiver pending further order of the court. A trial is scheduled for November 9, 1998. An attempt to settle the dispute amongst a limited number of the parties were held April 28, 1998, and at a trial court ordered mediation session held July 10, 1998; but no settlement was reached. Various motions for summary judgment have been filed with the court and at the writing only one issue has been decided and that in favor of the bank's position against the motion of another secured creditor. In order to establish an order of magnitude of the loss potential, a worst case scenario of no recovery on a loan of $613,000 plus an overdraft of $83,000 less $72,000 of the undisputed auction proceeds and less the current amount in the loan loss reserve of $304,000 allocated or available to be allocated to this loan, would produce an after-tax loss of approximately $204,000. Settlements proposed if accepted would have extinguished the loss reserve and produced no after-tax loss. Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-k. a. No reports on Form 8-K were filed during the quarter for which this report was filed. 2 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, (In Thousands)
June 30, ASSETS 1998 March 31, ------------ (unaudited) 1998 ------------ ------------ Cash and cash equivalents: Cash and due from banks $2,548 $2,642 Interest-bearing deposits with financial institutions 1,256 3,405 Total cash and cash equivalents 3,804 6,047 Investment securities - held-to-maturity - fair value of $3,004 at June 30, 1998 and $2,999 at March 31, 1998 3,000 3,000 Mortgage backed securities - fair value of $6,251 at June 30, 1998 and $6,546 at March 31, 1998 6,111 6,398 Loans held for sale 193 142 Loans receivable - net 78,528 78,297 Foreclosed properties and properties subject to foreclosure 312 159 Investment in Federal Home Loan Bank stock - at cost - which approximates fair value 953 1,159 Premises and equipment 2,252 2,250 Accrued interest receivable 597 578 Prepaid expenses and other assets 702 709 ------------ ------------ TOTAL ASSETS $96,452 $98,739 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Savings accounts $61,875 $62,278 Advances from Federal Home Loan Bank 17,562 19,062 Other borrowed money 4,555 5,258 Accounts payable and accrued expenses 706 627 ------------ ------------ Total liabilities 84,698 87,225 ------------ ------------ Stockholders' equity Preferred stock - $1 par value; 2,000,000 shares authorized; none issued - - - - Common stock - $1 par value; 4,000,000 shares authorized; 1,032,517 shares issued; 825,301 shares outstanding 1,033 1,033 Additional paid-in capital 6,582 6,584 Less unearned restricted stock plan award (13) (26) Less unearned Employee Stock Ownership Plan (358) (389) Less treasury stock - at cost (2,549) (2,557) Retained earnings - substantially restricted 7,059 6,869 ------------ ------------ Total stockholders' equity 11,754 11,514 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $96,452 $98,739 ============ ============ See accompanying Notes to Consolidated Financial Statements
3 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended June 30, (In Thousands except for per share amounts)
Three Months Ended June 30, 1998 1997 ------------ ------------ Interest income: Interest and fees on loans $1,745 $1,702 Interest on mortgage-backed securities 115 132 Interest and dividends on investments 97 77 ------------ ------------ Total interest income 1,957 1,911 ------------ ------------ Interest expense: Interest on deposits 720 717 Interest on borrowings 326 333 ------------ ------------ Total interest expense 1,046 1,050 ------------ ------------ Net interest income 911 861 Provision for loan losses 25 25 ------------ ------------ Net interest income after provision for loan losses 886 836 ------------ ------------ Other income: Mortgage servicing fees 21 22 Service charges on deposits 62 58 Gain on sale of mortgage loans 38 16 Other 83 34 ------------ ------------ Total other income 204 130 ------------ ------------ General and administrative expenses: Salaries and employee benefits 336 310 Net occupancy expense 86 78 Data processing 35 32 Federal insurance premiums 10 10 Other 134 131 ------------ ------------ Total general and administrative expense 601 561 ------------ ------------ Income before provision for income taxes 489 405 Provision for income taxes 167 153 ------------ ------------ Net income $322 $252 ============ ============ Basic earnings per share $0.42 $0.33 ============ ============ Diluted earnings per share $0.39 $0.27 ============ ============ See accompanying Notes to Consolidated Financial Statements
4 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) Three Months Ended June 30, (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, 1997 Balance - March 31, 1997 $1,033 $6,584 $(29) $(115) $(558) $(2,256) $6,200 $10,859 Net income - - - - - - - - - - - - 252 252 Adjustment of carrying value of securities available for sale, net of deferred taxes of $8 - - - - 9 - - - - - - - - 9 Amortization of unearned ESOP and restricted stock award - - - - - - 32 41 - - - - 73 Cash dividends - $.12 per share - - - - - - - - - - - - (100) (100) ----------------------------------------------------------------------------------- Balance - June 30, 1997 1,033 6,584 (20) (83) (517) (2,256) 6,352 11,093 ================================================================================== Three Months Ended June 30, 1998 Balance - March 31, 1998 1,033 6,584 - - (26) (389) (2,557) 6,869 11,514 Net income - - - - - - - - - - - - 322 322 Exercise of stock options - - (2) - - - - - - 8 - - 6 Amortization of unearned ESOP and restricted stock award - - - - - - 13 31 - - - - 44 Cash dividends - $.16 per share - - - - - - - - - - - - (132) - - ---------------------------------------------------------------------------------- Balance - June 30, 1998 $1,033 $6,582 $ - - $(13) $(358) $(2,549) $7,059 $11,754 ================================================================================== See accompanying Notes to Consolidated Financial Statements
5 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended June 30, (In Thousands)
Three Months Ended June 30, 1998 1997 ------------ ------------ Cash flows from operating activities: Net income $322 $252 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation 37 37 Provision for loan losses 25 25 Deferred income taxes - - (28) Amortization of ESOP and restricted stock awards 44 73 Proceeds from sales of mortgage loans 4,466 964 Loans originated for sale (4,517) (951) Changes in operating assets and liabilities: Accrued interest receivable (19) 59 Prepaid expenses and other assets 7 (87) Accrued interest payable 128 21 Accrued income taxes payable 79 55 Other accrued liabilities (130) 40 ------------ ------------ Net cash provided by operating activities 442 460 ------------ ------------ Cash flows from investing activities: Available for sale securities: Proceeds from sales 206 - - Held to maturity securities: Proceeds from maturity 500 - - Purchases of investment securities (500) (302) Principal collected on mortgage-backed securities 287 97 Principal collected on long-term loans 5,398 7,354 Long-term loans originated or acquired (5,807) (7,792) Purchase of office properties and equipment (39) (9) ------------ ------------ Net cash (used in) investing activities 45 (652) ------------ ------------ See accompanying Notes to Consolidated Financial Statements
6 NORTHWEST EQUITY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended June 30, (In Thousands)
1998 1997 ------------ ------------ Cash flows from financing activities: Net increase (decrease) in savings accounts (403) 1,656 Net increase (decrease) in short-term borrowings (6,309) (992) Repayments of long-term financing (834) 180 Proceeds from long-term financing 4,940 600 Exercise of stock options 8 - - Dividends paid (132) (100) ------------ ------------ Net cash provided by (used in) financing activities (2,730) 1,344 ------------ ------------ Increase (decrease) in cash and equivalents (2,243) 1,152 Cash and equivalents at beginning 6,047 2,980 ------------ ------------ Cash and equivalents at end $3,804 $4,132 ============ ============ Supplemental disclosures of cash flow information: Loans receivable transferred to foreclosed properties and properties subject to foreclosure $166 $9 Loans charged off 40 21 Interest paid 918 1,029 Income taxes paid 88 98 See accompanying Notes to Consolidated Financial Statements
7 NORTHWEST EQUITY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies: The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with the accounting policies described in the Bank's audited financial statements for the year ended March 31, 1998 and should be read in conjunction with the financial statements and notes which appear in that report. These statements do not include all the information and disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Note 2. Subsequent Events: none 8 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, 1997 and June 30, 1998 Net Income Net income for the three months ended June 30, 1998, increased $70,000 or 27.8% to $322,000 compared to $252,000 for the three months ended June 30, 1997. The increase in net income was primarily due to an increase in total other income of $74,000 from $130,000 for the three months ended June 30, 1997 to $204,000 for the three months ended June 30, 1998. Other income increased $49,000 from $34,000 for the three months ended June 30, 1997, to $83,000 for the three months ended June 30, 1998. The increase in other income was partially due to an increase in the profit on sale of real estate held in the Bank's subsidiary of $39,000 from $11,000 for the three months ended June 30, 1997, to $50,000 for the three months ended June 30, 1998 and an increase of $14,000 in brokerage commissions from $9,000 for the three months ended June 30, 1997, to $23,000 for the three months ended June 30, 1998. Gain on sale of mortgage loans increased $22,000 from $16,000 for the three months ended June 30, 1997, to $38,000 for the three months ended June 30, 1998. A $50,000 increase in net interest income from $861,000 for the three months ended June 30, 1997 to $911,000 for the three months ended June 30, 1998, was partially offset by an increase in $40,000 in general and administrative expense from $561,000 for the three months ended June 30, 1997 to $601,000 for the three months ended June 30, 1998. Net Interest Income Net interest income increased by $50,000 from $861,000 for the three months ended June 30, 1997, to $911,000 for the three months ended June 30, 1998. The improvement in net interest income results from interest income increasing $46,000 to $1,957,000 for the three months ended June 30, 1998, compared to $1,911,000 for the three months ended June 30, 1997, while interest expense decreased $4,000 to $1,046,000 for the three months ended June 30, 1998, from $1,050,000 for the three months ended June 30, 1997. Interest Income Interest income increased $46,000 or 2.4% to $1,957,000 for the three months ended June 30, 1998, compared to $1,911,000 million for the three months ended June 30, 1997. Interest and fees on loans increased $43,000 to $1,745,000 for the three months ended June 30, 1998, compared to $1,702,000 for the three months ended June 30, 1997. The increase was due to the increase in the average outstanding balance of total loans to $79.1 million for the three months ended June 30, 1998, compared to $77.4 million for the three months ended June 30, 1997. Interest on mortgage-backed and related securities decreased $17,000 to $115,000 for the three months ended June 30, 1998, from $132,000 for the three months ended June 30, 1997, due to an decrease in the average balance of mortgage backed and related securities from $7.2 million for the three months ended June 30, 1997, to an average balance of $6.3 million for the three months ended June 30, 1998, that was the result of the principal repayments and pre-payments. Interest on investments increased $20,000 to $97,000 for the three months ended June 30, 1998, compared to $77,000 for the three months ended June 30, 1997, as a result of an increase in the average outstanding balance of interest bearing deposits in other financial institutions from $1.5 million for the three months ended June 30, l997, to $2.3 million for the three months ended June 30, 1998. Interest Expense Interest expense decreased $4,000 or 0.4% to $1,046,000 for the three months ended June 30, 1998, compared to $1,050,000 for the three months ended June 30, 1997. Interest on deposits increased $3,000 or 0.4% from $717,000 for the three months ended June 30, 1997 to $720,000 for the three months ended June 30, 1998. The increase reflects an increase in the average outstanding balance of total deposits to $62.2 million for the three months ended June 30, 1998, from an average balance of $61.6 million for the three months ended June 30, 1997. Interest on borrowings decreased $7,000 or .21% from $333,000 for the three months ended June 30, 1997, to $326,000 for the three months ended June 30, 1998. The decrease reflects a decrease in average rate paid on advances and other borrowings from 5.98% for the three months ended June 30, 1997, to 5.68% for the three months ended June 30, 1998. 9 MANAGEMENT'S DISCUSSION (CONT.) Provision for Loan Losses The provision for loan losses remained at $25,000 for the three months ended June 30, 1998, compared to $25,000 for the three months ended June 30, 1997. The allowance for loan losses totaled $472,000 at June 30, 1998, compared to $466,000 at June 30, 1997, and represented 0.59% and 0.59% of gross loans and 34.9% and 38.3% of non-performing loans, respectively. The Board of Directors is currently adding $25,000 each quarter to the loan loss reserve to provide for a commercial loan discussed under Asset Quality. That policy will continue until a reasonable estimate of any loss potential can be determined. The non-performing assets to total assets ratio was 1.72% at June 30, 1998, compared to 1.26% at June 30, 1997. Other Income Total other income increased 56.9% or $74,000 to $204,000 for the three months ended June 30, 1998, compared to $130,000 for the three months ended June 30, 1997. Other income increased $49,000 from $34,000 for the three months ended June 30, 1997 to $83,000 for the three months ended June 30, 1998. The increase in other income was partially due to an increase in the profit on sale of real estate held in the Bank's subsidiary of $39,000 from $11,000 for the three months ended June 30, 1997, to $50,000 for the three months ended June 30, 1998, and an increase of $14,000 in brokerage commissions from $9,000 for the three months ended June 30, 1997, to $23,000 for the three months ended June 30, 1998. Gain on sale of mortgage loans increased $22,000 from $16,000 for the three months ended June 30, 1997, to $38,000 for the three months ended June 30, 1998, and reflects the general downward trend in interest rates over the comparable periods which acts to produce gains on sale of mortgage loans sold in the secondary market. Service charges on deposits increased $4,000 from $58,000 for the three months ended June 30, 1997, to $62,000 for the three months ended June 30, 1998. General and Administrative Expenses General and administrative expenses increased $40,000 or 7.1% to $601,000 for the three months ended June 30, 1998, compared to $561,000 for the three months ended June 30, 1997. Salaries and employee benefits increased $26,000 from $310,000 for the three months ended June 30, 1997, to $336,000 for the three months ended June 30, 1998. The increase in salaries is due to cost of living salary increases and additional personnel. Net occupancy expense increased $8,000 from $78,000 for the three months ended June 30, 1997, to $86,000 for the three months ended June 30, 1998, and reflects some extraordinary maintenance items occurring during the quarter. Data processing expenses increased $3,000 from $32,000 for the three months ended June 30, 1997, to $35,000 for the three months ended June 30, 1998. The increase in expense is the result of escalation clauses in the data-processing contract that change with an increase in transaction volumes. Income Tax Expense Income tax expense increased $14,000 or 9.2% from $153,000 for the three months ended June 30, 1997, to $167,000 for the three months ended June 30, 1998. Income before taxes increased $84,000 from $405,000 for the three months ended June 30, 1997, to $489,000 for the three months ended June 30, 1998. The effective tax rate for the three months ended June 30, 1998, was 34.1% compared to 37.8% for the three months ended June 30, 1997. The decrease in the effective rate reflects the establishment on May 30, 1997, of Northwest Investments, Inc., a wholly owned subsidiary domiciled in the state of Nevada, that acts to lower the Company's state income tax obligation. 10 MANAGEMENT'S DISCUSSION (CONT.) Financial Condition Total assets decreased $2.2 million or 2.2% to $96.5 million at June 30, 1998, compared to $98.7 million at March 31, 1998 due to a decrease in cash of $2.2 million to $3.8 million at June 30, 1998, form $6.0 million at March 31, 1998. The cash was used to reduce advances for the Federal Home Loan Bank $1.5 million from $19.1million at March 31, 1998, to $17.6 million at June 30, 1998; fund a decrease in deposits of $0.4 million to $61.9 million at June 30, 1998, from $62.3 million at March 31, 1998; and fund a decrease in other borrowed money of $0.7million from $5.3 million at March 31, 1998, to $4.6 million at June 30, 1998. The decrease in other borrowed money is the result of seasonal cash withdrawals of retail reverse repurchase agreements held by the local school district. Loans receivable increased $0.2 million to $78.5 million at June 30, 1998, compared to $78.3 million at March 31, 1998. The increase in net loans receivable was the result of the expected seasonal increase of loan activity during the spring and summer months. Investment securities held-to-maturity remained at $3.0 million at June 30, 1998, and March 31, 1998. Mortgage backed and related securities decreased $287,000 from $6.4 million on March 31, 1998, to $6.1 million at June 30, 1998, as the result of principal repayments and prepayments. Shareholders' equity increased $240,000 from $11.5 million at March 31, 1998, to $11.8 million at June 30, 1998, as a result of net income for the three months ended June 30, 1998, less $132,000 in cash dividends and the amortization of the common stock purchased by the employee stock ownership plan of $31,000 from ($389,000) on March 31, 1998 to ($358,000) on June 30, 1998; and the amortization of the unearned restricted stock plan award of $13,000 from ($26,000) at March 31, 1998, to ($13,000) at June 30, 1998. Disclosures Involving Year 2000 Issues Issues related to the century date change and the impact on computer systems and business operations are receiving prominent publicity and attention. Depositors, business partners, investors, and the general public are specifically interested in the effect on the financial condition of each depository institution. The FDIC has advised state savings banks that safe and sound banking practices require them to address Year 2000 issues. The Securities and Exchange Commission (SEC) issued a revised Staff Legal Bulletin NO. 5 to provide specific guidance on disclosure associated with Year 2000 obligations for companies registered under federal securities laws. Computer programs generally abbreviated dates by eliminating the century digits of the year. Many resources, such as software; hardware; telephones; voicemail; heating; ventilating and air conditioning; alarms, etc. ("Systems") are affected. These Systems were designed to assume a century value of "19" to save memory and disk space within their programs. In addition, many Systems use a value of "99" in a year or "99/99/99" in a date to indicate "no date" or "any date" or even a default expiration date. As the year 2000 approaches, this abbreviated date mechanism within Systems threatens to disrupt the function of computer software at nearly every business which relies heavily on computer systems for account and other recordkeeping functions. If the millennium issue is ignored, system failures or miscalculations could occur, causing disruptions of operations and a temporary inability to process business transactions. The Bank has an inventory of personal computers that access a data processing system provided by EDS in Des Moines, Iowa. If the personal computers and data processing systems fail to process the century date change, it may impair the Bank's ability to process loan payments, accept deposits, and address other operational issues. The Bank's customers, suppliers, other constituents may also be impaired to meet their contractual obligations with the Bank. The Bank has developed a Year 2000 Plan (the "Plan"). The Bank's Plan attempts to identify the systems, assess the risk, and conduct inventories as necessary to assure compliance with the Plan. The Plan calls for identifying all systems in need of remediation by June 30, 1999, and remedying all systems in need of remediation by September 30, 1999. As of March 31, 1998, the Bank estimates it will have to purchase hardware and equipment in the amount of $17,000 (pre-tax) to address the Y2K issues. The expenditures would be amortized over 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 will be assessed in the current fiscal year 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. 11 MANAGEMENT'S DISCUSSION (CONT.) 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. 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 0.29% of total assets, at the latest available reporting date of March 31, 1998. A negative gap occurs when a greater dollar amount of interest-earning liabilities than interest-bearing assets are repricing or maturing during a given time period. During periods of rising interest rates, a negative interest rate sensitivity gap will tend to negatively affect net interest income. During periods of falling interest rates, a negative interest rate sensitivity gap will tend to positively affect the net interest income. Management believes that its asset/liability management strategies have reduced the potential effects of changes in interest rates on its operations. Increases in interest rates may decrease net interest income because interest-bearing liabilities will reprice more quickly than interest-earning assets. The Company's analysis of the maturity and repricing of assets and liabilities incorporates certain assumptions concerning the amortization and prepayment of such assets and liabilities. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. Management Strategy Asset Quality The Company emphasizes high asset quality in both its investment portfolio and lending activities. Non-performing assets have ranged between .95% and 1.72% of total assets during the last three years and were 1.72% of total assets at June 30, 1998. Cumulative gross charge-offs over the last three fiscal years totaled $193,000 and were offset by $38,000 in recoveries. The last three years cumulative gross charge-offs of commercial loans have totaled $19,000. The cumulative gross charge-offs, $169,000 were installment loans and were offset by $9,000 in recoveries. The remaining $5,000 in cumulative gross charge-offs were real estate loans and were offset by $29,000 in recoveries. On October 16, 1996, the Bank learned that a Minnesota Bank had commenced a repleven lawsuit against a borrower of the Bank that involves several parties claiming interests in collateral secured by a General Business Security Agreement of the Bank. On November 20, 1996, the Bank filed its answer and a third party complaint seeking repleven of its collateral and money judgments against its borrowers, the guarantors, and other interested parties. Repleven judgment was entered in favor of the Bank on January 15, 1997. A money judgment was filed against a guarantor on December 30, 1996. One of the guarantors has since filed personal bankruptcy and the Bank was awarded a non-dischargeable judgment against the guarantor in the amount of $80,000. Depending upon the non-exempt assets of the parties involved, the Bank's legal counsel believes the Bank should have sufficient legal grounds to expect recovery from the Bank's collateral, personal guarantees, and the other parties involved. The Board of Directors at its meeting October 8, 1996, decided to increase the quarterly loss allowance to $25,000 until more information is available to make a reasonable estimate of any losses that may occur. The Board continued this policy at its meeting held December 10, 1996, and subsequent meetings because a reasonable estimate cannot be determined until the legal issues are resolved. As soon as the Board can identify and quantify the amount of the loss, it will book the loss. An auction of the business inventory and equipment was held March 26, 1998. Proceeds of the auction and the recovery of other equipment total $220,435 and will be held by the court appointed receiver. Of that amount, approximately $72,000 is from the sale of property that is not disputed by any third parties and should be recovered by the Bank. The remaining $148,000 will continue to be held by the receiver pending MANAGEMENT'S DISCUSSION (CONT.) 12 further order of the court. A trial is scheduled for November 9, 1998. An attempt to settle the dispute amongst a limited number of the parties was held April 28, 1998, but no agreements were reached. The trial court ordered a mediation session for July 10, 1998. Various motions for summary judgment have been filed with the court and the court's decision is expected by July 1, 1998. In order to establish an order of magnitude of the loss potential, a worst case scenario of no recovery on a loan of $613,000 plus an overdraft of $83,000 less $72,000 of the undisputed auction proceeds and less the current amount in the loan loss reserve of $304,000 allocated or available to be allocated to this loan, would produce an after-tax loss of approximately $204,000. Settlements proposed if accepted would have extinguished the loss reserve and produced no after-tax loss. During the fiscal years ended March 31, 1998, 1997 and 1996, the Company recorded provisions for loan losses of $100,000, $81,000, and $24,000, respectively, to its allowance for loan losses and had net charge-offs of $77,000, $53,000, and $25,000, respectively. The Company's allowance for loan losses at June 30, 1998, totaled $472,000 or 304.5% of cumulative gross charge-offs during the last three fiscal years. Management currently believes the allowance for loan losses at June 30, 1998, is at an adequate level and that future provisions for loan losses will be maintained at current levels until more information is available concerning the large commercial loan mentioned in the previous paragraph. Total loans delinquent 90 days or more decreased from $1.4 million at March 31, 1998 to $1.3 million or 1.34% of assets at June 30, 1998. Total loans delinquent 31-89 days increased from $1.5 million at March 31, 1998, to $3.2 million at June 30, 1998. The latest available peer group comparison of the average nonperforming loans and real estate owned as a percentage of total loans as prepared by America's Community Bankers was 1.44% for the Company at September 30, 1997, compared to 1.43% on a nation wide basis, 0.90% on a geographic basis, 1.25% on an asset size basis, and 1.70% on an owner type basis. Considering that the commercial loan mentioned above with a delinquent balance of $613,000, total loans delinquent 90 days or more would compare very favorably with the peer group. Selected Financial Ratios and Other Data: At or For the Three months ended June 30, Performance Ratios 1998 1997 ---- ---- Return on average assets 1.32% 1.05% Return on average equity 11.3% 9.33% 13 MANAGEMENT' S DISCUSSION(CONT.)
Three Months Ended June 30, ------------------------------------------------------------------------------------------- 1998 1997 ------------------------------------------------------------------------------------------- Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Assets Interest-earning assets: Mortgage loans $ 66,827 $ 1,449 8.67% $ 65,404 $ 1,420 8.68% Commerical loans 4,399 104 9.46% 4,733 101 8.54% Consumer loans 7,837 192 9.80% 7,229 181 10.02% ------------ --------- ---------- -------- Total loans 79,063 1,745 8.83% 77,366 1,702 8.80% Mortgage-backed securities 6,311 115 7.29% 7,226 132 7.31% Interest bearing deposits in other financial institutions 2,339 32 5.47% 1,529 21 5.50% Investment securities 2,978 46 6.18% 3,002 40 5.33% Federal Home Loan Bank stock 1,003 19 6.75% 912 16 6.75% ------------ --------- ----------- --------- Total interest-earning assets 91,694 $ 1,957 8.54% 90,035 $ 1,911 8.49% --------- ---------- Non-interest earning assets 5,299 5,299 ------------ ----------- Total assets $ 96,993 $ 95,334 ============ =========== Liabilities and retained earnings: Deposits: NOW accounts(1) $ 9,842 $ 35 1.42% $ 9,059 $ 34 1.50% Money market deposit accounts 6,171 76 4.93% 4,940 56 4.53% Passbook 6,146 33 2.15% 5,962 32 2.15% Certificates of deposit 40,021 576 5.76% 41,640 595 5.72% ------------ --------- ------------ ---------- Total deposits 62,180 720 4.63% 61,601 717 4.66% Advances and other borrowings 22,974 326 5.68% 22,270 333 5.98% ------------- ---------- ------------ ----------- Total interest-bearing liabilities 85,154 1,046 4.91% 83,871 1,050 5.01% ---------- ----------- Non-interest bearing liabilities 416 664 Equity 11,423 10,799 ------------- ------------ Total liabilities and retained earnings $ 96,993 $ 95,334 ============= ============= Net interest income/interest rate spread(2) $ 911 3.63% $ 861 3.48% ========== ======= ========== ======= Net earning assets/net interest margin(3) $ 6,540 3.97% $ 6,164 3.82% ============= ======== ============== ======= Average interest-earning assets to average interest-bearing liabilities 1.08 x 1.07 x ============= =============== ________________________ (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.
14 EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULES TO 10Q
9 1,000 3-MOS MAR-31-1999 JUN-30-1998 2,548 1,256 0 0 0 3,000 3,004 78,721 472 96,452 61,875 8,454 706 13,663 0 0 1,033 10,721 96,452 1,745 212 0 1,957 720 1,046 911 25 0 601 489 167 0 0 322 .39 .39 3.63 1,269 13 72 0 474 53 1 472 0 0 0
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