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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
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Commission file number: 0-27982
FIRST NORTHERN CAPITAL CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1830142
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 North Monroe Ave., P.O. Box 23100, Green Bay, WI 54305-3100
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(920) 437-7101
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
As of February 27, 1998, 8,922,023 shares of Common Stock were outstanding,
and the aggregate market value of the Common Stock (based upon the $13.00 last
sale price quotation on The NASDAQ Stock Market, Inc./National Market System as
reported in the Wall Street Journal) held by non-affiliates (excludes a total of
1,153,447 shares reported as beneficially owned by directors and executive
officers or held in the registrant's 401(k) Savings Plan; does not constitute an
admission as to affiliate status) was approximately $100,991,488.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Document are Incorporated
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Proxy Statement for Annual Meeting of
Stockholders on April 22, 1998 Part III
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FIRST NORTHERN CAPITAL CORP.
FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1997
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TABLE OF CONTENTS
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ITEM PAGE
PART I
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1. Business............................................................... 1-29
2. Properties............................................................. 29-30
3. Legal Proceedings...................................................... 31
4. Submission of Matters to a Vote of Security Holders.................... 31
Executive Officers of the Registrant................................... 31-32
PART II
5. Market for Registrant's Common Equity and Related Stockholders Matters. 32-33
6. Selected Financial Data................................................ 34-35
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 36-51
7A. Quantitative and Qualitative Disclosures About Market Risk............. 52-53
8. Financial Statements and Supplementary Data............................ 54-83
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................. 84
PART III
10. Directors and Executive Officers of the Registrant.................... 85
11. Executive Compensation................................................ 85
12. Security Ownership of Certain Beneficial Owners and Management........ 85
13. Certain Relationships and Related Transactions........................ 85
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 86
Signatures............................................................ 87
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Part I.
Item 1. Business
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Overview. First Northern Capital Corp. (the "Company" or "First Northern"), a
unitary savings and loan holding company, was incorporated in Wisconsin in 1995
for the purpose of owning all of the outstanding stock of First Northern Savings
Bank, S.A. (the "Savings Bank"), a Wisconsin chartered capital stock savings and
loan association, which reorganized into the holding company structure effective
December 20, 1995 (the"Reorganization"). At that date, each outstanding share
of the Savings Bank's common stock was converted into one share of the Company's
common stock. Consequently, the former holders of all the outstanding stock of
the Savings Bank acquired the same proportionate ownership interest in First
Northern as they had held in the Savings Bank. The consolidated capitalization,
assets, liabilities, income and other financial data of First Northern
immediately following the Reorganization were substantially the same as those of
the Savings Bank immediately prior to consummation of the Reorganization. The
Reorganization was effected to provide greater flexibility in meeting the
Company's future financial and competitive needs. All data presented in this
10-K for dates and periods prior to December 20, 1995 relates to the Savings
Bank. All references herein to First Northern or the Company for any date or
period prior to consummation of the Reorganization shall be deemed to refer to
the Savings Bank.
The Savings Bank is the only direct subsidiary of the Company and its
operations are the primary contributor to the Company's earnings and expenses.
The Savings Bank's business consists primarily of attracting deposits from the
general public and originating loans throughout its Northeastern Wisconsin
branch network. Great Northern Financial Services Corporation ("GNFSC")
(formerly known as Great Northern Development Corporation), a wholly-owned
subsidiary of the Savings Bank, offers full brokerage services to the public,
including the sale of tax deferred annuities and mutual funds, and sells credit
life and disability insurance. Another wholly-owned subsidiary, First Northern
Investments, Inc. ("FNII"), manages a majority of the Savings Bank's
investments. The Savings Bank's 50% owned subsidiary, Savings Financial
Corporation ("SFC"), originates, services and sells automobile loans to its
parent corporations.
First Northern is based in Green Bay, Wisconsin and conducts its business
from 19 offices located in a contiguous, eight-county (Brown, Marinette,
Manitowoc, Door, Shawano, Outagamie, Waupaca, and Calumet) area in Northeastern
Wisconsin.
On August 18, 1997, First Northern effected a 2-for-1 stock split in the
form of a 100% stock dividend. Unless otherwise indicated, all shares and per
share information have been restated to reflect the stock split.
Cautionary Factors. This Form 10-K contains or incorporates by reference
various forward-looking statements concerning the Company's prospects that are
based on the current expectations and beliefs of management. Forward-looking
statements may also be made by the Company from time to time in other reports
and documents as well as oral presentations. When used in written documents or
oral statements, the words "anticipate," "believe," "estimate," "expect,"
"objective" and similar expressions are intended to identify forward-looking
statements. The statements contained herein and such future statements involve
or may involve certain assumptions, risks and uncertainties, many of which are
beyond the Company's control, that could cause the Company's actual results and
performance to differ materially from what is expected. In addition to the
assumptions and other factors referenced specifically in connection with such
statements, the following factors could impact the business and financial
prospects of the Company: general economic conditions; legislative and
regulatory initiatives; monetary and fiscal policies of the federal government;
deposit flows; disintermediation; the cost of funds; general market rates of
interest; interest rates or investment returns on competing investments; demand
for loan products; demand for financial services; changes in accounting policies
or guidelines; and changes in the quality or composition of the Savings Bank's
loan and investment portfolios and the investment portfolio of FNII.
The Thrift Industry. The operations of First Northern and the Savings Bank, as
well as other savings associations and other financial institutions, are
significantly influenced by general economic conditions, by the related
monetary, tax and fiscal policies of the federal government and by the policies
of regulatory authorities, including the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"), the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and in the case of
First Northern and the Savings
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Bank, the Wisconsin Department of Financial Institutions---Division of Savings
Institutions ("WDFI- Administrator"). First Northern's results of operations are
also affected by accounting principles and regulations adopted by the Financial
Accounting Standards Board ("FASB") and other organizations. Deposit flows and
costs of funds are influenced by interest rates on competing investments,
general market rates of interest, the level of personal savings and the public
perception of the financial strength of the industry. Lending activities are
affected by the demand for mortgage financing and other types of loans, which in
turn is affected by the interest rates at which such financing may be offered
and market forces acting upon the supply of housing and the availability of
funds.
Recapitalization of SAIF. The Savings Association Insurance Fund ("SAIF") of
the FDIC was recapitalized during 1996 by a one-time special assessment imposed
on all SAIF members. The $2,856,000 assessment paid by First Northern had a
significant impact on its 1996 financial results. However, the effect of the
recapitalization is a significant reduction in federal deposit insurance
premiums for SAIF-insured institutions on an ongoing basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Acquisitions. On April 28, 1994, Prime Federal Bank, FSB ("Prime Federal")
merged with and into the Savings Bank. As a part of the business combination,
the Savings Bank exchanged 2.8275 shares of its common stock for each share of
Prime Federal common stock outstanding, resulting in the issuance of 2,486,000
shares of the Savings Bank's common stock. The transaction was accounted for as
a pooling of interests; consequently, financial data for years prior to 1994
have been restated to include the operating results of Prime Federal.
On June 12, 1992, the Savings Bank completed its acquisition of New London
Savings and Loan Association ("New London"). As part of the transaction, New
London converted from a Wisconsin chartered mutual savings and loan association
to a Wisconsin chartered stock savings institution and simultaneously merged
with and into the Savings Bank. The Savings Bank issued 1,359,168 shares of its
common stock to certain members of New London, other eligible subscribers, and
the general public for approximately $6.1 million of additional capital.
Market Area and Competition. First Northern's primary market area is an eight
county area in Northeastern Wisconsin which surrounds Green Bay, the third
largest city in Wisconsin. First Northern operates 19 offices located in 14
cities in this area. These counties and cities are serviced by four Green Bay
area television stations and are included in the circulation of a Green Bay
newspaper.
Financial organizations, such as First Northern, experience intense
competition in both attracting and retaining deposits and in making real estate
and consumer loans. First Northern's management believes that its share of the
deposit and mortgage lending markets in its primary market area is approximately
10%. Most direct competition for deposits has come from savings and loan
associations, commercial banks, credit unions, stock brokerage firms and money
market mutual funds. In addition to offering competitive types of accounts and
interest rates, the principal methods used by First Northern to attract deposits
include the offering of a variety of services, and convenient business hours and
branch locations, with inter-branch deposit and withdrawal privileges at each
location. Competition in originating real estate loans comes primarily from
other savings institutions, commercial banks and mortgage bankers. The primary
factors in competing for loans are interest rates and interest rate adjustment
provisions, loan fees and the quality of service to borrowers.
The Wisconsin Statutes governing savings associations and their holding
companies provide for regional reciprocal interstate banking which permits
additional competitors to enter First Northern's primary market and may tend to
create further concentration in the financial services industry. Under
Wisconsin law, Wisconsin chartered savings institutions may open branches in
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri and Ohio,
provided that reciprocal legislation is adopted in such states (the "Regional
States"). Currently, all but Missouri have adopted reciprocal legislation. A
Wisconsin based savings and loan holding company is able to acquire a savings
institution or holding company in any of the Regional States and such a holding
company located in a Regional State is able to make similar acquisitions in
Wisconsin. In addition, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, which allows bank holding companies that are adequately
capitalized and adequately managed to acquire banks anywhere in the nation
regardless of whether the acquisition is prohibited under state law, is also
expected to create further competition and concentration in the financial
services
2
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industry.
Lending Activities. First Northern has traditionally concentrated on
originations of adjustable and fixed interest rate one- to four-family mortgage
loans and consumer loans. First Northern also originates five or more family
residential, commercial real estate and short-term construction mortgage loans.
Adjustable interest rate mortgage loans are originated for First Northern's
portfolio; while 30 year fixed interest rate mortgage loans are primarily
originated for sale in the secondary mortgage market. Fixed interest rate
mortgage loans with terms of 15 and 20 years are retained in First Northern's
mortgage loan portfolio. At December 31, 1997, approximately 89% of First
Northern's mortgage loan portfolio was interest rate adjustable as compared to
90% at December 31, 1996.
To aid in matching maturities of its assets and liabilities, First Northern
originates second mortgage loans, automobile, boat, recreational vehicle and
other types of consumer loans. These loans are generally of shorter maturities
than first mortgage loans and are originated at both adjustable or fixed
interest rates.
First Northern lends primarily in its eight county market area in
Northeastern Wisconsin. At December 31, 1997, approximately 99.2% of the total
dollar amount of First Northern's mortgage loans outstanding were on properties
located in Wisconsin with the other 0.8% representing properties located
primarily in other Midwestern states.
First Northern's loan portfolio of $608.0 million before deductions at
December 31, 1997 was 91.1% by dollar volume of its total assets. As of that
date, approximately 67.9% by dollar volume of the loan portfolio consisted of
conventional first mortgage loans secured by one- to four-family residences,
with an additional 25.8% by dollar volume in consumer loans, 4.0% by dollar
volume in multi-family (more than four) residential properties, 1.9% by dollar
volume in commercial real estate properties and .4% by dollar volume in other
properties.
Loan Interest Rates and Terms. Interest rates charged on First Northern's loans
are affected primarily by the demand for such loans and the supply and cost of
money available for lending purposes. These factors are in turn affected by
general economic conditions and such other forces as monetary policies of the
federal government, including the Federal Reserve Board, the general supply of
money, tax policies and governmental budgetary matters. Certain lending
activities of Wisconsin chartered savings associations are subject to Wisconsin
usury laws.
The maturities and average periods that loans actually remain outstanding,
together with the variability of loan interest provisions, in each case as
compared with the corresponding factors for loan funding sources, are the key
determinants of a lender's exposure to interest rate risk. Loan sales may also
be used as a means of reducing interest rate risk. First Northern's general
policy, which is subject to review by management as a result of changing market
and economic conditions, and other factors, is to retain all adjustable interest
rate mortgage loans in its portfolio and to keep up to approximately 20% of the
mortgage portfolio in fixed interest rate mortgage loans. First Northern
estimates that generally not more than 5% of the total mortgage portfolio will
be in 30 year fixed interest rate mortgage loans. This policy is part of First
Northern's asset/liability management strategy.
Mortgage loans made by First Northern generally are long-term loans,
amortized on a monthly basis with principal and interest due each month. First
Northern does not include a prepayment penalty on one- to four-family owner-
occupied mortgage loans. Although the original contractual loan payment period
for mortgage loans normally ranges from 15 to 30 years, First Northern's
experience has been that, because of prepayments in connection with refinancing
and sales of property, mortgage loans typically remain outstanding for a
substantially shorter period. First Northern estimates that the average range of
time mortgage loans are outstanding is approximately six to ten years.
Management of First Northern is committed to matching the maturities of
assets and liabilities. In furtherance of this goal, management's policy is to
emphasize the origination of consumer loans and other loans having short
maturities, such as three to six years, and mortgage loans which are interest
rate adjustable or are eligible for sale in the secondary market. At December
31, 1997, consumer loans (second mortgage, automobile and other consumer loans)
outstanding totaled $157.1 million. Consumer loan originations and purchases
for the year ended December 31, 1997 were $98.2 million, of which $29.2 million
or 29.7% were interest rate adjustable. Consumer loan originations and
purchases in 1996 were $88.3 million, of which $25.0 million or 28.3% were
3
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interest rate adjustable, and in 1995 were $68.3 million, of which $30.3 million
or 44.4% were interest rate adjustable.
First lien residential mortgage loans originated after November 1, 1981 do
not have a usury interest rate limitation in Wisconsin. Since February 1985,
First Northern has originated mortgage loans using contracts which contain
interest rate adjustment clauses allowing a lifetime interest rate adjustment of
between 5% to 8% over the original contract interest rate on all residential
mortgage loans and subject to annual interest rate adjustment caps of up to 2%.
First Northern's ability to successfully market such loans depends on, among
other things, prevailing interest rates, the volatility of interest rates and
the public's acceptance of adjustable interest rate mortgage loans. First
Northern has generally fixed the interest rate for the first one, two, three or
five years of the loan term. First Northern also maintains a policy of
including a "due on sale" clause in its mortgage loans. This clause generally
gives First Northern the right, subject to certain restrictions, to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the real property subject to the
mortgage without first either obtaining First Northern's consent or repaying the
loan.
Loan Originations. First Northern has general authority to lend anywhere in the
United States; however, it has chosen to concentrate its mortgage origination
activities in Northeastern Wisconsin with primary emphasis in the counties
served by its offices. As of December 31, 1997, First Northern had only 101
loans secured by out of state properties, representing $3.6 million or 0.8% of
the total dollars in its mortgage loan portfolio. First Northern's mortgage
lending is subject to written, non-discriminatory underwriting guidelines and to
loan origination procedures prescribed annually by First Northern's Board of
Directors. Property appraisals by independent appraisers, in accordance with
First Northern's appraisal policy, are required. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and employment and income confirmations. Loans are
reviewed and approved as directed by the underwriting guidelines established by
the Board of Directors.
At December 31, 1997, First Northern serviced for others $127.0 million of
whole loans and participation interests in mortgage loans. In addition, as of
December 31, 1997, First Northern had approximately $51.2 million of 15, 20 and
30 year fixed interest rate mortgages in its mortgage investment portfolio. See
"Loan Interest Rates and Terms" above. In 1997, 1996 and 1995, First Northern
sold $18.7, $11.1 and $11.6 million, respectively of fixed interest rate
mortgage loans to the secondary market in accordance with First Northern's asset
and liability management policy. First Northern also originates mortgage loans
for the Wisconsin Department of Veterans Affairs ("WDVA") and the Wisconsin
Housing and Economic Development Authority ("WHEDA"), which result in additional
origination fees and servicing income. First Northern does not currently
originate a significant amount of Federal Housing Administration ("FHA") insured
or Veterans Administration ("VA") partially guaranteed loans.
In addition to traditional mortgage lending activities, First Northern has
participated in various State and local special loan programs. Many of these
programs are designed specifically to make home ownership more available to
qualified low/moderate income families. Through the Federal Home Loan Bank
("FHLB") of Chicago's Affordable Housing Program, First Northern has obtained
funding for down payment and closing cost assistance to assist low income first-
time home buyers.
During 1997, First Northern purchased $7.8 million of single-family home
loans, $3.7 million in multi-family loans, and $1.0 million in commercial real
estate loans from others. In 1996, First Northern purchased $8.4 million of
single-family loans, $0.8 million of multi-family loans, and no commercial real
estate loans.
First Northern requires borrowers to obtain title insurance or abstracts of
title, depending on the type of mortgage product, on first mortgage real estate
loans. Home equity loan borrowers are required to obtain a title search before
and after the loan is originated to assure First Northern that the loan has been
properly recorded and secured. Borrowers also must obtain hazard insurance
prior to closing and, when required by the Department of Housing and Urban
Development, flood insurance. Borrowers may be required to advance funds on a
monthly basis together with each payment of principal and interest to a mortgage
escrow account from which First Northern makes disbursements for items such as
real estate taxes and private mortgage insurance premiums as they become due.
First Northern is required by Wisconsin law to pay interest on mortgage escrow
accounts where the loan was originated after January 31, 1983 and is secured by
one- to four-family, owner-occupied residences. The interest
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rate is based on the annual average of passbook interest rates paid by all
Wisconsin financial institutions (2.83% for 1997). Currently, approximately
84.1% of the escrow dollars are interest bearing. The interest rate paid on
escrow dollars is adjusted annually. The interest rate to be paid on qualified
mortgage escrow dollars in 1998 is 2.83%.
Regulations of the WDFI-Administrator also limit the amount which First
Northern may lend up to specific percentages of the value of the real property
securing the loan (referred to as "loan-to-value" ratios), as determined by an
appraisal at the time the loan is originated. A loan secured by a first lien
mortgage may not exceed 90% of the appraised value of the real estate security
unless, among other things, the portion exceeding that percentage is insured or
guaranteed by a mortgage insurance company against losses resulting from
borrower default or the loan is guaranteed by a federal or state agency. First
Northern's policy is to not make first mortgage loans in excess of 80% of the
lower of the appraised value or the purchase price unless the excess is insured
by private mortgage insurance or the loan is guaranteed by a federal or state
agency. Real estate loans secured by other than a first lien must also conform
generally to First Northern's policy of limiting loans to 80% of value.
However, it is anticipated that in 1998 First Northern will adjust its policy to
100% of value on other than first lien mortgages. All mortgage loan
applications are reviewed by First Northern's corporate underwriting staff to
ensure compliance with its uniform loan underwriting guidelines.
The federal agencies regulating First Northern have also established real
estate lending standards, that, among other things, create loan-to-value ratios
for various real estate loan categories. First Northern's current underwriting
standards, as stated above, conform with these real estate lending standards.
First Northern has been expanding its consumer lending portfolio, which
generally consists of home equity loans, automobile loans, boat, recreational
vehicles, credit card and other loan, to obtain higher yields and to serve the
needs of its customers. In addition, First Northern purchases automobile loans
from its subsidiary, SFC which originates automobile loans on an indirect basis
for its parent companies. First Northern has historically experienced
relatively low delinquencies and few losses on consumer loans.
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Loan Portfolio Composition. The following table sets forth the composition of
First Northern's loan portfolio (excluding loans held for sale) by type of
security at the dates indicated. The table does not reflect loans sold and
serviced for others. First Northern continues to service loans sold to others.
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Year Ended December 31
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1997 1996 1995 1994 1993
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(Dollars In Thousands)
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Mortgage loans:
One to four family
residential $393,563 64.74% $376,189 66.72% $352,449 69.08% $350,291 69.54% $304,891 70.14%
Five or more family
residential 24,506 4.03 20,154 3.57 17,591 3.45 18,478 3.67 20,162 4.64
Commercial real estate 9,269 1.52 9,975 1.77 10,028 1.97 9,501 1.89 10,280 2.37
Construction-residential 19,192 3.16 16,306 2.89 10,782 2.11 6,916 1.38 10,443 2.40
Construction-commercial 2,156 0.35 1,701 0.30 1,225 0.24 1,533 0.30 1,044 0.24
Other 2,226 0.37 1,900 0.34 1,788 0.35 1,533 0.30 1,044 0.24
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Total mortgage loans 450,912 74.17 426,225 75.59 393,863 77.20 388,252 77.08 347,864 80.03
Consumer loans:
Consumer 18,200 2.99 18,179 3.22 20,307 3.98 21,756 4.32 22,241 5.12
Second mortgage 68,596 11.28 59,148 10.49 46,528 9.12 29,454 5.85 22,853 5.26
Automobile 70,276 11.56 60,339 10.70 49,504 9.70 53,527 10.63 33,102 7.62
Education - - - - - - 10,677 2.12 8,583 1.97
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Total consumer loans 157,072 25.83 137,666 24.41 116,339 22.80 115,414 22.92 86,779 19.97
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Gross total loans 607,984 100.00% 563,891 100.00% 510,202 100.00% 503,666 100.00% 434,643 100.00%
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Less:
Undisbursed loan proceeds 10,290 5,942 6,071 3,146 7,056
Allowance for losses 3,177 2,937 2,608 2,400 2,306
Unearned loan fees 988 1,017 988 1,059 1,047
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Net loans receivable $593,529 $553,995 $500,535 $497,061 $424,234
======== ======== ======== ======== ========
</TABLE>
Contractual Maturities of Loans. The following table presents information as of
December 31, 1997 regarding loan maturities and contractual principal repayments
by categories of loans during the periods indicated. Loans with adjustable
interest rates are shown as maturing in the year of their contractual maturity.
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Principal Repayments Contractually Due in Year(s) Ended December 31
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2001- 2003- 2007- AFTER
1998 1999 2000 2002 2006 2011 2011 TOTAL
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(In Thousands)
Loans:
Mortgage $ 1,004 $ 996 $ 728 $ 9,781 $28,180 $75,109 $313,766 $429,564
Mortgage
construction (1) 3,799 424 17,125 21,348
Consumer loans 24,348 21,564 22,000 34,505 32,000 18,294 4,361 157,072
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Total $29,151 $22,984 $22,728 $44,286 $60,180 $93,403 $335,252 $607,984
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
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(1) First Northern's mortgage construction loans are originated for either the
construction phase or the combined construction and full amortization term
of the loan.
Of the $578.8 million of loans contractually due after December 31,
1998, approximately $157.4 million have fixed interest rates and
approximately $421.4 million have adjustable interest rates.
Contractual maturities of loans do not reflect the actual life of the
loan portfolio. The average life of mortgage loans is substantially less
than their contractual terms because of loan prepayments. The average life
of mortgage loans tends to increase, however, when current mortgage market
interest rates exceed interest rates on existing mortgages and decrease
when mortgage interest rates decline. The average life of consumer loans is
affected by the general and local economy.
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Mortgage and Consumer Loans. The following table sets forth activity for First
Northern's investment and held for sale loan portfolios for the periods
indicated.
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Year Ended December 31
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1997 1996 1995 1994 1993
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(In Thousands)
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Mortgage loans originated
and purchased:
Construction $ 25,709 $ 26,596 $ 17,316 $ 18,706 $ 17,659
Loans on existing property 51,536 49,017 37,491 51,652 39,340
Refinancing (1) 42,166 35,497 15,130 33,068 127,138
Other 2,398 2,668 2,560 1,316 3,574
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Total mortgage loans originated
and purchased 121,809 113,778 72,497 104,742 187,711
Consumer loans originated
and purchased:
Consumer 18,348 15,292 8,773 11,150 9,144
Second mortgage 27,218 24,871 30,474 25,340 22,385
Automobile 50,059 45,722 26,109 39,842 23,713
Education 2,568 2,382 2,895 3,290 2,325
--------- --------- --------- -------- ---------
Total consumer loans originated
and purchased 98,193 88,267 68,251 79,622 57,567
--------- --------- --------- -------- ---------
Mortgage loans sold (18,668) (11,065) (11,583) (18,174) (68,576)
Education loans sold (2,491) (3,187) (10,489)
Loan repayments and other credits (154,750) (134,104) (112,140) (97,167) (156,665)
--------- --------- --------- -------- ---------
Net increase in real estate
loans and other loans $ 44,093 $ 53,689 $ 6,536 $ 69,023 $ 20,037
========= ========= ========= ======== =========
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</TABLE>
(1) Refinanced mortgage loans are stated as gross dollars. Net new refinanced
dollars for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
were $25.7 million, $24.9 million, $10.8 million, $21.7 million, and $67.2
million, respectively. Net new dollars are the additional dollars that were
disbursed above an existing loan balance for the same borrower and property.
First Northern is permitted to make secured and unsecured consumer loans
including automobile, recreational vehicle, marine and other consumer loans,
home equity, property improvement, manufactured housing, education and deposit
account loans. At December 31, 1997, consumer loans represented 25.8% of total
loans.
Loan Fee Income. A borrower on a one- to four-family owner-occupied residence
may be charged a loan origination fee or a processing fee of up to 1% of the
loan amount, with the actual amount being dependent upon, among other things,
market conditions at the time of origination. These fees are in addition to
appraisal and other third party fees paid by the borrower to First Northern at
the time of application. Loan origination and commitment fees and certain direct
loan origination costs are being deferred and the net amounts amortized as an
adjustment to the related loan's yield. First Northern is amortizing these
amounts using the level-yield method, adjusted for prepayments, over the
contractual life of the related loans. Currently, there are no loan fees charged
on consumer loans.
Usury Limitation and Interest Rate Adjustment Provisions. Any loan secured by a
real estate mortgage and made, refinanced, renewed, extended or modified after
November 1, 1981, is not subject to a maximum interest rate. Consumer loans of
$25,000 or less are generally subject to the Wisconsin Consumer Act which
establishes
7
<PAGE>
disclosure requirements for interest rates and finance charges and, for
transactions entered into before November 1, 1984, limits the maximum finance
charges.
Mortgage lenders have historically had authority under Wisconsin law to
include interest adjustment clauses in loan contracts. Before June 12, 1976, the
only limit on interest adjustment increases was the general usury ceiling.
However, as of that date, Wisconsin law began to distinguish between two kinds
of interest adjustment clauses in connection with loans on owner-occupied one-to
four- family residential property: (1) those that tie interest adjustments to
fluctuations in an approved index ("indexed" interest adjustment provisions);
and (2) those that do not ("unindexed" interest adjustment provisions). Subject
to certain statutory restrictions, interest adjustments under an unindexed
interest adjustment provision are solely at the option of the lender.
Under Wisconsin law, unindexed adjustable rate provisions contained in
first lien mortgage loans made on one- to four-family owner occupied dwellings
may: (1) permit rate increases to be made as often as once every 6 months, upon
30 days' written notice, and in increments of up to 1% each; and (2) enable a
lender that has waived a permitted interest rate increase to subsequently
increase the interest rate to the level that would have been in effect had the
opportunity for an increase not been waived.
Mortgages that are subject to indexed interest adjustment provisions are
treated in substantially the same way under Wisconsin law. However, instead of
increases or decreases occurring solely at the discretion of the lender,
interest rates may be increased, and must be decreased, in accordance with
changes in the approved index. Unlike its unindexed adjustable rate counterpart,
adjustments made under an indexed adjustable rate provision governed by the 1981
law may be made at intervals more frequent than 6 months.
Borrowers may prepay their loan without penalty during the 30 days
following notice of a rate increase, or at any time after 5 years from the date
of the loan.
First Northern has used both an unindexed and an indexed adjustable
interest rate mortgage. With both types of adjustable rate forms, First Northern
has generally fixed the interest rate for the first one, two, three or five
years of the loan term. The unindexed adjustable interest rate loans also
provide for a maximum interest rate adjustment of 1% during each 12 month period
thereafter. The indexed adjustable rate loan provides for a maximum interest
rate adjustment of the lesser of the index or 1% to 2% depending on origination
date of the loan, during each 12 month period. Since February 1985, First
Northern has originated mortgage loans using contracts which contain interest
rate adjustment clauses allowing a lifetime interest rate adjustment of between
5% and 8% over the original contract interest rate on all residential mortgage
loans.
Loans made for a business purpose, when secured by commercial real estate,
or made to a corporate borrower and originated, renewed or refinanced on or
after November 1, 1981, are not subject to any interest rate or contract
provision limitations. The terms of such loans are dependent on market
conditions and negotiation between lenders and borrowers.
First Northern has been able to exercise its escalation rights under the
interest rate escalation clauses on its mortgage loan portfolio. The use of the
escalation clause gives First Northern greater control over its income due to
its ability to increase interest yields on its mortgage portfolio. See "Loan
Interest Rates and Terms" above.
Classified Assets and Delinquencies. When a borrower fails to make a required
payment on a loan, First Northern or SFC attempts to have the deficiency cured
by contacting the borrower. Contacts are made after a payment is more than 30
days past due and, in most cases, deficiencies are cured promptly. If the
delinquency exceeds 90 days and is not cured through First Northern's normal
collection procedures, First Northern will institute measures to remedy the
default, including commencing a foreclosure action or accepting a voluntary deed
of the secured property in lieu of foreclosure from the mortgagor or
repossessing other collateral. If a foreclosure action is instituted and the
loan is not reinstated, paid in full, or refinanced, the property is sold at a
judicial sale at which, in most instances, First Northern is the buyer.
Under Wisconsin law, a mortgagor is afforded a period of time, subsequent
to the entry of judgment and prior to judicial sale, within which to redeem the
equity in the property ("equity right of redemption"). The length
8
<PAGE>
of the equity right of redemption varies depending on the form of foreclosure
proceedings selected by the lender, the type and condition of the real estate
security and other factors. The majority of First Northern's residential
foreclosures follow a form which provides a 6 month equity right of redemption
and a waiver of any deficiency judgment against the borrower. Use of this
process takes approximately 8-12 months from commencement of the action to
judicial confirmation of the sale.
The OTS has established a classification system for problem assets. Under
the regulation, problem assets are classified as "substandard," "doubtful," or
"loss." Assets classified as loss are required to be charged-off. Assets
classified as doubtful or substandard do not require a write-off of the amounts
so classified but may necessitate additions to the general allowances for
losses. An institution's determination as to the classification of its assets
and the amount of valuation allowances are subject to review by the District
Director of the OTS or the FDIC, who could order the establishment of additional
loan loss allowances.
The following table identifies the dollar amount of loans that are
classified as substandard, doubtful or loss as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31
---------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Substandard $578 $905 $518
Doubtful 16 21 13
Loss 9
---- ---- ----
Total Classified Assets $594 $935 $531
==== ==== ====
</TABLE>
The decrease in the amount of substandard assets in 1997 was the result of a
decrease in overall delinquencies. The 1995 level of Total Classified Assets was
at a historically low level.
Allowances for Losses. Allowances for losses on loans, real estate, and
repossessed assets are based on management's evaluation of various factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loss experience, estimated sales price of collateral,
regulatory environment and holding and selling costs.
While First Northern has a low level of non-performing assets and low
historical charge-off experience, the inherent credit risk within the portfolio
(primarily relating to the automobile loan portfolio) has increased. It is this
increase which primarily resulted in the increase in the loan loss allowance.
At December 31, 1993, First Northern's automobile loan portfolio was $33.1
million as compared to $70.3 million at December 31, 1997. This increase of
$37.2 million represents a 112.3% growth in the automobile loan portfolio while
the allowance for all losses increased from $2.3 million to $3.2 million or an
increase of 38.7%.
Management believes that the allowances for losses on loans, real estate,
and repossessed assets are adequate. While Management uses available information
to recognize losses on loans and real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions or
regulatory requirements.
9
<PAGE>
All of First Northern's loans are domestic. A summary of the allowance for
losses is shown below.
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Balance, beginning of year $1,453 $1,578 $1,499 $1,426 $1,151
Provisions, charged to provision
for loan losses 170 10 79 292
Charge-offs:
1 to 4 family residential (20) (44)
Recoveries:
1 to 4 family residential 24 7
Commercial real estate 1 1 20
------ ------ ------ ------ ------
Total recoveries 1 1 24 27
------ ------ ------ ------ ------
Net (charge-offs) or recoveries 1 1 4 (17)
------ ------ ------ ------ ------
Transfer of loss reserve (136)
Adjustment to conform pooled
companies' fiscal year ends 69
------ ------ ------ ------ ------
Balance, end of year 1,624 1,453 1,578 1,499 1,426
Consumer loans:
Balance, beginning of year 1,484 1,030 901 880 705
Provisions, charged to provision
for loan losses 150 360 161 145 247
Charge-offs:
Consumer (44) (23) (30) (59) (46)
Automobile (57) (43) (41) (68) (35)
------ ------ ------ ------ ------
Total charge-offs (101) (66) (71) (127) (81)
------ ------ ------ ------ ------
Recoveries:
Consumer 8 11 21 5 6
Automobile 12 13 18 16 3
------ ------ ------ ------ ------
Total recoveries 20 24 39 21 9
------ ------ ------ ------ ------
Net charge-offs (81) (42) (32) (106) (72)
------ ------ ------ ------ ------
Transfer of loss reserve 136
Adjustment to conform pooled
companies' fiscal year ends (18)
------ ------ ------ ------ ------
Balance, end of year 1,553 1,484 1,030 901 880
------ ------ ------ ------ ------
Total allowance for losses $3,177 $2,937 $2,608 $2,400 $2,306
====== ====== ====== ====== ======
Foreclosed properties & repossessed assets:
Balance, beginning of year $ - $ 1 $ 1 $ 1 $ 67
Provisions, charged to
non-interest expense 13 13
Charge-offs:
1 to 4 family residential (14) (79)
------ ------ ------ ------ ------
Balance, end of year $ - $ - $ 1 $ 1 $ 1
====== ====== ====== ====== ======
Total charge-offs
to average loans outstanding 0.02% 0.01% 0.01% 0.02% 0.04%
====== ====== ====== ====== ======
Net charge-offs to average
loans outstanding 0.01% 0.01% 0.01% 0.02% 0.02%
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
Interest income on loans is accrued and credited to operations based on the
principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest
and/or when, in the opinion of management, full collection is unlikely. When
interest accruals are discontinued, uncollected interest credited to income in
the current year is reversed and uncollected interest accrued in the prior year
is charged to the allowance for loan losses. Management may elect to continue
the accrual of interest when the loan is in the process of collection and the
value of collateral is sufficient to cover the principal balance and accrued
interest. Interest received on non-accrual loans generally is either applied
against principal or reported as interest income, according to management's
judgment as to the collectibility of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
The following tables show the Company's total allowance for loan losses and
the allocation to the various categories of loans held for investment at the
dates indicated.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------
% of
Loans in
Allowance Category
as a % of to Total
Loans in Outstanding
Amount Category(1) Loans(1)
------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,324 0.34% 64.74%
Five or more family residential 135 0.55 4.03
Commercial real estate 127 1.37 1.52
Construction 0.00 3.51
Other 24 1.08 0.37
Classified mortgage loans 14 3.00
------ ---- ------
Total mortgage loans 1,624 0.36 74.17
Consumer loans:
Consumer 85 0.47 2.99
Second mortgage 250 0.37 11.28
Automobile 1,212 1.73 11.56
Education
Classified consumer loans 5 2.00
------ ---- ------
Total consumer loans 1,553 0.99 25.83
------ ---- ------
Total allowance for loans $3,177 0.52% 100.00%
====== ==== ======
- - -----------------------
</TABLE>
(1) Percentages are calculated on gross loan balances.
11
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------
% of
Loans in
Allowance Category
as a % of to Total
Loans in Outstanding
Amount Category(1) Loans(1)
------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,180 0.31% 66.72%
Five or more family residential 121 0.60 3.57
Commercial real estate 114 1.14 1.77
Construction 3.19
Other 18 0.95 0.34
Classified mortgage loans 20 3.00
------ ---- ------
Total mortgage loans 1,453 0.34 75.59
Consumer loans:
Consumer 83 0.46 3.22
Second mortgage 211 0.36 10.49
Automobile 1,172 1.94 10.70
Education
Classified consumer loans 18 2.00
------ ---- ------
Total consumer loans 1,484 1.08 24.41
------ ---- ------
Total allowance for loans $2,937 0.52% 100.00%
====== ==== ======
- - -----------------------
</TABLE>
(1) Percentages are calculated on gross loan balances.
<TABLE>
<CAPTION>
At December 31, 1995
------------------------------------
% of
Loans in
Allowance Category
as a % of to Total
Loans in Outstanding
Amount Category(1) Loans(1)
------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,359 0.39% 69.08%
Five or more family residential 98 0.56 3.45
Commercial real estate 97 0.97 1.97
Construction 2.35
Other 16 0.89 0.35
Classified mortgage loans 8 2.05
------ ---- ------
Total mortgage loans 1,578 0.40 77.20
Consumer loans:
Consumer 79 0.39 3.98
Second mortgage 137 0.29 9.12
Automobile 811 1.64 9.70
Education
Classified consumer loans 3 2.00
------ ---- ------
Total consumer loans 1,030 0.89 22.80
------ ---- ------
Total allowance for loans $2,608 0.51% 100.00%
====== ==== ======
- - -----------------------
</TABLE>
(1) Percentages are calculated on gross loan balances.
12
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------------
% of
Loans in
Allowance Category
as a % of to Total
Loans in Outstanding
Amount Category(1) Loans(1)
------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,295 0.37% 69.54%
Five or more family residential 85 0.46 3.67
Commercial real estate 92 0.97 1.89
Construction 1.68
Other 13 0.85 0.30
Classified mortgage loans 14 2.05
------ ---- -----
Total mortgage loans 1,499 0.39 77.08
Consumer loans:
Consumer 84 0.39 4.32
Second mortgage 93 0.32 5.85
Automobile 720 1.34 10.63
Education 2.12
Classified consumer loans 4 2.00
------ ---- ------
Total consumer loans 901 0.78 22.92
------ ---- ------
Total allowance for loans $2,400 0.48% 100.00%
====== ==== ======
- - -----------------------
</TABLE>
(1) Percentages are calculated on gross loan balances.
<TABLE>
<CAPTION>
At December 31, 1993
------------------------------------
% of
Loans in
Allowance Category
as a % of to Total
Loans in Outstanding
Amount Category(1) Loans(1)
------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,242 0.41% 70.14%
Five or more family residential 74 0.37 4.64
Commercial real estate 82 0.80 2.37
Construction 2.64
Other 11 1.05 0.24
Classified mortgage loans 17 2.05
------ ---- -----
Total mortgage loans 1,426 0.41 80.03
Consumer loans:
Consumer 172 0.77 5.12
Second mortgage 154 0.67 5.26
Automobile 550 1.66 7.62
Education 1.97
Classified consumer loans 4 2.00
------ ---- ------
Total consumer loans 880 1.01 19.97
------ ---- ------
Total allowance for loans $2,306 0.53% 100.00%
====== ==== ======
- - -----------------------
</TABLE>
(1) Percentages are calculated on gross loan balances.
13
<PAGE>
The following table is a summary of non-performing loans and assets.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans
(90 days or more past due) $ 333 $ 509 $ 266 $ 407 $ 668
Non-accrual consumer loans 107 235 152 139 140
------- ------- ------- ------- -------
Total non-performing loans 440 744 418 546 808
Foreclosed properties, properties
subject to foreclosure and
repossessed assets 153 189 136 120 44
------- ------- ------- ------- -------
Total non-performing assets $ 593 $ 933 $ 544 $ 666 $ 852
======= ======= ======= ======= =======
Non-performing loans as a
percentage of total loans .07% .13% .08% .11% .19%
======= ======= ======= ======= =======
Non-performing assets as a
percentage of total assets .09% .15% .10% .12% .17%
======= ======= ======= ======= =======
Loan loss allowances as
a percentage of non-
performing loans 722.05% 394.76% 623.92% 439.56% 285.40%
======= ======= ======= ======= =======
Loan loss allowances as
a percentage of non-
performing assets 535.75% 314.79% 470.76% 360.36% 270.77%
======= ======= ======= ======= =======
Interest income that would
be recognized if non-accrual
loans had been current (1) $ 13 $ 25 $ 12 $ 19 $ 36
======= ======= ======= ======= =======
- - -------------------------
</TABLE>
(1) No accrued interest income was included in net income in 1997, 1996,
1995, 1994 and 1993 from loans classified as non-accrual.
Investment and Mortgage-Related Activities. First Northern is authorized to
invest in obligations issued or fully guaranteed by the United States, certain
federal agency obligations, certain time deposits, negotiable certificates of
deposit issued by commercial banks, mortgage-backed and mortgage-related
securities, investment grade corporate notes and other specified investments.
14
<PAGE>
The following table sets forth the composition of First Northern's
investment and mortgage-related securities portfolio at December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
Investment and Mortgage-related Securities Portfolio Composition
At December 31
-------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- --------------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Total Value Total Value Total
---------- ---------- ---------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 324 0.81% $ 1,598 4.57% $ 82 .28%
Securities available-for-sale:
U. S. government securities 3,290 8.24 2,517 7.20 1,018 3.58
Federal agency obligations 2,002 5.01 1,985 5.67 1,004 3.53
Mortgage-related securities 932 2.33 1,837 5.25 2,013 7.07
Asset Management Fund 500 1.25 471 1.35 455 1.60
FHLMC stock 1,007 2.52 662 1.89 501 1.76
------- ------ ------- ------ ------- ------
Total securities available-for-sale 7,731 19.35 7,472 21.36 4,991 17.54
Securities held-to-maturity:
U.S. Government securities 1,000 2.50 3,004 8.59 10,073 35.39
Federal agency obligations 20,231 50.63 13,579 38.82 9,291 32.65
Mortgage-related securities 10,675 26.71 9,325 26.66 4,024 14.14
------- ------ ------- ------ ------- ------
Total securities held-to-maturity 31,906 79.84 25,908 74.07 23,388 82.18
------- ------ ------- ------ ------- ------
Total $39,961 100.00% $34,978 100.00% $28,461 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing for interest-earning
deposits, securities
available-for-sale and
investment securities (1) 18 months 12 months 14 months
- - ---------------------------
</TABLE>
(1) For purposes of calculating the remaining life or term, securities
available-for-sale are assumed to have a zero term.
See Notes B and C of the Notes to Consolidated Financial Statements.
15
<PAGE>
The following table sets forth the maturity ranges for investment and
mortgage-related securities, with their respective weighted average yields and
the total market value.
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------------------------------------------------------------------
Over One Over Five
One Year or Less to Five Years to Ten Years Over Ten Years
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale:
Investment and
Mortgage-related Securities
U.S. government obligations $ 496 6.56% $ 2,744 6.44%
Federal agency obligations 2,000 6.43
Mortgage-related securities $ 932 7.17%
Asset Management Fund 505 5.97
FHLMC stock 33 30.00
------ ----- ------- ---- ------ ----- ------ ----
Total investment and
mortgage-related securities $ 529 7.78% $ 5,249 6.39% $ - $ - $ 932 7.17%
====== ===== ======= ==== ====== ===== ====== ====
Held-to-Maturity:
Investment and
Mortgage-related Securities
U.S. government obligations $1,000 7.48%
Federal agency obligations 6,751 6.02 $12,480 6.20% $1,000 6.80%
Mortgage-related securities 5,476 6.00 $5,199 6.63%
------ ----- ------- ---- ------ ---- ------ ----
Total investment and
mortgage-related securities $7,751 6.21% $12,480 6.20% $6,476 6.12% $5,199 6.63%
====== ===== ======= ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
------------------------------
Investment and
Mortgage-related
Securities Total
------------------------------
Approx. Weighted
Amortized Market Average
Cost Value Yield
--------- ------ --------
<S> <C> <C> <C>
Available-for-Sale:
Investment and
Mortgage-related Securities
U.S. government obligations $ 3,240 $ 3,290 6.46%
Federal agency obligations 2,000 2,002 6.43
Mortgage-related securities 932 932 7.17
Asset Management Fund 505 500 5.97
FHLMC stock 33 1,007 30.00
------- ------- -----
Total investment and
mortgage-related securities $ 6,710 $ 7,731 6.61%
======= ======= =====
Held-to-Maturity:
Investment and
Mortgage-related Securities
U.S. government obligations $ 1,000 $ 1,001 7.48%
Federal agency obligations 20,231 20,312 6.17
Mortgage-related securities 10,675 10,689 6.31
------- ------- -----
Total investment and
mortgage-related securities $31,906 $32,002 6.26%
======= ======= =====
</TABLE>
16
<PAGE>
The following table sets forth the composition of First Northern's
mortgage-related held-to-maturity securities portfolio at December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
Mortgage-Related Portfolio Composition
At December 31
--------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ 6,259 $ 4,715 $ 3,019
Federal National Mortgage Association 3,647 3,730 998
Other 769 880 7
------- ------- -------
Total mortgage-related securities $10,675 $ 9,325 $ 4,024
======= ======= =======
Average remaining contractual life or term to
repricing for mortgage-related securities 139 months 157 months 203 months
</TABLE>
Deposit Activities. First Northern has a number of different programs designed
to attract both short-term and long-term deposits from the general public. These
programs include regular passbook accounts, NOW checking accounts, money market
deposit accounts, fixed rate and variable rate certificate accounts and
negotiated rate certificates, as well as certain other accounts. Included among
those programs are individual retirement accounts ("IRAs") and self-employed
pension plan ("SEPP") accounts.
The specific programs offered by First Northern have changed over time as
new types of accounts and minimum denomination requirements have been
authorized. Currently there are no statutory or regulatory required minimum
denominations or interest rate ceilings on any deposit accounts. First Northern
presently offers deposit accounts with minimum balance requirements and interest
rates as follows:
<TABLE>
<CAPTION>
Minimum Interest
Type or Term Balance Rate
- - ------------ ------- ----
<S> <C> <C>
NOW Checking Accounts(1) Varies Rate Set Weekly
Regular Deposit Accounts(2) $ 100 Rate Set Weekly
Money Market Accounts $ 2,500 Rate Set Weekly
Daily Advantage MMA $10,000 Rate Set Weekly
High Five Passbook $ 5,000 Rate Set Weekly
91 Day through 60 Month Certificate $ 500 Rate Set Weekly
18 month IRA and SEPP Variable Certificates $ 100 Rate Set Monthly
- - --------------
</TABLE>
(1) Some of the NOW Checking Accounts offered by First Northern do not bear
interest.
(2) As a practical matter, although subject to First Northern's right to impose
a prior notice requirement, deposits may be invested in and withdrawn from
passbook accounts without restriction. Interest is computed daily from the
date of deposit to the date of withdrawal and credited quarterly at a rate
established by the Investment Committee of management within regulatory
limits.
17
<PAGE>
The following tables set forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average effective interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------
Weighted
Percent Average
Average of Total Effective
Balance Deposits Rate
----------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Core deposits:
Non-interest bearing NOW checking $ 19,364 4.10%
Interest bearing NOW checking 35,036 7.42 1.06%
Money market 50,265 10.65 4.31
Passbook 60,057 12.72 2.20
-------- ------ ----
Total core deposits 164,722 34.89 2.25
Certificate of deposit accounts 307,423 65.11 5.72
-------- ------ ----
Total deposits $472,145 100.00% 4.54%
======== ====== ====
For the Year Ended December 31, 1996
--------------------------------------
Weighted
Percent Average
Average of Total Effective
Balance Deposits Rate
----------- ---------- -----------
(Dollars in Thousands)
Core deposits:
Non-interest bearing NOW checking $ 16,646 3.67%
Interest bearing NOW checking 36,655 8.08 1.03%
Money market 49,037 10.81 4.10
Passbook 58,744 12.96 2.24
-------- ------ ----
Total core deposits 161,082 35.52 2.30
Certificate of deposit accounts 292,477 64.48 5.66
-------- ------ ----
Total deposits $453,559 100.00% 4.46%
======== ====== ====
For the Year Ended December 31, 1995
--------------------------------------
Weighted
Percent Average
Average of Total Effective
Balance Deposits Rate
----------- ---------- -----------
(Dollars in Thousands)
Core deposits:
Non-interest bearing NOW checking $ 13,765 3.14%
Interest bearing NOW checking 36,049 8.23 1.40%
Money market 35,420 8.09 3.89
Passbook 60,367 13.79 2.48
-------- ------ ----
Total core deposits 145,601 33.25 2.32
Certificate of deposit accounts 292,248 66.75 5.54
-------- ------ ----
Total deposits $437,849 100.00% 4.47%
======== ====== ====
</TABLE>
18
<PAGE>
The following table presents certificates of deposits in amounts of $100,000 or
more by maturity:
<TABLE>
<CAPTION>
At December 31
-----------------------------
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Maturity:
3 months or less $ 9,164 $ 5,917
Greater than 3 months - 6 months 6,530 3,767
Greater than 6 months - 12 months 12,505 5,697
Greater than 12 months 7,189 6,233
-------- --------
$ 35,388 $ 21,614
======== ========
</TABLE>
Borrowed Funds. First Northern has a line of credit with the FHLB of Chicago and
has borrowed from the FHLB on an overnight and fixed interest rate basis to
assist with funding loan originations.
From time to time, First Northern borrows funds under repurchase
agreements. First Northern accepts funds from municipalities and school
districts. When the amounts of such funds are in excess of FDIC insurance
limits, First Northern collateralizes its obligation to repay such parties
through repurchase agreements. Repurchase agreements are used to lock-in a
profit spread to First Northern. Furthermore, because the repurchase agreements
from municipalities and school districts are not considered deposits, First
Northern does not pay premiums to the FDIC on such amounts. At December 31,
1997, First Northern had $0.9 million of borrowings under repurchase agreements.
The weighted average rate of the repurchase agreements as of December 31, 1997,
1996 and 1995 was 5.79%, 5.59% and 5.65%, respectively. See Note G of the Notes
to Consolidated Financial Statements.
19
<PAGE>
The following table sets forth certain information regarding borrowings by
First Northern at the end of and during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance outstanding at end of year:
Securities sold under agreement
to repurchase $ 900 $ 1,500 $ 1,000
Fixed interest rate notes
payable to FHLB 75,075 58,150 20,000
Overnight borrowings from FHLB 26,065 17,255
Other borrowings 1,237 367
Weighted average interest rate at
end of year:
Securities sold under agreements
to repurchase 5.79% 5.59% 5.65%
Fixed interest rate notes
payable to FHLB 5.85% 5.73% 6.03%
Overnight borrowings from FHLB 6.92% 6.95%
Other borrowings 5.27% 5.18%
Maximum amount outstanding
during the year:
Securities sold under agreements
to repurchase $ 1,500 $ 1,500 $ 2,900
Fixed interest rate notes
payable to FHLB 75,525 58,150 25,000
Overnight borrowings from FHLB 33,400 29,360 42,050
Other borrowings 1,312 1,044
Average amount outstanding during
the year:
Securities sold under agreements
to repurchase $ 1,236 $ 1,030 $ 2,543
Fixed interest rate notes
payable to FHLB 65,830 35,957 18,957
Overnight borrowings from FHLB 15,264 11,264 12,181
Other borrowings 314 142
Weighted average interest rate
during the year:
Securities sold under agreements
to repurchase 5.65% 5.69% 6.62%
Fixed interest rate notes
payable to FHLB 5.97% 5.82% 7.19%
Overnight borrowings from FHLB 5.80% 5.68% 6.19%
Other borrowings 5.49% 5.18%
</TABLE>
Borrowings increased to $103.3 million at December 31, 1997, as compared to
$77.3 million at December 31, 1996, primarily to fund the growth in interest-
earning assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Yields Earned and Rates Paid. First Northern's net earnings depend primarily
upon the spread between the income it receives from its loan and investment
portfolios and its cost of money, consisting of interest paid on deposit
accounts and borrowings.
20
<PAGE>
The following table sets forth First Northern's weighted average yields
earned on mortgage loans, consumer loans, and investment and mortgage-related
securities; the weighted average interest rates paid on deposits and borrowings;
and the spread between yields earned and rates paid at the dates indicated.
Since the majority of First Northern's deposit accounts are market rate
accounts, the cost of deposits will likely continue to be subject to interest
rate fluctuations.
<TABLE>
<CAPTION>
At December 31
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average rate of return:
Mortgage loans 7.34% 7.22% 7.06% 6.69% 6.99%
Consumer loans 8.56 8.56 8.66 8.18 8.36
Mortgage and consumer loans 7.66 7.55 7.44 7.03 7.26
Investment securities 6.41 6.14 6.33 6.44 5.16
Mortgage-related securities 6.37 6.44 7.02 7.12 8.21
Total loan portfolio, investment securities,
and mortgage-related securities 7.57 7.46 7.39 7.01 7.10
Weighted average rate paid:
Deposits 4.61 4.42 4.56 4.03 3.78
Federal Home Loan Bank and other borrowings 5.87 5.71 6.02 6.24 3.98
Total deposits and Federal Home Loan Bank
and other borrowings 4.83 4.60 4.63 4.23 3.78
Spread at the end of the year 2.74 2.86 2.76 2.78 3.32
</TABLE>
21
<PAGE>
The following table shows average yields and rates of return (month-end
averages) during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average yield earned during the year:
Mortgage loans 7.37% 7.18% 6.99% 6.91% 7.90%
Consumer loans 8.43 8.50 8.44 7.93 8.82
Investment securities 6.31 6.23 6.47 6.13 5.21
Mortgage-related securities 6.36 6.50 7.06 6.91 8.09
All interest-earning assets 7.55 7.42 7.28 7.08 7.78
Average rate paid during the year:
Deposits 4.51 4.43 4.42 3.73 4.14
Borrowings 5.94 5.78 6.79 5.14 4.16
All interest-bearing liabilities 4.72 4.56 4.59 3.79 4.14
Average interest rate spread (1) 2.83 2.86 2.69 3.29 3.64
Net yield on average interest-earning assets (2) 3.26 3.31 3.17 3.71 4.09
Net yield on total interest-earning assets (3) 3.14 3.14 3.17 3.51 4.06
</TABLE>
- - ------------------
(1) Average yield on all interest-earning assets during the period less average
rate paid on all interest-bearing liabilities.
(2) Net interest earned divided by average interest-earning assets.
(3) Net interest earned divided by total interest-earning assets.
Average Balance Sheet and Rate/Yield Analysis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Average Equity to Average Assets. The ratio of average equity to average assets
measures a financial institution's financial strength. At December 31, 1997,
savings and loan associations in Wisconsin were required to maintain an average
equity to average assets ratio of at least 6.00%. At December 31, 1997, 1996,
1995, 1994 and 1993 First Northern's average equity to average assets ratio was
11.24%, 12.14%, 12.99%, 13.25%, and 12.86%, respectively.
22
<PAGE>
Cash Dividends. The following schedule sets forth the cash dividends paid per
year:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cash Dividends Paid Per Share $0.32 $0.30 $0.28 $0.26 $0.24(1)
===== ===== ===== ===== =====
Cash Dividends Payout Ratio 47.1% 81.1%(2) 54.9% 55.3% 32.4%
(dividends declared per share ===== ===== ===== ===== =====
divided by basic net income per share)
</TABLE>
- - ------------------
(1) Not restated to reflect the acquisition of Prime Federal.
(2) The Cash Dividends Payout Ratio was significantly increased in 1996 as a
result of the SAIF special assessment which significantly reduced net
income per share. Without the SAIF special assessment, the Cash Dividend
Payout Ratio would have been 55.0%.
Subsidiaries. GNFSC, a wholly-owned subsidiary of the Savings Bank, engages in
the sale of credit life and disability insurance, and offers brokerage services
to the public, including the sale of tax deferred annuities and mutual funds.
First Northern's book value investment in GNFSC as of December 31, 1997 was
$454,211.
FNII, a wholly-owned Savings Bank subsidiary, was established September 2,
1994 for the purpose of managing a majority of First Northern's investment
portfolio. FNII managed approximately $28.5 million of investments for First
Northern at December 31, 1997. First Northern's book value investment in FNII as
of December 31, 1997 was $28,766,598.
In March 1992, First Northern acquired a 50% stock interest in SFC from
another financial institution. SFC originates, sells, and services automobile
loans. As a result of this acquisition, SFC will on a regular basis, sell such
loans to First Northern but retain the servicing of the loans. First Northern
purchased $41.3 million of such loans in 1997, $38.0 million in 1996 and $18.7
million in 1995. First Northern's book value investment in SFC as of December
31, 1997 was $35,743.
Keystone Financial Services, Inc. ("Keystone"), a wholly-owned subsidiary
of the Savings Bank, also engaged in the sale of credit life and disability
insurance and tax deferred annuities and offered discount brokerage services for
Prime Federal prior to the merger with and into First Northern. After the
merger, First Northern transferred such business to GNFSC. Keystone is inactive,
but will continue to be a wholly-owned subsidiary of the Savings Bank for
possible future use in a related or other area. First Northern's book value
investment in Keystone as of December 31, 1997 was $100.
Another wholly-owned subsidiary of the Savings Bank, First Northern
Financial Services, Inc., operated as a consumer lending subsidiary through
1981. As a result of legislative changes, First Northern now directly engages in
consumer lending activities. First Northern Financial Services, Inc. is
inactive, but it continues in existence for possible future use in a related or
other area. First Northern's book value investment in First Northern Financial
Services, Inc. as of December 31, 1997 was $100.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") imposes restrictions on savings associations' powers. It essentially
creates parallel regulation for state and federally chartered savings
associations and prevents state associations, such as the Savings Bank, from
exercising powers not authorized to federal associations or which the FDIC deems
to constitute a serious risk to the safety, soundness or stability of an insured
institution and/or the SAIF or to be inconsistent with sound banking principles.
The FDIC has informed First Northern that the certain activities that GNFSC is
performing are permissible for a federal association but not a national bank.
Therefore, First Northern is required to deduct its investment and loans to
GNFSC when calculating its core, tangible and risked-based capital ratios.
23
<PAGE>
Employees. At December 31, 1997, First Northern employed 191 full-time and 49
part-time employees. Management considers its relations with its employees to be
excellent.
Regulation
General. The operations of First Northern and the Savings Bank are highly
regulated, both at the federal and state level. First Northern is a registered
non-diversified unitary savings and loan holding company within the meaning of
the Home Owners' Loan Act of 1933, as amended. As such, First Northern is
subject to OTS examination and supervision as well as to certain reporting
requirements. Since First Northern controls the Savings Bank, which is a state
chartered institution, it is also subject to examination, supervision and
regulation by the WDFI-Administrator. As a subsidiary of a savings and loan
holding company, the Savings Bank is subject to certain restrictions in its
dealings with First Northern and with other companies affiliated with First
Northern, and is otherwise subject to extensive supervision and regulation by
the OTS (its primary federal regulator), the WDFI-Administrator (its primary
state regulator), the FDIC (as administrator of the SAIF) and the Federal
Reserve Board. The Savings Bank is also a member of the FHLB of Chicago, which
provides a central credit facility to its members. As a member of the FHLB of
Chicago, the Savings Bank is required to acquire and hold shares of capital
stock in the FHLB of Chicago. The following summary does not purport to be a
complete description of the applicable laws and regulations which govern First
Northern and the Savings Bank and is qualified in its entirety by reference
thereto.
Federal Regulation of Holding Companies
Activities Restrictions. There generally are no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the OTS may impose such
restrictions as deemed necessary to address such risk including limiting: (i)
payment of dividends by the savings association; (ii) transactions between the
savings association and its affiliates; and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
If First Northern were to acquire control of another savings association in
addition to the Savings Bank, First Northern would thereupon become a multiple
savings and loan holding company. Except where such acquisition is pursuant to
the OTS' authority to approve emergency thrift acquisitions and where each
subsidiary savings association meets the qualified thrift lender ("QTL") test,
the activities of First Northern and any of its subsidiaries (other than Savings
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings association may commence or
continue beyond a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings association; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) those activities authorized by the Federal Reserve
Board as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the OTS prior
to being engaged in by a multiple holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the QTL test, then such
unitary holding company will become subject to the activities restrictions
applicable to multiple holding companies and, unless the savings association
requalifies as a QTL within one year thereafter, shall register with the Federal
Reserve Board as, and become subject to the restrictions applicable to, a bank
holding company. Generally, the QTL test requires a savings association to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
mortgage-backed and similar
24
<PAGE>
securities) on a monthly basis in nine out of every 12 months. The Economic
Growth Act of 1996 liberalized the QTL test for savings associations by
permitting them to satisfy a similar-but-different 60% asset test under the
Internal Revenue Code. Alternately, savings associations may meet the QTL test
by satisfying a more liberal 65% asset test that allows an institution to
include small business, credit card, and education loans or qualified
investments for purposes of the test. Furthermore, consumer loans now count as
qualified thrift investments up to 20% of portfolio assets. On April 3, 1997,
OTS made an interim final rule that implements provisions of the Economic Growth
Act of 1996, including the QTL test. The Savings Bank has met the QTL test since
it first became applicable in 1987.
Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the OTS: (i) control of any other savings association or savings and loan
holding company or substantially all the assets thereof; or (ii) more than 5% of
the voting shares of a savings association or holding company thereof which is
not a subsidiary. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings association, other than a subsidiary savings association,
or of any other savings and loan holding company.
The OTS may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings associations in
more than one state if: (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987; (ii) the
acquiror is authorized to acquire control of the savings association pursuant to
the emergency acquisition provisions of the Federal Deposit Insurance Act; or
(iii) the statutes of the state in which the association to be acquired is
located specifically permit institutions to be acquired by state-chartered
associations or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institution). Under current Wisconsin law, Wisconsin
chartered savings associations and their holding companies may acquire savings
associations and holding companies whose principal place of business is located
in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri or Ohio,
provided that reciprocal legislation is adopted in such states. All but Missouri
have adopted reciprocal legislation. Consequently, savings associations or their
holding companies in such states that have adopted reciprocal legislation may
acquire a savings association or holding company based in Wisconsin.
Transactions with Affiliates. Transactions between savings associations and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a savings association is any company or entity which controls,
is controlled by or is under common control with the savings association. In a
holding company context, the parent holding company of a savings association
(such as First Northern) and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally, Sections
23A and 23B: (i) limit the extent to which the savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such savings association's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus; and (ii) require that all
such 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 transactions" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar types of transactions. In addition to
the restrictions imposed by Sections 23A and 23B, no savings association may:
(i) loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies; or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
The restrictions contained in Section 22(h) of the Federal Reserve Act
apply to loans by savings associations to executive officers, directors and
principal stockholders (such as First Northern). Section 22(h) requires that
loans to directors, executive officers and greater than 10% stockholders
("Insiders") be made on terms substantially the same as offered in comparable
transactions to other persons. Loans to Insiders may only be made on more
favorable terms pursuant to a benefit or compensation program which is widely
available to association employees and which does not give preference to any
Insiders over other employees. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings association, and
certain affiliated entities of
25
<PAGE>
either, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the association's loan-to-one-borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus and
an additional 10% of such capital and surplus for loans fully secured by certain
readily marketable collateral). Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of a savings association,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the association with any "interested"
director not participating in the voting. The Federal Reserve Board has
prescribed the loan amount (which includes all other outstanding loans to such
person), as to which such prior board of director approval is required, to be
the greater of $25,000 or 5% of capital and surplus (up to $500,000).
FIRREA and FDICIA. The FIRREA, adopted on August 9, 1989, has
significantly changed the federal regulatory framework for savings associations.
FIRREA redefined applicable capital standards for savings associations and
significantly increased the minimum levels of capital required to be maintained
by savings associations, with the levels being raised in steps until fully
phased-in on January 1, 1993. Regulations adopted by the OTS since the enactment
of FIRREA have established new minimum leverage capital requirements for savings
associations. The Savings Bank is in compliance with the minimum capital
requirements applicable to it.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted into law. FDICIA provides for, among other
things, establishment by the federal banking agencies of revised risk-based
capital requirements designed to account for interest rate risk, concentration
of credit risk and the risks of nontraditional activities; enhanced federal
supervision of depository institutions, including greater authority for the
appointment of a conservator or receiver for undercapitalized institutions; the
establishment of risk-based deposit insurance premiums; limitation of equity
investments and other activities permissible to state savings associations to
those permissible for federal savings associations; liberalization of the QTL;
greater restrictions on transactions with affiliates; and mandated consumer
protection disclosures with respect to deposit accounts. Certain provisions of
FDICIA which are potentially applicable to the Savings Bank are discussed below.
FDICIA requires the federal banking regulators to define five levels of
regulatory capital (i.e., well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and mandates specific enforcement actions that the federal
banking agencies must take with respect to depository institutions whose capital
level is significantly below the required minimums. Depending upon the capital
level which the institution fails to meet, such institution may be prohibited
from increasing its assets, acquiring another institution, establishing a
branch, engaging in any new activities, or making capital distributions. Other
actions which federal banking agencies may take with respect to such institution
include requiring the issuance of additional voting securities; placing
limitations on asset growth; mandating asset reduction; mandating changes in
senior management; requiring the divestiture, merger or acquisition of the
institution; placing restrictions on executive compensation; and any other
action that the agency deems appropriate. If the depository institution's
capital levels fall below certain thresholds, FDICIA requires that the
appropriate federal banking agency be appointed as a receiver or conservator of
the institution.
During 1992, the federal banking regulators began the task of proposing and
adopting regulations required to implement the provisions of FDICIA. The OTS,
along with the other federal banking agencies, adopted uniform regulations
establishing criteria to define the five levels of regulatory capital specified
under FDICIA. Under those regulations, the Savings Bank falls into the category
of well capitalized, and the provisions of FDICIA described in the preceding
paragraph are therefore not expected to have any material adverse effect on the
Savings Bank.
The FDIC also adopted a final rule establishing a risk-based insurance
premium assessment system which took effect on January 1, 1993. Under this
regulation, insurance premiums of SAIF insured institutions may vary, depending
on the regulatory capital level and supervisory rating of the institution. This
risk-based premium assessment system is not expected to result in any material
increase in insurance premium assessments applicable to the Savings Bank because
of its relatively high level of regulatory capital and favorable supervisory
ratings. However, the FDIC has indicated it will review the adequacy of the
premium assessment levels and will make further changes in premium rates as
necessary to assure sufficient reserves are maintained in the insurance fund.
26
<PAGE>
As anticipated, the SAIF was recapitalized during 1996 by a one-time
special assessment imposed on all SAIF members. The $2,856,000 assessment paid
by First Northern had a significant impact on its 1996 financial results.
However, the effect of the recapitalization is a significant reduction in
federal deposit insurance premiums for SAIF-insured institutions on an ongoing
basis. See Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Other examples of regulations adopted and other significant regulatory
developments under FDICIA are summarized below. Although applicable to the
Savings Bank, none of these regulations are expected to have any material
adverse effect on First Northern's financial condition or future operations. The
FDIC has adopted regulations requiring all insured depository institutions with
$150 million or more in assets to have annual audits by an independent public
accountant and an independent audit committee made up of outside directors, and
requiring annual reports by management on its responsibility for preparing
financial statements and establishing and maintaining an internal control
structure for financial reporting and compliance. The FDIC adopted a rule
prohibiting insured depository institutions from soliciting deposits by offering
rates significantly higher than community rates or the national rates paid on
deposits of comparable maturity. The federal regulatory agencies have
established uniform rules and guidelines for real estate lending, but these
rules do not preclude individual institutions from establishing their own
specific standards. The Federal Reserve Board adopted a rule under the Truth in
Savings Act imposing certain disclosure in advertising requirements for
interest-bearing transaction and savings accounts, and requiring that an
individual and other non-business accounts offered by depository institutions be
accompanied by disclosures of the terms, conditions, fees and yields applicable
to the account. This rule also establishes standardized terms that must be used
in connection with interest-bearing deposits. Finally, the OTS adopted a new
rule effective January 1, 1994 requiring savings institutions to reflect
interest-rate risk in their capital requirements. For institutions in excess of
$300 million in assets, like the Savings Bank, institutions will be required to
hold capital against interest rate risk only when the risk exceeds a decline in
net portfolio value of more than 2% of an institution's assets. Net portfolio
value is the difference between incoming and outgoing discounted cash flows from
assets, liabilities and off-balance sheet contracts.
State Regulation
Under Wisconsin law, a savings and loan holding company which controls a
Wisconsin chartered savings and loan (such as First Northern) is subject to the
supervision and control of the WDFI-Administrator. A savings and loan holding
company will be required to file reports of its financial condition when
requested by the WDFI-Administrator. The WDFI-Administrator may examine the
savings and loan holding company at any time it deems necessary. If in the
opinion of the WDFI-Administrator, the condition or operations of the savings
and loan holding company would endanger the safety of the capital of the Savings
Bank, the WDFI-Administrator may: (i) order the savings and loan holding company
to correct any such deficiency; (ii) fully direct the operation of such savings
and loan association or savings and loan holding company until the order is
complied with; and/or (iii) withhold all dividends from the institution whose
operation it directs.
While specific Wisconsin provisions governing savings associations may vary
from the federal regulations described above, in most regards the state
regulations parallel federal regulations. Regulations of the WDFI-Administrator
limit the loan-to-value ratios with respect to residential and commercial
property loans, establish liquidity and loan reserve requirements, regulate the
sale of loans and participation interest therein, and limit service corporation
activities. The approval of the WDFI-Administrator is required to open, sell,
purchase or relocate a branch office and to effect mergers involving Wisconsin
chartered savings institutions.
The WDFI-Administrator established a net worth (computed in accordance with
generally accepted accounting principles) to total assets ("net worth ratio")
requirement in 1987. This requirement was implemented in stages until the
current required 6% net worth ratio was achieved. The WDFI-Administrator may,
however, require a state-chartered savings institution to maintain a higher net
worth level if the WDFI-Administrator determines that the institution's
operations otherwise entail a greater risk requiring a higher level of net worth
to assure stability.
27
<PAGE>
Payment of Dividends
The ability of the Savings Bank to pay dividends on its stock is restricted
by regulations of the OTS and WDFI-Administrator and by tax considerations
related to savings associations. While First Northern will not be subject
directly to these restrictions on its ability to pay dividends, and will be only
directly governed by certain restrictions imposed by the Wisconsin Business
Corporation Law (the "WBCL") on Wisconsin corporations generally, because First
Northern's ability to pay dividends will depend primarily upon the ability of
the Savings Bank to pay dividends or otherwise transfer funds to it, First
Northern will be indirectly affected by these restrictions.
Under OTS regulations, a savings association that, immediately prior to,
and on a pro forma basis after giving effect to, a proposed capital distribution
(including cash dividends, stock repurchases and cash mergers), has total
capital (as defined by OTS regulation) that is equal to or greater than the
amount of its fully phased-in capital requirements (a "Tier 1 Association") is
generally permitted, after notice, to make capital distributions during a
calendar year in the amount equal to the greater of: (a) 75% of its net income
for the previous four quarters; or (b) up to 100% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in
capital requirement to its assets at the beginning of the calendar year. The
Savings Bank currently qualifies as a Tier 1 Association. Furthermore, the OTS
may prohibit a proposed capital distribution which would otherwise be permitted
by the regulations if the OTS determines that such distribution would constitute
an unsafe or unsound practice.
As discussed above, the WDFI-Administrator has promulgated regulations
which establish certain net worth to total assets requirements. The net worth
requirement is 6.00% for 1997 and thereafter. Unless a Wisconsin savings
association receives the WDFI-Administrator's prior written approval, it may not
pay a dividend or otherwise distribute any profits when its net worth ratio is,
or upon such payment or distribution would be, below the WDFI-Administrator's
net worth requirements. At December 31, 1997, First Northern's net worth ratio
for Wisconsin regulatory purposes was 10.8%.
In addition to the foregoing, earnings of the Savings Bank appropriated to
bad debt reserves for losses and deducted for federal income tax purposes are
not available to pay cash dividends or other distributions without payment of
federal income taxes at the then current income tax rates on the amounts deemed
paid therefrom. Also, the Savings Bank is not permitted to pay dividends on its
capital stock if its regulatory capital would thereby be reduced below the
remaining balance of any liquidation accounts which were established for the
benefit of certain depositors of the Savings Bank (and savings associations
merged into the Savings Bank) in connection with the conversion from the mutual
to stock form of ownership.
While the ability of First Northern to pay dividends will not be directly
subject to the above restrictions, it will be limited by restrictions imposed by
the WBCL. The WBCL prohibits a Wisconsin corporation from making a distribution
(including a cash dividend, stock repurchase or a distribution of evidences of
indebtedness) if, after giving effect to such distribution, such corporation
would be unable to pay its debts as they come due in the usual course of
business or if such corporation's total assets would be less than the sum of its
liabilities and the amount that would be needed, if such corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of any stockholders whose preferential rights are superior to
those receiving the distribution.
The payment of future cash dividends by First Northern will depend
primarily upon the Savings Bank's earnings, financial condition and capital
requirements, as well as the tax and regulatory considerations discussed herein.
The Savings Bank Board of Directors considers many factors in the payment of
dividends, including the Savings Bank's profitability, maintenance of adequate
capital, the Savings Bank's current and anticipated future income, outstanding
loan commitments, adequacy of loan loss reserves, cash flow requirements and
economic conditions. Federal regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends to First
Northern.
The dividend restrictions referred to above are not currently expected to
impair the ability of First Northern to make dividend payments consistent with
past practice.
28
<PAGE>
Federal and State Taxation
Federal Taxation. First Northern and its subsidiaries file a calendar year
consolidated federal income tax return, reporting income and expenses using the
accrual method of accounting.
Bad Debt Reserves. On August 20, 1996, the President of the United States
signed the Small Business Job Protection Act of 1996 (the "Act"). The Act
repealed the "reserve method" of accounting for bad debts by most thrift
institutions effective for taxable years beginning after 1995. Larger thrift
institutions such as First Northern are now required to use the "specific
charge-off method." The Act also grants partial relief from reserve recapture
provisions which are triggered by the change in method. This legislation is not
expected to have a material impact on First Northern's financial condition or
results of operations. See Note H of the Notes to First Northern's Consolidate
Financial Statement, incorporated by reference in Item 8 hereof.
The federal income tax returns for First Northern have been examined and
audited or closed without audit by the IRS for tax years through 1989.
Depending on the composition of its items of income and expense, a savings
institution may be subject to alternative minimum tax ("AMT") to the extent AMT
exceeds the regular tax liability. AMT is calculated at 20% of alternative
minimum taxable income ("AMTI"). AMTI equals regular taxable income increased
by certain tax preferences, including depreciation deductions in excess of
allowable AMT amounts, certain tax-exempt interest income, the excess of bad
debt deduction over the experience calculation and 75% of the excess of adjusted
current earnings ("ACE") over AMTI. ACE equals AMTI adjusted for certain items,
primarily accelerated depreciation and tax-exempt interest. The payment of AMT
will create a tax credit which can be carried forward indefinitely to reduce the
regular tax liability in future years.
State Taxation. The state of Wisconsin imposes a corporate franchise tax at
7.9% on the separate taxable incomes of the members of First Northern's
consolidated federal income tax group except FNII, which is located in Nevada.
The income of FNII is only subject to taxation in Nevada which currently does
not impose a corporate income or franchise tax.
Item 2. Properties.
First Northern's corporate/downtown office is located at 201 North Monroe
Avenue, Green Bay, Wisconsin. The Savings Bank conducts its business from the
corporate/downtown office and 18 additional branch offices at locations
described below in Brown, Manitowoc, Door, Shawano, Calumet, Outagamie, Waupaca
and Marinette counties. First Northern has under continuing review the
possibility of applying for additional branch locations, depending on
management's assessment of market and economic conditions, the availability of
locations and the proximity of branches of competing institutions.
The following table lists each of First Northern's offices.
Downtown Green Bay Kiel
------------------ ----
201 N. Monroe Avenue 622 Fremont Street
Green Bay, WI 54301-4995 Kiel, WI 53042-1321
Brown County Manitowoc County
Peshtigo Sturgeon Bay
-------- ------------
616 French Street 1227 Egg Harbor Road
Peshtigo, WI 54157-0193 Sturgeon Bay, WI 54235-0068
Marinette County Door County
29
<PAGE>
Pine Tree Mall Shawano
-------------- -------
2314 Roosevelt Road 835 E. Green Bay Avenue
Marinette, WI 54143-0345 Shawano, WI 54166-0396
Marinette County Shawano County
Ashwaubenon Brillion
----------- --------
2357 S. Oneida Street 314 N. Main Street
Green Bay, WI 54304-5286 Brillion, WI 54110-1198
Brown County Calumet County
Howard East Mason
------ ----------
2603 Glendale Avenue 2370 East Mason Street
Green Bay, WI 54313-6823 Green Bay, WI 54302-3347
Brown County Brown County
East West De Pere
---- ------------
2255 University Avenue 749 Main Avenue
Green Bay, WI 54308-8046 De Pere, WI 54115-5190
Brown County Brown County
Crivitz East De Pere
------- ------------
315 Highway 141 330 North Broadway
Crivitz, WI 54114-0340 De Pere, WI 54115-5250
Marinette County Brown County
New Holstein West
------------ ----
2205 Wisconsin Avenue 2424 West Mason Street
New Holstein, WI 53061-1291 Green Bay, WI 54303-4711
Calumet County Brown County
New London Hortonville
---------- -----------
101 Park Street 209 South Nash Street
New London, WI 54961 Hortonville, WI 54944
Waupaca County Outagamie County
Marinette
---------
830 Pierce Avenue
Marinette, WI 54143-0138
Marinette County
With the exception of the Pine Tree Mall location, which is leased, First
Northern owns the remainder of its locations. The eighteen owned locations are
all free-standing buildings which contain between 1,800 and 3,600 square feet,
with the exception of the corporate/downtown office, New London office and East
De Pere office which contain approximately 25,000, 8,000 and 4,400 square feet,
respectively. Each of the owned locations also has drive-up facilities. The Pine
Tree Mall location is approximately 1,500 square feet. All of First Northern's
services are available to its customers in each office.
The eighteen locations owned by First Northern had a book value (net of
accumulated depreciation) of $6,455,000 at December 31, 1997. The leasehold
improvements of the Pine Tree Mall location had a book value (net of accumulated
depreciation) of $14,000 at December 31, 1997. First Northern sold two free
standing offices in 1995, which had an aggregate book value of $435,000 and one
office in 1997 which had an aggregate book value of $243,511.
All of First Northern's locations are designed for use and operation as a
savings bank, are well maintained and suitable for current operations.
30
<PAGE>
Item 3. Legal Proceedings.
To First Northern's knowledge, no material legal proceedings are pending or
contemplated to which it or any of its subsidiaries are or would be a party, or
of which any of their property is or would be the subject, other than ordinary
routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant.
The following table contains certain information regarding those officers
of First Northern and the Savings Bank who have been determined by the Board of
Directors of First Northern to be Executive Officers of First Northern.
<TABLE>
<CAPTION>
Offices and Positions
With First Northern Present Office
Name Age and the Savings Bank Held Since(1)
- - ---- --- -------------------- ---------------
<S> <C> <C> <C>
Michael D. Meeuwsen 44 Director, President 1988 (2)
and Chief Executive Officer
of First Northern and the
Savings Bank
Rick B. Colberg 45 Vice President, Chief 1980 (3)
Financial Officer and
Treasurer of First Northern
and Senior Vice President,
Chief Financial Officer and
Treasurer of the Savings Bank
Marla J. Carr 42 Vice President-Human 1980 (4)
Resources and Secretary
of First Northern and
Senior Vice President-Human
Resources and Secretary
of the Savings Bank
John E. Steinbrecker 47 Senior Vice President-Retail 1984 (5)
Deposits and Brokerage Services
of the Savings Bank
Richard E. Aicher 47 Senior Vice President-Lending of 1979 (6)
the Savings Bank
Dale J. Darmody 49 Senior Vice President-Director of 1990 (7)
Branch Development of the
Savings Bank
Steven L. Wilmet 51 Senior Vice President-Operations and 1994 (8)
Branch Development of the
Savings Bank
</TABLE>
- - ---------------------
31
<PAGE>
(1) Indicates date when individual first held present office with the Savings
Bank. All persons listed herein became executive officers of First Northern in
1995.
(2) Mr. Meeuwsen joined the Savings Bank in 1980 as a branch manager and was
named Vice President of Operations and Savings Manager in 1982. In 1984, Mr.
Meeuwsen became Executive Vice President and Chief Operating Officer, in April,
1989 was named President and Chief Operating Officer and in January, 1990 was
named President and Chief Executive Officer of the Savings Bank.
(3) Mr. Colberg, prior to becoming Treasurer of the Savings Bank in 1982, was
Vice President since 1978, was Chief Financial Officer in 1980 and designated
Senior Vice President in 1997. Mr. Colberg has been employed by the Savings Bank
for 26 years.
(4) Ms. Carr has been Human Resources Director of the Savings Bank since 1976.
She was elected Vice President, Secretary in 1980 and designated Senior Vice
President in 1997. Ms. Carr has been with the Savings Bank for 24 years.
(5) Mr. Steinbrecker was named Vice President-Retail Deposits and Brokerage
Services in 1994 and Senior Vice President in 1997. Prior to that he was named
Vice President-Savings and Marketing in 1984 and was named Vice President and
Marketing Director in 1981. Mr. Steinbrecker has been employed by the Savings
Bank for 18 years.
(6) Mr. Aicher, who has been with the Savings Bank since 1974, was elected Vice
President in 1977, loan manager in 1979 and Senior Vice President in 1997. Mr.
Aicher has been employed by the Savings Bank for 22 years.
(7) Mr. Darmody was elected Vice President in 1990 and Senior Vice President in
1997. Prior to that date, he was Assistant Vice President and Residential Loan
Origination Manager since 1985. Mr. Darmody joined the Savings Bank in 1981.
(8) Mr. Wilmet joined the Savings Bank in April, 1994 upon consummation of the
merger with Prime Federal, assuming his present position pursuant to the terms
of the merger agreement and designated Senior Vice President in 1997. Prior to
such merger, Mr. Wilmet served as Vice President of Operations and Secretary of
Prime Federal.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.
- - ------- ----------------------------------------------------------------------
The common stock of First Northern Capital Corp. is traded on The Nasdaq
Stock Market Inc.'s National Market under the symbol "FNGB." Information in
this section has been restated to give retroactive effect to the Company's
August 18, 1997, two-for-one stock split in the form of a 100% stock dividend.
As of February 27, 1998, there were 8,922,023 shares of common stock
outstanding and approximately 2,507 stockholders of record of the Company's
common stock. The chart below represents the cash dividends paid for each of
the stated quarters.
CASH DIVIDENDS PAID
<TABLE>
<CAPTION>
QUARTER 1998 1997 1996 1995 1994 1993
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ .09* $ .08 $.075 $ .07 $.065 $ .06
2nd Quarter -- .08 .075 .07 .065 .06
3rd Quarter -- .08 .075 .07 .065 .06
4th Quarter -- .08 .075 .07 .065 .06
----- ----- ----- ----- ----- -----
Total -- $ .32 $.300 $ .28 $.260 $ .24
===== ===== ===== ===== ===== =====
</TABLE>
* The Company's Board of Directors raised the regular quarterly cash dividend
from $0.08 to $0.09 per share, a 12.5% increase, which was paid on February
13, 1998 to stockholders of record on January 30, 1998.
32
<PAGE>
The Company anticipates that it will continue to pay quarterly cash
dividends on its common stock, although there can be no assurance that payment
of such dividends will continue. The payment of dividends in the future is
discretionary with the Company's Board of Directors and will depend on the
Company's operating results and financial condition, regulatory limitations, tax
considerations and other factors.
Interest on deposit accounts will be paid prior to payment of dividends on
the Company's common stock. Earnings appropriated to bad debt reserves and
deducted for federal income tax purposes cannot be used to pay cash dividends
without the payment of federal income taxes on the amounts removed from the
reserves for such purpose at the then current income tax rate. See Note H to
the consolidated financial statements.
COMMON STOCK TRADING PRICE RANGE
(High and Low Sales Price)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------- -------------- ---------------- -------------- -------------
High Low High Low High Low High Low High Low
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 10 8 1/8 8 3/8 7 5/8 6 7/8 5 7/8 7 3/4 6 3/8 7 1/2 6 5/8
2nd Quarter 11 9 1/8 8 1/4 7 9/16 7 1/8 6 1/2 7 1/4 6 3/8 7 5/8 6 1/4
3rd Quarter 14 1/4 10 9/16 8 3/4 7 9/16 8 7/16 6 5/8 7 1/2 6 5/8 7 3/4 6 5/8
4th Quarter 14 1/8 12 3/4 9 1/2 8 8 1/4 7 3/8 7 1/8 5 7/8 7 7/8 7 1/4
</TABLE>
During the first two months of 1998, the Company's common stock sales price
ranged between $14.00 to $12.50 per share, and closed on February 27, 1998 at
$13.00 per share.
33
<PAGE>
Item 6. Selected Financial Data.
Selected Financial Highlights
All information has been restated to reflect the December 20, 1995,
reorganization of the Savings Bank into a unitary holding company structure and
the two-for-one stock split on August 18, 1997.
<TABLE>
<CAPTION>
Operating Results for Years Ended December 31
- - -------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest Income $46,596 $41,876 $39,025 $35,409 $37,760
Interest Expense 26,491 23,203 22,036 16,854 17,903
Net Interest Income 20,105 18,673 16,989 18,555 19,857
Provision for Loan Losses 320 370 240 145 539
Non-Interest Income 3,276 2,686 3,210 2,258 2,700
Non-Interest Expense 13,374 15,939(1) 12,651 13,278 12,016
Income Before Change in Accounting 6,036 3,283(2) 4,590 4,198(3) 6,050
Net Income 6,036 3,283(2) 4,590 4,198(3) 6,520
Basic Net Income Per Share
Before Change in Accounting 0.68 0.37(2) 0.51 0.47(3) 0.69
Basic Net Income Per Share 0.68 0.37(2) 0.51 0.47(3) 0.74
Diluted Net Income per Share 0.66 0.36(2) 0.49 0.46(3) 0.72
Dividends Declared (Historical) 0.32 0.30 0.28 0.26 0.24
</TABLE>
(1) Non-interest expense increased from the one-time special SAIF assessment of
$2,856,000.
(2) Net income, basic net income per share and diluted net income per share
were decreased by $1,733,000, $0.19 and $0.19, respectively by the after-
tax effect of the one-time special SAIF assessment.
(3) Net income, basic net income and diluted net income per share were
decreased by $691,000, $0.08 and $0.08, respectively from merger related
expenses.
<TABLE>
<CAPTION>
Financial Position at December 31
- - -------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Assets $667,696 $615,503 $553,467 $546,923 $504,952
Securities Available-for-Sale 7,731 7,472 4,991 4,861 492
Securities Held-to-Maturity 31,906 25,908 23,388 22,210 38,949
Loans Receivable 593,529 553,995 500,535 497,061 424,234
Loans Held for Sale 2,119 2,532 2,989 18,419
Deposits 481,788 458,323 449,954 423,793 421,852
Borrowings 103,277 77,272 21,000 42,900 3,223
Stockholders' Equity 73,817 70,224 72,579 70,007 66,963
Book Value Per Share 8.35 8.01 7.97 7.79 7.56
Shares Outstanding,
Net of Treasury Stock 8,846 8,775 9,110 8,990 8,856
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Key Ratios & Other Data at or for the Year Ended December 31
- - ---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest Rate Spread Information:
Weighted Average Interest Rates
Loans/Investments Yield 7.57% 7.43% 7.39% 7.01% 7.10%
Cost of Money 4.83% 4.60% 4.63% 4.23% 3.78%
Spread at December 31 2.74% 2.83% 2.76% 2.78% 3.32%
Average Spread Earned
During the Year 2.83% 2.86% 2.69% 3.29% 3.64%
Non-performing Assets to
Total Assets 0.09% 0.15% 0.10% 0.12% 0.17%
Return on Average Assets 0.94% 0.56%/1/ 0.83% 0.81% 1.30%
Return on Average
Stockholders' Equity 8.38% 4.61%/1/ 6.43% 6.09% 10.12%
Stockholders' Equity to
Total Assets 11.06% 11.41% 13.11% 12.80% 13.26%
Net Interest Margin 3.26% 3.31% 3.17% 3.71% 4.09%
Number of Offices 19 20 20 20 23
Number of Employees -
Full-Time Equivalents 216 214 213 206 211
</TABLE>
(1) Excluding one-time special SAIF assessment, Return on Average Assets would
have been .86% and Return on Average Stockholders' Equity would have been
7.05%.
35
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
First Northern Capital Corp. (the "Company" or "First Northern") is a unitary
savings and loan holding company, of which First Northern Savings Bank, S.A.
(the "Savings Bank") a Wisconsin chartered capital stock savings and loan
association, is a wholly-owned subsidiary.
The Savings Bank was reorganized into First Northern on December 20, 1995, with
each outstanding share of the Savings Bank's common stock converted into one
share of the Company's common stock (the "Reorganization"). Consequently, the
holders of all the outstanding stock of the Savings Bank acquired the same
proportionate ownership interest in First Northern as they had held in the
Savings Bank. The consolidated capital, assets, liabilities, income and other
financial data of First Northern immediately following the Reorganization were
substantially the same as those of the Savings Bank immediately prior to
consummation of the Reorganization. The discussion below reflects the accounts
and operations of the Company since December 20, 1995 and the accounts and
operations of the Savings Bank and its wholly-owned subsidiaries for the entire
periods discussed. The Reorganization was effected to provide greater
flexibility in meeting its future financial and competitive needs.
The Savings Bank is the only direct subsidiary of the Company and its operations
are the primary contributor to the Company's earnings and expenses. The Savings
Bank's business consists primarily of attracting deposits from the general
public and originating loans throughout its Northeastern Wisconsin branch
network. Great Northern Financial Services Corporation ("GNFSC"), a wholly-
owned subsidiary of the Savings Bank, offers full brokerage services to the
public, through a network agreement with a registered broker-dealer and sells
tax deferred annuities, credit life and disability insurance. Another wholly-
owned Savings Bank subsidiary, First Northern Investments, Inc. ("FNII"),
manages a majority of the Savings Bank's investments. The Savings Bank also
owns 50% of Savings Financial Corporation ("SFC"), which originates, sells and
services automobile loans to its parent corporations.
In connection with the following discussion, See the financial data in Item 1
and "Cautionary Factors" in Item 1 hereof regarding forward-looking statements
and factors that could impact the business and financial prospects of the
Company.
BALANCE SHEET ANALYSIS
Liquidity. The Company's primary sources of funds are deposits (retail and
wholesale), proceeds from principal and interest payments on loans, advances
from the Federal Home Loan Bank (the "FHLB") of Chicago, and, to a lesser
extent, maturities of investment securities and short-term investments, sales of
loans, repurchase agreements, and operations. While scheduled loan repayments
and maturing investments are a relatively predictable source of funds, deposit
flows and loan prepayments are influenced to a great extent by interest rates,
general economic conditions, and competition.
Federal regulations historically have required First Northern to maintain
minimum levels of liquid assets such as cash, certain time deposits, U.S.
government and agency securities, and other obligations generally having
remaining maturities of less than five years. Liquidity requirements have
varied from time to time based upon economic conditions and deposit flows. The
current requirement is 4% of the preceding calendar month's average net
withdrawable deposits and borrowings payable on demand or in one year or less
("liquidity base") or of the average daily balance of the liquidity base during
the preceding quarter. The Company's total liquidity ratio at December 31, 1997
was 5.67% and 5.97% at December 31, 1996. The liquidity ratio decreased at
year-end 1997 as compared to year-end 1996 as a result of funding loan
originations.
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) expected deposit flows, (iii)
yields available on interest-earning deposits and (iv) the objectives of its
asset/liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits and short-term U.S. government and agency
obligations. If the Savings Bank requires funds beyond its ability to generate
them from operations, it can borrow from the FHLB of Chicago (See "Borrowings").
36
<PAGE>
Investment and Mortgage-Related Securities. A substantial portion of the
Company's investment securities (approximately $28.5 million at December 31,
1997 and $24.6 million at December 31, 1996) are held and managed by FNII. (See
Notes to Consolidated Financial Statements -- Note B and Note C -- Securities
Available-for-Sale and Securities Held-to-Maturity.)
Interest-earning deposits decreased $1,274,000 in 1997 as a result of maturing
interest-earning deposits being used to partially fund the loan portfolio
growth.
The dollar amount of both the securities available-for-sale and securities held-
to-maturity increased in 1997 as compared to 1996 as a result of reinvesting
interest earned on the investment portfolio into additional securities and
purchasing of additional securities.
Lending Activities. First Northern has traditionally concentrated on the
origination of adjustable and fixed interest rate one- to four-family mortgage
and consumer loans throughout its 19 offices. First Northern also originates
construction, more than four-family ("multi-family") residential and commercial
real estate loans. In addition, the Savings Bank will purchase one family and
multi-family mortgage loans from other sources within the State of Wisconsin.
Adjustable interest rate mortgage loans are originated for First Northern's
portfolio while fixed interest rate mortgage loans, particularly those with
terms greater than 20 years, are primarily originated for sale in the secondary
mortgage market. First Northern retains 15 and 20 year fixed interest rate
mortgage loan originations in its portfolio. At December 31, 1997,
approximately 89% of First Northern's mortgage loan portfolio was interest rate
adjustable as compared to 90% at December 31, 1996.
First Northern originates a variety of adjustable and fixed interest rate
mortgage loan products based upon market demands and general economic
conditions. Adjustable indexed interest rate mortgage loans at December 31,
1997, contain an interest rate adjustment provision tied to the national monthly
median cost of funds ratio for Savings Association Insurance Fund ("SAIF")
insured institutions, plus an additional mark-up of 2.95% to 4.00% (the "index")
which varies with the mortgage loan product. Interest rates on indexed mortgage
loans are adjusted, up or down, on predetermined dates fixed by contract, in
relation to and based on the index or market interest rates as of a
predetermined time prior to the adjustment date.
Adjustable indexed interest rate mortgage loans have an initial period, ranging
from one to five years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps which vary with the product. Annual limits on interest rate increases are
1% to 2%, while aggregate lifetime interest rate increases over the term of the
loan are currently at 6% above the original mortgage loan interest rate.
First Northern's origination of second mortgage loans, automobile, boat,
recreational vehicle and other types of consumer loans, which are generally of
shorter maturities than first mortgage loans, enhances the matching of
maturities of its assets and liabilities. Second mortgage loans are offered on
both a fixed and adjustable interest rate basis; other consumer loans are
generally offered on a fixed interest rate basis.
At December 31, 1997 and 1996, approximately 35% of First Northern's consumer
loan portfolio was interest rate adjustable. Approximately 30%, by dollar
amount, of second mortgage loans originated in 1997 were interest rate
adjustable.
37
<PAGE>
The following table sets forth First Northern's mortgage and consumer loan
originations and purchases:
<TABLE>
<CAPTION>
LOAN ORIGINATIONS AND PURCHASES
During the Year Ended December 31
---------------------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Mortgage loans originated and purchased :
Construction - Residential $ 25,709 $ 26,596
Loans on existing property 51,536 49,017
Refinancing 42,166 35,497
Other loans 2,398 2,668
-------- --------
Total mortgage loans originated and purchased 121,809 113,778
Consumer loans originated and purchased:
Consumer 18,348 15,292
Second mortgage 27,218 24,871
Automobile 50,059 45,722
Education 2,568 2,382
-------- --------
Total consumer loans originated and purchased 98,193 88,267
-------- --------
Total loans originated and purchased $220,002 $202,045
======== ========
</TABLE>
The dollar volume of First Northern's mortgage loan originations and purchases
increased in 1997 as compared to 1996. First Northern purchased $7.8 million of
one-family residential, $3.7 million of multi-family and $1.0 million of
commercial real estate loans in 1997, as compared to $8.4 million of one-family
residential loans and $0.8 million of multi-family loans in 1996. First Northern
purchases loans when loan interest rates provide an opportunity to incrementally
add to the profitability of the Company.
First Northern's growth in the dollar amount of mortgage loans outstanding was
$24.7 million or 5.8% for 1997 as compared to $32.4 million or 8.2% in 1996.
Although 1997 mortgage loan originations exceeded 1996's mortgage loan
originations, the mortgage loan portfolio did not grow as fast as a result of
increased prepayments on existing mortgage loans. The increase in the 1997
mortgage loan portfolio was the result of the increased dollar amount of
adjustable indexed interest rate mortgage loans originated and purchased, which
First Northern retained in its portfolio.
As part of First Northern's asset and liability management strategy, its general
policy, which is subject to review by Management as a result of changing market
and economic conditions and other factors, is to retain all adjustable interest
rate mortgage loans in its portfolio and to retain up to approximately 20% of
the mortgage portfolio in fixed interest rate mortgage loans. At December 31,
1997, First Northern had approximately $51.2 million of 15 and 30 year fixed
interest rate mortgage loans in its mortgage loan portfolio, compared to
approximately $44.3 million of 15 and 30 year fixed interest rate mortgage loans
at December 31, 1996.
In 1997, First Northern sold $18.7 million of fixed interest rate mortgage loans
(primarily 30 year fixed interest rate) as compared to $11.1 million in 1996.
The consumer loan portfolio at December 31, 1997, increased 14.1% as compared to
December 31, 1996 as a result of increased consumer loan originations and
purchases. Consumer loan originations and purchases increased in 1997 as
compared to 1996 primarily as a result of increased originations by SFC, second
mortgage originations and increased loan purchases by the Savings Bank from SFC.
In 1997, First Northern purchased $41.3 million of automobile loans from SFC as
compared to $38.0 million in 1996. This increase in purchases from SFC was the
result of a more active automobile loan market and the further expansion of
SFC's operations in Northern Wisconsin. SFC originates indirect automobile loans
in the State of Wisconsin and sells these loans to First Northern and the other
SFC shareholder while retaining the servicing of such loans. The book value of
First Northern's investment in SFC as of December 31, 1997 was $34,914.
38
<PAGE>
Asset Quality. First Northern currently classifies any loan on which a payment
is 90 days or more past due as non-performing. The following table summarizes
non-performing loans and assets:
<TABLE>
<CAPTION>
NON-PERFORMING LOANS AND ASSETS
At December 31
-------------------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Non-accrual mortgage loans $333 $509
Non-accrual consumer loans 107 235
---- ----
Total non-performing loans 440 744
Properties subject to foreclosure 135 157
Foreclosed properties and repossessed assets 18 32
---- ----
Total non-performing assets $593 $933
==== ====
Non-performing loans as a percent of total loans .07% .13%
=== ===
Non-performing assets as a percent of total assets .09% .15%
=== ===
</TABLE>
Total non-performing loans and assets decreased in 1997 as compared to 1996 as a
result of the overall stable economy in First Northern's market areas and
management's continued emphasis to maintain non-performing assets at low levels.
Management believes non-performing loans and assets at the end of 1997 remain
significantly below state and national averages.
Management also believes that allowances for losses on loans, real estate owned
and repossessed assets are adequate. While management uses available information
to recognize losses on loans, real estate owned and repossessed assets, future
additions to the allowances may be necessary based on changes in economic
conditions or regulatory requirements.
A summary of the general loan loss allowances is shown below:
<TABLE>
<CAPTION>
GENERAL LOAN LOSS ALLOWANCES
At or for the Year Ended December 31
------------------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at the beginning of the year $2,937 $2,608 $2,400
Provisions 320 370 240
Loan charge-offs (101) (66) (71)
Recoveries 21 25 39
------ ------ ------
Balance at the end of the year $3,177 $2,937 $2,608
====== ====== ======
Allowance as a percent of total loans .53% .53% .52%
=== === ===
Allowance as a percent of non-performing loans 722.05% 394.76% 623.92%
====== ====== ======
Allowance as a percent of total assets .48% .48% .47%
=== === ===
Allowance as a percent of non-performing assets 535.75% 314.79% 470.76%
====== ====== ======
</TABLE>
39
<PAGE>
Other Assets. Other assets increased $8.0 million in 1997 primarily as a result
of the Savings Bank's purchase of $7.4 million of bank owned life insurance
("BOLI") on December 31, 1997. BOLI is long-term life insurance on the lives of
certain Savings Bank employees where the insurance policy benefits and ownership
are retained by the Savings Bank. The cash value accumulation on BOLI is tax
exempt if the policy is held to the participant's demise. Management believes
this is an effective method to help offset a portion of future employee benefit
costs.
Deposits. Deposits increased $23.5 million or 5.1% in 1997 as compared to $8.4
million or 1.9% in 1996. As of December 31, 1997, deposits totaled $481.8
million or 81.1% of total liabilities. Competition for deposits in First
Northern's market area has been and will continue to be very strong.
First Northern establishes savings deposit interest rates to be competitive in
each market area and to maintain a favorable spread from loan interest rates.
The deposit philosophy continues to be that an increase in deposit dollars will
be sought only if the increase is incrementally profitable.
Due to loan demand and competition for retail deposits, First Northern will
continue to seek alternative sources of funding, including wholesale and jumbo
($100,000 or more) deposits. In 1997, First Northern obtained wholesale
brokered, corporate and municipal jumbo deposits of approximately $14.8 million
and at December 31, 1997, First Northern had a total of $19.9 million of such
deposits. These deposits accounted for 63% of the deposit increase for 1997 and
were obtained at a lower cost than retail deposits. This strategy will be an
integral part of deposit acquisition for 1998.
First Northern believes that the household checking account is the basic account
upon which further customer banking relationships can be developed. First
Northern incorporated aggressive pricing and marketing of the checking account
and has been able to become the "primary financial institution" for many
households. To enhance this checking account relationship and to increase non-
interest fee income, First Northern expanded its First Northern CheckCard base
originated in 1996.
The First Northern CheckCard gives a checking account customer the opportunity
to access a checking account anywhere in the world where VISA is accepted. First
Northern aggressively marketed the First Northern CheckCard in late 1996 and
early 1997. As a result of this aggressive marketing philosophy, the CheckCard
has gained greater customer acceptance and increased product profitability.
The Taxpayers Relief Act of 1997 offers investors and homeowners new significant
tax planning opportunities ranging from income tax savings, estate tax savings,
lower capital gains rates, retirement and education benefits, and the
elimination of certain taxes altogether. Many people planning for retirement now
have the opportunity to save money on a tax-free as well as tax-deferred basis
with the new Roth and Education Individual Retirement Account. In addition, the
traditional Individual Retirement Account offers new features which will expand
the availability of this product. First Northern anticipates additional deposits
as a result of the implementation of these new products in 1998.
First Northern's objective is to create a one-stop family financial banking
center by offering a wide selection of checking accounts, short, intermediate
and long-term certificates of deposit, insured retirement accounts and mortgage
and consumer loans to meet a wide variety of customer needs.
The GNFSC Investment Center, established in April, 1995, posted a third straight
year of record profitability. The Investment Center offers non-insured deposit
products, such as tax-deferred annuities and, through a network agreement with a
registered broker-dealer, stocks, mutual funds and brokerage products. The
establishment of this division has resulted in increased customer retention and
new customer relationships through the existing Savings Bank's branch network.
Borrowings. Borrowings, primarily from the FHLB of Chicago, increased $26.0
million at December 31, 1997, as compared to December 31, 1996, as a result of
the Savings Bank's ability to increase interest-earning assets faster than the
Savings Bank's ability to fund those assets with deposits. The borrowings have
maturities ranging from overnight to approximately six years (See Notes to
Consolidated Financial Statements --- Note G-Borrowings). Management anticipates
it will continue to utilize borrowings to fund its growth in interest-earning
assets in 1998.
40
<PAGE>
Stockholders' Equity. First Northern's stockholders' equity to total assets
ratio at December 31, 1997, was 11.1%, as compared to 11.4% at December 31,
1996. First Northern employs methods which are intended to increase interest-
earning assets and thus reduce the percentage of equity to total assets (known
as leveraging). In addition to interest-earning asset growth, the Company has
also repurchased its stock. The first stock repurchase program, began in March
of 1996 and was completed in September 1996, resulted in the repurchase of
456,934 shares at an average cost of $7.91 per share. A second stock repurchase
program began in October 1996 authorized the repurchase of 438,114 shares. The
second stock repurchase program repurchased 60,800 shares at an average cost of
$8.62 per share before it expired in October 1997. First Northern may implement
additional stock repurchase programs in the future if it is economically
prudent.
The Wisconsin Department of Financial Institutions---Division of Savings
Institutions, which regulates the Savings Bank, requires maintenance of a
minimum of 6.00% equity to total assets. In addition, the Office of Thrift
Supervision ("OTS") capital rules require the Savings Bank to meet three
separate standards: (i) a leverage limit of core capital to adjusted total
assets of not less than three percent; (ii) tangible capital to adjusted total
assets of not less than one and one-half percent; and (iii) risk-based capital
to risk-weighted assets of eight percent. The Savings Bank meets and exceeds all
regulatory capital standards (See Notes to Consolidated Financial Statements---
Note I--Stockholders' Equity).
ASSET AND LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide liquidity
and maintain an appropriate balance between interest-earning assets and
interest-bearing liabilities. Interest rate risk is the imbalance between
interest-earning assets and interest-bearing liabilities at a given maturity or
repricing date and is commonly referred to as the interest rate gap (the "gap").
A positive gap exists when there are more assets than liabilities maturing or
repricing within the same time frame. A negative gap occurs when there are more
liabilities than assets maturing or repricing within the same time frame. The
following chart reflects First Northern's gap position as of December 31, 1997:
41
<PAGE>
<TABLE>
<CAPTION>
Cumulative GAP Position
-----------------------------------------------------
(Dollars in Thousands)
3 Months 4 to 12 1 to 5 Over
Or Less Months Years 5 Years Total
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (a) $ 71,768 $200,443 $135,655 $ 33,465 $441,331
Consumer loans (b) 53,016 54,150 44,271 7,045 158,482
Investment securities (c) 11,514 6,912 13,833 32,259
Mortgage-related securities (d) 408 1,377 9,342 480 11,607
Interest-earning deposits 324 324
-------- -------- -------- -------- --------
Total rate-sensitive assets 137,030 262,882 203,101 40,990 644,003
Interest-bearing liabilities:
Passbook accounts (e) 4,335 6,111 22,608 27,022 60,076
NOW & variable rate insured
money market accounts (e) 46,646 9,547 29,797 22,473 108,463
Time deposits (e) 65,285 176,647 68,798 310,730
Advance payments by borrowers
for taxes and insurance 1,930 1,931 3,861
Borrowings 41,302 33,900 25,525 2,550 103,277
-------- -------- -------- -------- --------
Total rate-sensitive liabilities 159,498 228,136 146,728 52,045 586,407
-------- -------- -------- -------- --------
Gap $(22,468) $ 34,746 $ 56,373 $(11,055) $ 57,596
======== ======== ======== ======== ========
Cumulative gap $(22,468) $ 12,278 $ 68,651 $ 57,596
======== ======== ======== ========
Cumulative gap as a percentage
of total assets (3.4)% 1.8% 10.3% 8.6%
==== === ==== ===
</TABLE>
(a) Excludes undisbursed loan proceeds of $10,290; includes $709 of mortgage
loans held for sale.
(b) Includes $1,410 of education loans held for sale.
(c) Includes $5,250 of FHLB stock; excludes unrealized gains or losses.
(d) Excludes unrealized gains or losses.
(e) Does not include accrued interest which totals $2,519 for all deposits.
The calculation of a gap position is subjective by nature and requires
management to make a number of assumptions as to when an asset or liability will
reprice or mature. Assumptions used in estimating the maturity/repricing amounts
and dates of the more significant asset and liability categories include: (i)
investment securities - based upon contractual maturities and if applicable,
call dates; (ii) loans and mortgage-related securities - based upon contractual
maturities, repricing date, if applicable, scheduled repayments of principal and
projected prepayments of principal based upon the Company's historical
experience; and (iii) deposits based upon contractual maturities and various
decay rates applied to the remaining deposit dollars. The decay rate, which
varies with deposit product, is based on historical decay rates of thrift
institutions.
First Northern's overall asset and liability management goal is to maximize
long-term profitability and returns to stockholders. First Northern's current
strategy is to: (i) originate and retain adjustable interest rate mortgage
loans; (ii) originate and retain 15 and 20 year fixed interest rate mortgage
loans; (iii) originate and sell 30 year fixed interest rate mortgage loans; (iv)
originate shorter maturity consumer loans; (v) emphasize the origination of
adjustable interest rate home equity loans; (vi) counsel depositors to balance
their deposits between short-, intermediate-, and long-term deposits; and (vii)
to offer new and attractive deposits and investment opportunities. In addition,
borrowings with various terms are used to reach the targeted asset/liability
mix. Currently, management's strategic goal for asset/liability management is to
maintain a cumulative one (1) year gap within a range of a positive 10% to a
negative 20%. Management believes this is an appropriate level to achieve First
Northern's long-term goals, while controlling interest rate risk.
42
<PAGE>
IMPACT OF YEAR 2000
Computer programs generally abbreviated dates by eliminating the century digits
of the year. Many resources, such as software, hardware, telephone, 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,
including First Northern, 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,
including among other things, a temporary inability to process transactions or
engage in similar normal business activities. First Northern out sources a
majority of its computer functions to a Milwaukee, Wisconsin--based company,
Fiserv, Inc. ("Fiserv"). Because year 2000 problems could affect Fiserv, and
hence the Savings Bank through its relationship with Fiserv, the Savings Bank
has discussed potential year 2000 problems with Fiserv. These discussions have
kept the Savings Bank abreast of Fiserv's progress in anticipating and
avoiding year 2000 problems that could affect First Northern's operations.
Based on recent assessments, First Northern has determined that it will be
required to modify or replace certain portions of its internal software and
hardware so that its Systems will function properly with respect to dates on or
after September 9, 1999 ("9/9/99"). It is currently anticipated that the cost
of these modifications will not exceed a total of $150,000 (pre-tax). First
Northern presently believes that with these modifications, the year 2000 will
not pose significant operational problems for its Systems. However, if such
modifications and conversions are not made, or are not completed in a timely
manner, the year 2000 could have a adverse impact on the operations of First
Northern.
First Northern has currently completed the awareness, inventory and assessment
phases of its year 2000 project. The analysis, conversion and implementation
phases are expected to be completed by late third quarter of 1998. At this
time, the analysis phase is approximately 50% completed. Systems testing and
the post implementation phase are anticipated to be completed in the fourth
quarter of 1998. First Northern expects to use internal resources to reprogram,
upgrade or replace and test its Systems.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications, are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
anticipated.
43
<PAGE>
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets, the resultant yields,
and the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates. No tax equivalent adjustments were made since First
Northern does not have any tax exempt investments. Average balances are derived
from average monthly balances. The yield on securities available-for-sale are
included in investment securities and mortgage- related securities and yields
are calculated on the historical basis. The yields and rates are established by
dividing income or expense dollars by the average balance of the asset or
liability.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET, INTEREST AND RATE PAID
Year Ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate Balance Earned/Paid Rate
-------- ----------- ------- -------- ----------- ------- -------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans $426,748 $31,443 7.37% $401,652 $28,831 7.18% $386,128 $26,982 6.99%
Consumer loans 148,614 12,529 8.43 126,177 10,725 8.50 117,899 9,948 8.44
Investment securities 29,154 1,844 6.33 25,215 1,582 6.27 24,865 1,612 6.48
Interest-earning deposits 762 45 5.91 1,220 66 5.41 1,601 100 6.25
Mortgage-related securities 11,558 735 6.36 10,344 672 6.50 5,428 383 7.06
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL 616,836 46,596 7.55 564,608 41,876 7.42 535,921 39,025 7.28
Interest-bearing liabilities:
Passbook accounts 60,057 1,322 2.20 58,744 1,313 2.24 60,367 1,498 2.48
NOW and variable rate insured
money market accounts 104,665 2,536 2.42 102,338 2,388 2.33 85,234 1,884 2.21
Time deposits 307,423 17,579 5.72 292,477 16,543 5.66 292,248 16,190 5.54
Advance payments by borrowers
for taxes and insurance 6,652 149 2.24 7,142 162 2.27 8,528 178 2.09
Borrowings 82,644 4,905 5.94 48,393 2,797 5.78 33,681 2,286 6.79
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL 561,441 26,491 4.72 509,094 23,203 4.56 480,058 22,036 4.59
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest earning assets
and interest rate spread $ 55,395 2.83% $ 55,514 2.86% $ 55,863 2.69%
======== ==== ======== ==== ======== ====
Average interest-earning
assets, net interest income
and net yield on average
interest-earning assets $616,836 $20,105 3.26% $564,608 $18,673 3.31% $535,921 $16,989 3.17%
======== ======= ==== ======== ======= ==== ======== ======= ====
Average interest-earning assets
to interest-bearing liabilities 109.9% 110.9% 111.6%
===== ===== =====
</TABLE>
(1) For the purpose of these computations, non-accruing loans and loans held-
for-sale are included in the average loan amounts outstanding.
44
<PAGE>
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
The interaction of changes in volume and rates earned or paid with regard to
interest-earning assets and interest-bearing liabilities has a significant
impact on net income between periods. The volume of interest-earning dollars in
loans and investments compared to the volume of interest-bearing dollars in
deposits and borrowings, combined with the interest rate spread, produces the
changes in net interest income between periods.
The following table sets forth the relative contribution of changes in volume
and effective interest rates on changes in net income:
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
Year Ended December 31
1997 vs 1996
--------------------------------
Increase (decrease) due to:
--------------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $763 $1,801 $ 48 $2,612
Consumer loans (88) 1,908 (16) 1,804
Investment securities 15 245 2 262
Interest-earning deposits 6 (25) (2) (21)
Mortgage-related securities (14) 79 (2) 63
---- ------ ---- ------
TOTAL $682 $4,008 $ 30 4,720
==== ====== ==== ------
Interest-bearing liabilities:
Passbook accounts $(23) $ 33 $ (1) 9
NOW and variable rate insured
money market accounts 92 54 2 148
Time deposits 175 852 9 1,036
Advance payments by borrowers
for taxes and insurance (2) (11) (13)
Borrowings 77 1,976 55 2,108
---- ------ ---- ------
TOTAL $319 $2,904 $ 65 3,288
==== ====== ==== ------
Net change in net interest income $1,432
======
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
Year Ended December 31
1996 vs 1995
---------------------------------
Increase (decrease) due to:
---------------------------------
Rate/
Rate Volume Volume Total
------ ------ ------ -------
<S> <C> <C> <C> <C>
(In Thousands)
Interest-earning assets:
Mortgage loans $ 734 $1,086 $ 29 $ 1,849
Consumer loans 71 701 5 777
Investment securities (52) 23 (1) (30)
Interest-earning deposits (13) (24) 3 (34)
Mortgage-related securities (30) 347 (28) 289
------ ------ ------ -------
TOTAL $ 710 $2,133 $ 8 2,851
====== ====== ====== -------
Interest-bearing liabilities:
Passbook accounts $ (149) $ (40) $ 4 (185)
NOW and variable rate insured
money market accounts 102 381 21 504
Time deposits 340 13 353
Advance payments by borrowers
for taxes and insurance 15 (29) (2) (16)
Borrowings (340) 1,000 (149) 511
------ ------ ----- -------
TOTAL $ (32) $1,325 $(126) 1,167
====== ====== ===== -------
Net change in net interest income $ 1,684
=======
</TABLE>
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
Year Ended December 31
1995 vs 1994
---------------------------------
Increase (decrease) due to:
---------------------------------
Rate/
Rate Volume Volume Total
------ ------ ------ -------
<S> <C> <C> <C> <C>
(In Thousands)
Interest-earning assets:
Mortgage loans $ 293 $1,379 $ 16 $1,688
Consumer loans 518 1,301 84 1,903
Investment securities 21 96 1 118
Interest-earning deposits 64 (80) (34) (50)
Mortgage-related securities 9 (51) (1) (43)
------ ------ ----- -------
TOTAL $ 905 $2,645 $ 66 3,616
====== ====== ===== -------
Interest-bearing liabilities:
Passbook accounts $ (21) $ (218) $ 3 (236)
NOW and variable rate insured
money market accounts 371 96 26 493
Time deposits 2,353 998 186 3,537
Advance payments by borrowers
for taxes and insurance (15) 7 (1) (9)
Borrowings 286 841 270 1,397
------ ------ ----- -------
TOTAL $2,974 $1,724 $ 484 5,182
====== ====== ===== -------
Net change in net interest income $(1,566)
=======
</TABLE>
46
<PAGE>
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1997 and 1996.
General. Net income increased $2,753,000 in 1997 primarily as a result of the
exclusion of the 1996 one-time SAIF special assessment of $2,856,000 pre-tax or
$1,733,000 after-tax and the continued growth of interest-earning assets which
contributed to the increase in interest income.
Interest income. Interest income on mortgage loans increased $2,612,000 as a
result of increased dollars outstanding in the mortgage loan portfolio and an
increase in the average interest rate earned. The dollar increase in the
mortgage loan portfolio resulted from an increase in adjustable interest rate
mortgage loan originations and purchases which First Northern retains in its
portfolio. The increase in the average interest rate earned resulted primarily
from interest rates being adjusted upward on existing adjustable interest rate
mortgage loans to the lesser of market interest rates or the contractual
allowable interest rate.
Interest income on consumer loans increased $1,804,000 as a result of an
increase of $22.4 million in consumer loans outstanding throughout 1997. The
average interest rate earned on the consumer loan portfolio decreased to 8.43%
in 1997 as compared to 8.50% in 1996 as a result of consumer loan originations
being originated at interest rates below the weighted average yield on the
consumer loan portfolio.
Investment securities interest and interest on mortgage-related securities rose
$262,000 and $63,000, respectively in 1997 as a result of increased dollars
outstanding. First Northern borrowed funds and reinvested those dollars into
investment securities (primarily agency securities) and mortgage-related
securities. First Northern will continue to look for profit opportunities in
1998 by borrowing and reinvesting.
Interest expense. Interest expense on deposits increased $1,193,000 as a result
of increased deposits and the cost of those deposits. Competition for deposits
within First Northern's market is strong which has increased the cost to acquire
and retain deposits. The competition for deposits is not only from other
financial institutions (banks, credit unions) but also from mutual funds and the
stock market in general. First Northern anticipates competition for deposits
will continue to be aggressive in 1998.
Borrowings, primarily from the FHLB of Chicago, continued to increase in 1997
thereby increasing the interest expense on borrowings. The growth in First
Northern's interest-earning assets outpaced its growth in deposits thereby
increasing borrowings. First Northern anticipates it will continue to borrow,
primarily from the FHLB of Chicago, to fund its growth in interest-earning
assets in 1998.
Advance payments by borrowings for taxes and insurance ("escrow") interest
expense decreased primarily as a result of lower balances in escrow accounts.
Although the number of mortgage loans with escrow accounts increased in 1997,
the average balances carried in individual escrow accounts were reduced as a
result of the Department of Housing and Urban Development ("HUD") regulation,
which requires aggregating of tax and insurance dollars within an individual's
escrow; reduction in the dollar amount of property taxes statewide (result of
funding schools via state revenues rather than property taxes); and a change in
First Northern's policy, of no longer escrowing for property insurance. The
interest rate paid on escrow accounts in 1997 was 2.83% compared to 2.91% in
1996. The escrow interest rate for 1998 is 2.83%, the same as 1997.
Provision for loan losses. First Northern expensed $320,000 for loan losses in
1997 as compared to $370,000 in 1996. The total loan loss allowance is
$3,177,000 or .53% of total loan portfolio at December 31, 1997, as compared to
$2,937,000 and .53% respectively, at December 31, 1996. Net charge-off for 1997
and 1996 were .01% of total loans.
Non-interest income. Fees on serviced loans decreased in 1997 primarily as a
result of Statement of Financial Accounting Standards ("Statement") No. 122,
"Accounting for Mortgage Servicing Rights" which amortizes a mortgage servicing
asset as a reduction to fees on serviced loans over the period of and in
proportion to the expected loan servicing fee revenue. In 1997, this
amortization amounted to $38,900.
47
<PAGE>
Deposit account service charges increased $267,000 in 1997 primarily as a result
of: (i) the increased number of NOW (checking) accounts and their associated
fees; and (ii) customer usage of CheckCard. CheckCard is a debit card where each
time the Savings Bank's CheckCard is used, a fee, which varies with each
merchant, is paid to the Savings Bank by the debit card company. The Savings
Bank promotes the use of its debit card by direct mail.
Gains on the sale of loans increased $100,000 in 1997 as a result of the
increased dollar amount of loan sales. In 1997, fixed interest rate mortgage
loan sales, primarily 30 year fixed interest rate mortgage loans, were $18.7
million as compared to $11.1 million in 1996. In addition, $2.5 million of
education loans were sold in 1997 as compared to $3.2 million in 1996.
In the third quarter of 1997, the Savings Bank sold its Seymour Branch Office
resulting in a one-time gain of $65,000. The Seymour Branch Office was sold to
another financial institution as a result of management's analysis of the growth
potential in the Seymour market area, the cost of continuing to operate the
branch office and the ability to service Seymour customers with other office
locations in West Green Bay.
Other income increased $184,000 in 1997 primarily as a result of increased
brokerage commissions earned and interest on bank owned life insurance. First
Northern has life insurance on its officers and directors to recapture its cost
of the supplemental executive retirement plan ("SERP") and directors' deferred
retirement plan. In addition, in late December 1997, First Northern purchased
additional bank owned life insurance to offset some of its future employee
benefit cost. (See "Balance Sheet Analysis--Other Assets").
Non-interest expense. Compensation, payroll taxes and other employee benefits
expense rose $537,000 in 1997 as a result of : (i) normal salary and benefit
cost increases; (ii) increased education and training costs primarily the result
of the new PC based teller system; and (iii) accrual expenses associated with
the SERP plan.
Federal insurance premiums decreased $701,000 in 1997 as a result of reduced
SAIF deposit insurance premiums and a $15,000 refund of deposit insurance
premiums from prior periods. In 1997, the Savings Bank, like other SAIF insured
financial institutions, had its SAIF insurance premium reduced to $0.065 per one
hundred dollars of assessable deposits as compared to $0.23 per one hundred
dollars of assessable deposits in 1996. This premium reduction was the result of
the special SAIF assessment charged to each SAIF insured institution in the
third quarter of 1996 to recapitalize the SAIF insurance fund. First Northern's
special assessment was $2,856,000.
Real estate tax increases, landscape maintenance and repairs to office
mechanical systems were the primary reasons for the increase of $43,000 to the
occupancy expense in 1997.
Data processing expense increased $237,000 in 1997 as a result of the purchase
and installation of a new PC based teller system. The Savings Bank completed its
installation of a new PC based teller system in the first quarter of 1997 to
further automate and improve the delivery of information and customer service.
Telephone and postage expense increased $22,000 in 1997 as a result of the
implementation of a 24 hour personal access line ("PAL") for customers. This
telephone access line allows customers, after utilizing their appropriate
security code, to transfer money between accounts or get historical information
on their accounts.
To support the growth strategy of the Savings Bank's loan and deposit
portfolios, First Northern increased its marketing expense in 1997. Competition
in First Northern's market area is such that growth in lending and deposit
volumes necessitates increased marketing.
Other expenses increased $164,000 primarily as a result of; (i) costs associated
with the operation of SFC; (ii) costs associated with the CheckCard; and (iii)
customers use of automated teller machines.
Income taxes. The effective income tax rate for 1997 was 37.7% as compared to
35.0% in 1996. The 1997 income tax rate was greater than 1996's effective income
tax rate as a result of a tax benefit received from the SAIF special assessment
paid in 1996.
48
<PAGE>
Comparison of Years Ended December 31, 1996 and 1995.
General. Net income decreased $1,307,000 in 1996 primarily as a result of a one-
time SAIF special assessment of $2,856,000 pre-tax or $1,733,000 after-tax, on
assessable deposits. In addition, 1995 net income included $391,000 of non-
recurring net income primarily from: (i) the sale of $10.5 million of education
loans for a pre-tax gain of $468,000; (ii) the sale of Federal Home Loan
Mortgage Corporation ("Freddie Mac") stock for a pre-tax gain of $318,000; and
(iii) the sale of an excess branch office property (resulting from the Prime
Federal acquisition) for a pre-tax gain of $149,000.
Interest income. Interest income on mortgage loans increased $1,849,000 as a
result of increased dollars outstanding in the mortgage loan portfolio and an
increase in the average interest rate earned. The dollar increase in the
mortgage loan portfolio resulted from the increase of adjustable interest rate
mortgage loan originations. The increase in the average interest rate earned
resulted primarily from interest rates being adjusted upward on existing
adjustable interest rate mortgage loans. At times, First Northern will not
increase interest rates on qualified adjustable interest rate mortgage loans to
the maximum allowable contractual interest rates since to do so would be
inconsistent with market rates and promote the refinancing of mortgage loans at
a lower interest rate.
Interest income on consumer loans increased $777,000 primarily as the result of
growth in the consumer loan portfolio. The yield on consumer loans increased to
8.50% from 8.44% as a result of escalations on the interest rate adjustable
portion of the consumer loan portfolio and consumer loan originations at higher
interest rates than the historical yield on the consumer loan portfolio.
Interest income on investment securities and interest-earning deposits decreased
in 1996 as a result of maturing securities and deposits and the reinvestment of
those funds at lower interest rates. In addition, the average balance of
interest-earning deposits decreased $381,000 in 1996.
Mortgage-related securities average balance increased in 1996, which resulted in
the $289,000 increase in interest income on mortgage-related securities. First
Northern, to a limited extent, borrowed funds and reinvested those monies in
mortgage-related securities. Historically, mortgage-related securities have had
higher yields than other investments with like terms.
Interest expense. Interest expense on deposits increased $672,000 in 1996 as a
result of increased deposit dollars outstanding and an increase in the cost of
deposits. Although deposits at year-end 1996 increased $8.4 million, average
deposits increased $15,710,000 in 1996.
Interest expense on borrowings increased $511,000 as a result of increased
borrowings outstanding. First Northern utilizes borrowings to supplement
deposits for the funding of loans and investments.
Interest expense on advance payments by borrowers for taxes and insurance
("escrow") decreased slightly in 1996 as a result of lower balances in escrow
accounts. Even though First Northern increased the number of loans with escrows
in 1996, the HUD regulation, which requires aggregating of tax and insurance
dollars within an individual's escrow, effectively reduces the monies needed
within escrow accounts. First Northern estimates the HUD ruling reduced escrows
by approximately $1.0 million. The interest rate paid on escrow accounts in 1996
was 2.91% as compared to 2.81% in 1995.
Provision for loan losses. First Northern expensed $370,000 in 1996 as compared
to $240,000 in 1995 primarily as a result of the increased dollars outstanding
in the loan portfolio. The total loan loss allowance is $2,937,000 which is .53%
of the total loan portfolio. Net charge-offs were .01% of total loans in 1996.
Non-interest income. Fees on serviced loans decreased slightly in 1996 as a
result of a decrease in the dollar amount of loans serviced. Loan fees and
service charges increased $8,000 primarily as the result of increases in late
charges and commissions on mortgage loans closed for others (i.e., Wisconsin
Housing and Economic Development Authority ("WHEDA") loans, State V.A. loans or
other loans).
49
<PAGE>
Deposit account service charges increased $147,000 as a result of increased
number of accounts and their associated fees and an increase in pricing for
deposit account services. First Northern periodically reviews its product
pricing in relationship to the internal cost of offering the service and
external competition and makes appropriate adjustments in its pricing of those
products or services.
Insurance commissions increased in 1996 primarily as the result of bonuses
received from insurance carriers. If First Northern obtains a predetermined
threshold of insurance sales and insurance losses are at or below another
threshold, insurance bonuses can be earned. In 1996, those insurance bonuses
amounted to $76,978 and in 1995, insurance bonuses were $50,393.
The gain on sales of loans decreased $390,000 in 1996, primarily as the result
of the sale of $10.5 million of education loans in 1995 for a pre-tax gain of
$468,000.
First Northern normally sells all of the 20 and 30 year fixed interest rate
mortgage loans and education loans it originates, in the secondary market.
Depending on pricing at the time of the sale, it may incur a gain or loss on the
sale of the mortgage loans. In 1996, First Northern sold $11.1 million of fixed
interest rate mortgage loans and $3.2 of education loans. In addition, Statement
No. 122 "Accounting for Mortgage Servicing Rights" requires First Northern to
recognize an asset for servicing rights on loans it sells and services. This
accounting change increased the gain on the sale of loans approximately $109,000
in 1996.
Management periodically reviews its securities available-for-sale for profit
opportunities. In 1996, management determined that there was more opportunity to
be gained by retaining securities and therefore, did not sell any securities. In
1995, First Northern sold Freddie Mac stock for a pre-tax gain of $318,000.
Gain on sale of assets decreased $157,000 in 1996 because in 1995 an excess
branch office property (resulting from the Prime Federal acquisition), was sold
for a pre-tax gain of $149,000.
Non-interest expense. Compensation and compensation related expenses increased
$346,000 or 5.4% in 1996 as a result of: (i) annual salary increases; (ii)
increased benefit costs; (iii) a higher cash payout of a management incentive
plan as a result of increased profitability; and (iv) increased education and
training costs. First Northern has self-funded health and dental insurance
plans, with appropriate maximum stop losses, that initially will cause a modest
increase in costs. It is anticipated, that after the initial phase-in period,
these self-funded plans will have subsequent increases that are less than
conventionally funded plans. Education and training have been emphasized by
management especially with the implementation of a new PC based teller system.
Training for the new teller system will continue throughout 1997.
Federal insurance premiums decreased in 1996 as a result of the recapitalization
of the SAIF deposit insurance fund. The SAIF deposit insurance fund
recapitalization resulted from a one-time special assessment of all SAIF
members. First Northern paid an assessment of $2,856,000. The reduction in First
Northern's SAIF deposit insurance premiums occurred in the fourth quarter of
1996 in the amount of $56,000. It is anticipated that the reduced SAIF premiums
will decrease First Northern's SAIF deposit insurance expense by approximately
$750,000 in 1997.
Occupancy costs decreased in 1996 primarily as a result of the reduction in real
estate taxes on First Northern offices and the sale of an excess branch office
property in 1995.
Data processing expense rose slightly in 1996 as a result of the implementation
of service contracts associated with the Wide Area Network ("WAN"). In 1995,
First Northern implemented a WAN and in 1996, began the implementation of a PC
based teller system.
Furniture and equipment expense increased in 1996 as a result of a portion of
the new PC based teller system being installed in 1996. The total cost of the
new teller system will be approximately $750,000 with the majority of the cost
depreciated over five years.
50
<PAGE>
Telephone and postage increased $28,000 in 1996 as a result of increased number
of mailings and the addition of the PAL line. PAL allows customers to access
their account balances or transfer money between First Northern accounts, at any
time of the day via their telephone. The increased number of mailings is the
result of increased number of accounts that First Northern services and the
offering of new services and accounts.
To increase lending and deposit volumes in 1996, First Northern also increased
its marketing expense by $20,000 in 1996. First Northern believes that growth in
lending and deposit volumes necessitates increased marketing and hence,
increased marketing costs.
First Northern incurred $108,000 of non-recurring reorganization cost with the
formation of a unitary savings and loan holding company on December 20, 1995.
The Savings Bank became a wholly-owned subsidiary of First Northern, which was
formed to permit greater flexibility in meeting its future financial and
competitive needs.
Income taxes. First Northern's effective income tax rate was 35.0% in 1996 as
compared to 37.2% in 1995. The effective income tax rate was lower in 1996 as a
result of an over-accrual of taxes in 1995.
51
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
First Northern's financial performance is impacted by, among other factors,
interest rate risk and credit risk. First Northern does not use derivatives to
mitigate its interest rate risk, or credit risk relying instead on loan review
and an adequate loan loss reserve (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by First Northern's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in market value of portfolio equity ("MVPE") and in GAP position (See
"Management's Discussion and Analysis -- Asset and Liability Management"). The
ALCO attempts to manage the various components of First Northern's balance sheet
to minimize the impact of sudden and sustained changes in interest rates on net
interest income.
First Northern's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine First
Northern's change in MVPE and First Northern's GAP analysis. If First Northern's
change to MVPE and GAP is not within the limits established by the Board, the
Board may direct management to adjust its asset and liability mix to bring
interest rate risk within Board approved limits.
In order to reduce the exposure to interest rate risk, First Northern has
developed strategies to manage its liquidity, shorten the effective maturities
of certain interest-earning assets, and increase the effective maturities of
certain interest-bearing liabilities. First Northern has focused on: (i) its
residential lending on ARMs, which generally reprice within one to three years;
(ii) its non-residential lending on adjustable or floating rate and/or short-
term loans; (iii) its investment activities on short- and medium-term
securities; (iv) maintaining and increasing its passbook and transaction deposit
accounts, which are considered to be relatively resistant to changes in interest
rates; and (v) utilizing long-term borrowings and deposit marketing programs to
adjust the term to repricing of its liabilities.
Interest rate sensitivity analysis is used to measure the Company's interest
rate risk by computing estimated changes in MVPE of its cash flows from assets,
liabilities and off-balance sheet items in the event of an increase or decrease
of 200 basis points of assumed changes in market interest rates. MVPE is equal
to the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. The Company's Board of Directors
has adopted an interest rate risk policy which establishes maximum decreases in
the MVPE of 25.0% in the event of sudden and sustained increases and decreases
in market interest rates. The following table presents the Company's projected
change in MVPE for 200 basis point shock level as of December 31, 1997 and the
Board's established limitations relating thereto. All market rate sensitive
instruments presented in this table are classified as either held to maturity or
available-for-sale. The Company has no trading securities.
<TABLE>
<CAPTION>
Change In Actual Percent Board
Interest Rate MVPE Change Change Limit
- - ------------------------- ------- ------ ------- -----
<S> <C> <C> <C> <C>
(Dollars In Thousands)
200 basis point rise $94,004 $ 921 1.0% (25.0)%
Base Scenario $93,083 $ 0 0.0% 0.0%
200 basis point decline $91,472 $1,611 (1.7)% (25.0)%
</TABLE>
The preceding table indicated that at December 31, 1997, in the event of a
sudden and sustained increase or decrease in prevailing market interest rates,
the Company's MVPE would be expected to decrease. At December 31, 1997, the
Company's estimated changes in MVPE were within the targets established by the
Board of Directors.
MVPE is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources.
52
<PAGE>
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
MVPE analysis. Actual cash flows and values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the MVPE analysis. Certain assets, such as adjustable rate loans,
which represent one of First Northern's primary loan products, have features
which restrict changes in interest rates on a short-term basis and over the life
of the assets. In addition, the proportion of adjustable interest rate loans in
First Northern's portfolio could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinancing 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
MVPE analysis. Finally, the ability of many borrowers to repay their adjustable
rate mortgage loans may decrease in the event of interest rate increases.
53
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
Board of Directors and Stockholders
First Northern Capital Corp.
We have audited the accompanying consolidated statements of financial condition
of First Northern Capital Corp. (the "Company") and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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
a reasonable assurance about whether the financial statements are free of
material misstatement. An audit also 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
January 23, 1998
Milwaukee, Wisconsin
54
<PAGE>
First Northern Capital Corp. And Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 640 $ 1,965
Interest-earning deposits 324 1,598
-------- --------
CASH AND CASH EQUIVALENTS 964 3,563
Securities available-for-sale, at fair value:
Investment securities 6,799 5,635
Mortgage-related securities 932 1,837
Securities held-to-maturity:
Investment securities (estimated fair value of
$21,313,000-1997; $16,633,000-1996) 21,231 16,583
Mortgage-related securities (estimated fair value of
$10,689,000-1997; $9,247,000-1996) 10,675 9,325
Loans held for sale 2,119 2,532
Loans receivable 593,529 553,995
Accrued interest receivable 3,646 3,295
Foreclosed properties and repossessed assets 153 189
Office properties and equipment 8,004 8,350
Federal Home Loan Bank stock 5,250 3,773
Prepaid expenses and other assets 14,394 6,426
-------- --------
$667,696 $615,503
======== ========
LIABILITIES
Deposits $481,788 $458,323
Borrowings 103,277 77,272
Advance payments by borrowers for taxes and insurance 3,861 5,447
Other liabilities 4,953 4,237
-------- --------
TOTAL LIABILITIES 593,879 545,279
STOCKHOLDERS' EQUITY
Cumulative preferred stock, $1 par value; 10,000,000
shares authorized; none outstanding
Common stock, $1 par value; 30,000,000 shares
authorized; shares issued: 9,136,104-1997 and 1996;
shares outstanding: 8,845,676-1997; 8,774,858-1996 9,136 9,136
Additional paid-in capital 9,438 9,841
Unrealized gain on securities available-for-sale,
net of taxes 614 385
Treasury stock at cost (290,428 shares-1997; 361,246
shares-1996) (2,316) (2,873)
Retained earnings 56,945 53,735
-------- --------
TOTAL STOCKHOLDERS' EQUITY 73,817 70,224
-------- --------
$667,696 $615,503
======== ========
</TABLE>
See accompanying notes.
55
<PAGE>
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
-------- -------- -------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Interest income:
Mortgage loans $ 31,443 $ 28,831 $26,982
Consumer loans 12,529 10,725 9,948
Investment securities 1,844 1,582 1,612
Interest-earning deposits 45 66 100
Mortgage-related securities 735 672 383
-------- -------- -------
TOTAL INTEREST INCOME 46,596 41,876 39,025
Interest expense:
Deposits 21,437 20,244 19,572
Borrowings 4,905 2,797 2,286
Advance payments by borrowers for taxes and insurance 149 162 178
-------- -------- -------
TOTAL INTEREST EXPENSE 26,491 23,203 22,036
-------- -------- -------
NET INTEREST INCOME 20,105 18,673 16,989
Provision for loan losses 320 370 240
-------- -------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,785 18,303 16,749
Non-interest income:
Fees for serviced loans 313 354 364
Loan fees and service charges 251 234 226
Deposit account service charges 1,227 960 813
Insurance commissions 324 320 269
Gains on sales of loans 359 259 649
Gain on sale of securities 321
Gains on sale of other assets 88 29 186
Other 714 530 382
-------- -------- -------
TOTAL NON-INTEREST INCOME 3,276 2,686 3,210
Non-interest expense:
Compensation, payroll taxes and other employee benefits 7,266 6,729 6,383
Federal insurance premiums 284 985 998
SAIF special assessment 2,856
Occupancy 875 832 849
Data processing 1,403 1,166 1,118
Furniture and equipment 480 510 526
Telephone and postage 471 449 421
Marketing 370 351 331
Reorganization costs 108
Other 2,225 2,061 1,917
-------- -------- -------
TOTAL NON-INTEREST EXPENSE 13,374 15,939 12,651
-------- -------- -------
Income before income taxes 9,687 5,050 7,308
Income taxes 3,651 1,767 2,718
-------- -------- -------
NET INCOME $ 6,036 $ 3,283 $ 4,590
======== ======== =======
BASIC NET INCOME PER SHARE $.68 $.37 $.51
======== ======== =======
DILUTED NET INCOME PER SHARE $.66 $.36 $.49
======== ======== =======
CASH DIVIDENDS PAID PER SHARE $.32 $.30 $.28
======== ======== =======
</TABLE>
See accompanying notes.
56
<PAGE>
First Northern Capital Corp. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain
on Securities
Additional Available-
Common Paid-In For-Sale, Treasury Retained
Stock Capital Net of Taxes Stock Earnings Total
--------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $8,990 $ 9,721 $233 $ $51,063 $70,007
Comprehensive income:
Net income 4,590 4,590
Other comprehensive income:
Reorganization costs (8) (8)
Change in net unrealized gain
on securities available-for-
sale, net of income taxes 82 82
------ ------- ---- ------ ------- -------
Total comprehensive income (8) 82 4,590 4,664
Cash dividends ($.28 per share) (2,534) (2,534)
Exercise of stock options 120 322 442
------ ------- ---- ------ ------- -------
Balance at December 31, 1995 9,110 10,035 315 53,119 72,579
Comprehensive income:
Net income 3,283 3,283
Other comprehensive income -
Change in net unrealized gain
on securities available-for-
sale, net of income taxes 70 70
------ ------- ---- ------ ------- -------
Total comprehensive income 70 3,283 3,353
Cash dividends ($.30 per share) (2,667) (2,667)
Retirement of common stock (8) (58) (66)
Purchase of treasury stock (3,698) (3,698)
Exercise of stock options 34 (136) 825 723
------ ------- ---- ------ ------- -------
Balance at December 31, 1996 9,136 9,841 385 (2,873) 53,735 70,224
Comprehensive income:
Net income 6,036 6,036
Other comprehensive income -
Change in net unrealized gain
on securities available-for-
sale, net of income taxes 229 229
------ ------- ---- ------ ------- -------
Total comprehensive income 229 6,036 6,265
Cash dividends ($.32 per share) (2,826) (2,826)
Purchase of treasury stock (441) (441)
Exercise of stock options (403) 998 595
------ ------- ---- ------ ------- -------
Balance at December 31, 1997 $9,136 $ 9,438 $614 $(2,316) $56,945 $73,817
====== ======= ==== ======= ======= =======
</TABLE>
See accompanying notes.
57
<PAGE>
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,036 $ 3,283 $ 4,590
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for losses on loans 320 370 240
Provision for depreciation and amortization 873 756 732
Gains on sales of loans (359) (259) (649)
Gains on sales of securities (321)
Loans originated for sale (20,746) (13,795) (14,572)
Proceeds from loan sales 21,159 14,252 22,072
Increase in interest receivable (351) (221) (235)
Increase in interest payable 165 75 599
Other (6,490) (245) 767
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 607 4,216 13,223
INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities and interest-earning deposits 6,800 11,150 10,680
Proceeds from the sale of securities 156
Purchases of investment securities (12,211) (10,782) (10,987)
Principal repayments of mortgage-related
securities 1,522 556 353
Purchases of mortgage-related securities (1,977) (5,697) (997)
Loan originations and purchases (178,455) (177,809) (118,923)
Loan principal repayments 138,492 123,723 104,503
Purchases of office properties and equipment (839) (745) (697)
Proceeds from sales of real estate 226
Purchase of Federal Home Loan Bank stock (1,477) (5) (278)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (48,145) (59,609) (15,964)
</TABLE>
See accompanying notes.
58
<PAGE>
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits $ 23,300 $ 8,294 $ 25,562
Net increase (decrease) in short-term borrowings 9,680 17,622 (38,000)
Proceeds from long-term borrowings 63,825 51,150 41,000
Repayment of long-term borrowings (46,900) (13,000) (23,000)
Proceeds from securities sold under agreement
to repurchase 1,900 1,500
Maturity of securities sold under agreement
to repurchase (2,500) (1,000) (1,900)
Cash dividends (2,826) (2,667) (2,534)
Purchase of treasury stock (441) (3,698)
Retirement of common stock (66)
Proceeds from exercise of stock options 487 650 442
Net decrease in advance payments by borrowers for
taxes and insurance (1,586) (1,103) (199)
-------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 44,939 57,682 1,371
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,599) 2,289 (1,370)
Cash and cash equivalents at beginning of year 3,563 1,274 2,644
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 964 $ 3,563 $ 1,274
======== ======== ========
SUPPLEMENTAL INFORMATION TO THE
STATEMENTS OF CASH FLOWS:
Interest credited and paid on deposits $ 21,273 $ 20,169 $ 19,151
Interest paid on borrowings 4,799 2,539 2,375
Payments for federal and state income taxes 3,212 2,193 2,826
Loans transferred to foreclosed properties and
repossessed assets 387 411 449
Loans held for investment transferred to
held for sale 11,152
</TABLE>
See accompanying notes.
59
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1997
Note A-Summary of Significant Accounting Policies
Business: First Northern Capital Corp. is a Wisconsin corporation incorporated
in August 1995 for the purpose of becoming a unitary savings and loan holding
company for First Northern Savings Bank, S.A. (the "Savings Bank"). On December
20, 1995, stockholders of the Savings Bank exchanged shares of the Savings Bank
for those of the newly formed Company. The Company and subsidiaries provide a
full range of financial services to individual customers through their branch
locations in Northeastern Wisconsin. The Company is subject to competition from
other traditional and nontraditional financial institutions and is also subject
to the regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation: The consolidated financial statements
include the accounts and operations of the Company since it became operational
(December 20, 1995) and the accounts and operations of the Savings Bank and its
wholly owned subsidiaries for the entire periods presented. Significant
intercompany accounts and transactions have been eliminated. Investment in its
fifty percent owned subsidiary, which is not material, is accounted for on the
equity method.
In preparing the consolidated financial statements in accordance with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change in the
near-term relate to the determination of the allowance for losses on loans and
the valuation of investments and real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of the allowance for losses on loans and real estate owned, management obtains
independent appraisals for significant properties.
Cash and Cash Equivalents: The Company considers its interest-earning deposits,
which have a maturity of three months or less when purchased, to be cash
equivalents
Investment and Mortgage-Related Securities Held-to-Maturity and Available-for-
Sale: Securities are classified as held-to-maturity and carried at amortized
cost if management has the intent and ability to hold the securities to
maturity. Securities not classified as held-to-maturity are designated as
available-for-sale and carried at fair value, with unrealized gains and losses
net of income taxes, reflected in stockholders' equity.
Interest and dividends are included in interest income from the related
securities as earned. Realized gains and losses are computed on a specific
identification basis and declines in value judged to be other than temporary,
are included in gains (losses) on sale of securities.
Interest on Loans: Interest income on loans is accrued and credited to
operations based on the principal amount outstanding. The accrual of interest
income is generally discontinued when a loan becomes 90 days past due as to
principal or interest and/or when, in the opinion of management, full collection
is unlikely. Management may elect to continue the accrual of interest when the
loan is in the process of collection and the value of collateral is sufficient
to cover the principal balance and accrued interest. Interest received on
nonaccrual loans generally is either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the obligation
is brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
60
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note A-Summary of Significant Accounting Policies (continued)
Loan Fees and Costs: Loan origination and commitment fees and certain direct
loan origination costs relative to loans not held for sale are being deferred.
The net amounts on loans held for investment are amortized as an adjustment of
the related loan's yield. The Company is amortizing these amounts using the
level-yield method, adjusted for prepayments, over the contractual life of the
related loans.
Loans Held for Sale: Loans held for sale generally consist of current production
of certain fixed interest rate first mortgage loans and education loans which
are recorded at the lower of aggregate cost or market value. Fees received from
the borrower are deferred and recorded as an adjustment of the sales price.
Mortgage Servicing Rights: An allocation of costs is made between loans and
their related servicing rights for loans originated with a definitive plan to
sell or securitize these loans and retain the servicing rights. The Company
recognizes a separate asset for servicing rights which effectively increases the
gain on sale of loans when the servicing rights are retained. This asset amount
is amortized over the period of and in proportion to the expected loan servicing
fee revenue as a reduction of "Fees on Serviced Loans." The unamortized balance
of the asset is carried at the lower of cost or fair value. In previous periods,
costs were fully allocated to the loan and servicing income was recognized as
received over the life of the loan.
Foreclosed Properties and Repossessed Assets: Foreclosed properties (which were
acquired by foreclosure, by deed in lieu of foreclosure or in-substance
foreclosure) and repossessed assets are carried at the lower of cost or fair
market value. Costs relating to the development and improvement of the property
are capitalized; holding period costs are charged to expense.
Allowances for Losses on Loans, Real Estate and Repossessed Assets: Allowances
for losses on loans, real estate and repossessed assets are provided based on
past experience and on prevailing market conditions. Management's evaluation of
loss considers various factors including, but not limited to, general economic
conditions, loan portfolio composition, prior loss experience, estimated sales
price, and holding and selling costs.
The Savings Bank considers loans secured by one- to four-unit residential
properties and all consumer loans as homogenous loans and therefore exempt for
purposes of measuring impairment as defined by Statement of Financial Accounting
Standards ("SFAS" or "Statement") No. 114, "Accounting by Creditors for
Impairment of a Loan," which requires that impaired loans be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
Per this definition, the Savings Bank had no impaired loans in 1997 or 1996.
Office Properties and Equipment: Office properties and equipment are recorded at
cost. When properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in income or expense, respectively.
Provisions for depreciation of office properties and equipment are computed
principally using the straight-line method. The cost of leasehold improvements
is amortized using the straight-line method over the lesser of the term of the
respective lease or estimated economic life of the improvements.
Federal Home Loan Bank Stock: Members of the Federal Home Loan Bank ("FHLB")
system are required to maintain a specified investment in FHLB stock. Because of
restricted ownership and the lack of marketability, the stock is carried at cost
which equals redemption value.
61
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note A-Summary of Significant Accounting Policies (continued)
Earnings Per Share: Earnings per share are based on the weighted average number
of shares of common stock and common stock equivalents, if dilutive, outstanding
during each year. The resulting number of shares used in computing basic
earnings per share is 8,834,937; 8,922,526; and 9,047,380 for the years ended
December 31, 1997, 1996 and 1995, respectively. The number of shares used in
computing diluted earnings per share is 9,080,237; 9,130,444; and 9,272,956,
for the years ended December 31, 1997, 1996 and 1995, respectively.
Common stock, additional paid-in capital and earnings per share amounts,
dividends per share amounts and the average number of shares outstanding for
1996 and 1995 have been restated throughout the financial statements to reflect
the two-for-one stock split in the form of a 100% stock dividend paid August 18,
1997.
Accounting Changes: The Company adopted Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
as of January 1, 1997, which provides new accounting and reporting standards for
sales, securitization and servicing of receivables and other financial assets
and extinguishments of liabilities in 1997 without significant impact to the
financial statements of the Company.
In 1997, the Company adopted Statement No. 130, "Reporting Comprehensive
Income," which establishes new rules for the reporting and display of
comprehensive income and its components in the consolidated financial
statements. The new rules require that all items that are recognized under
accounting standards as components of comprehensive income be reported with
prominence in the financial statements. Application of Statement No. 130 does
not impact amounts previously reported for net income or affect the
comparability of previously issued financial statements.
Pending Accounting Change: In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the reporting of financial information from
operating segments in annual and interim financial statements. This Statement
requires that financial information be reported on the basis that it is reported
internally for evaluating segment performance and deciding how to allocate
resources to segments. Because this Statement addresses how supplemental
financial information is disclosed in annual and interim reports, the adoption
will have no material impact on the financial statements. SFAS No. 131 will
become effective in 1998.
Reclassifications: Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentations.
62
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note B-Securities Available-For-Sale
The amortized cost and estimated fair value of securities available-for-sale are
as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1997:
U.S. Treasury Notes $5,240 $ 55 $ (3) $5,292
Asset Management Funds 505 (5) 500
FHLMC stock 33 974 1,007
------ ------ ---- ------
5,778 1,029 (8) 6,799
Mortgage-related securities 932 932
------ ------ ---- ------
$6,710 $1,029 $ (8) $7,731
====== ====== ==== ======
At December 31, 1996:
U.S. Treasury Notes $4,495 $ 22 $(15) $4,502
Asset Management Funds 476 (5) 471
FHLMC stock 33 629 662
------ ------ ---- ------
5,004 651 (20) 5,635
Mortgage-related securities 1,828 9 1,837
------ ------ ---- ------
$6,832 $ 660 $(20) $7,472
====== ====== ==== ======
</TABLE>
Proceeds from sale of securities available-for-sale in 1997, 1996 and 1995 were
$0, $0 and $347,000, respectively. Gross gains of $0, $0 and $318,000,
respectively, were realized on those sales.
At December 31, 1997, U.S. Government and agency securities available-for-sale
have maturities of less than five years.
Note C-Securities Held-to-Maturity
The amortized cost and estimated fair values of investment securities held-to-
maturity are as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
(In Thousands)
At December 31, 1997:
U.S. Government and agency
securities $21,231 $101 $(19) $21,313
======= ==== ==== =======
At December 31, 1996:
U.S. Government and agency
securities $16,583 $ 86 $(36) $16,633
======= ==== ==== =======
</TABLE>
63
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note C-Securities Held-to-Maturity (continued)
At December 31, 1997, securities held-to-maturity have the following maturities:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 7,751 $ 7,749
Due after one year through five years 12,480 12,563
Due after five years through ten years 1,000 1,001
------- -------
$21,231 $21,313
======= =======
</TABLE>
The amortized cost and estimated fair values of mortgage-related securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------- ------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1997:
Federal Home Loan Mortgage
Corporation $ 6,259 $55 $ (36) $ 6,278
Federal National Mortgage
Association 3,647 19 (28) 3,638
Other 769 4 773
------- --- ----- -------
$10,675 $78 $ (64) $10,689
======= === ===== =======
At December 31, 1996:
Federal Home Loan Mortgage
Corporation $ 4,715 $46 $ (89) $ 4,672
Federal National Mortgage
Association 3,730 17 (56) 3,691
Other 880 4 884
------- --- ----- -------
$ 9,325 $67 $(145) $ 9,247
======= === ===== =======
</TABLE>
64
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Note D-Loans Receivable
Loans receivable consist of the following:
December 31
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
First mortgage loans:
One- to four-family residential $393,563 $376,189
Five or more family residential 24,506 20,154
Commercial real estate 9,269 9,975
Construction, primarily one-family residential 21,348 18,007
Other 2,226 1,900
-------- --------
450,912 426,225
Consumer loans:
Consumer 18,200 18,179
Second mortgage 68,596 59,148
Automobile 70,276 60,339
-------- --------
157,072 137,666
-------- --------
607,984 563,891
Less:
Undisbursed loan proceeds 10,290 5,942
Allowance for losses on loans 3,177 2,937
Unearned loan fees 988 1,017
-------- --------
14,455 9,896
-------- --------
$593,529 $553,995
======== ========
</TABLE>
The majority of the Company's lending activity is with borrowers within its
primary market area of Northeastern Wisconsin.
Loans serviced for investors were $126,979,904, $120,999,358 and $123,901,000 at
December 31, 1997, 1996 and 1995, respectively. These loans are not reflected
in the consolidated financial statements.
Activity in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $2,937 $2,608 $2,400
Provisions 320 370 240
Charge-offs (101) (66) (71)
Recoveries 21 25 39
------ ------ ------
BALANCE AT END OF YEAR $3,177 $2,937 $2,608
====== ====== ======
</TABLE>
65
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note E-Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Land $ 2,045 $ 2,117
Office buildings 7,032 7,177
Furniture and equipment 2,896 2,822
Leasehold improvements 74 74
------- -------
12,047 12,190
Less allowance for depreciation and amortization 4,043 3,840
------- -------
$ 8,004 $ 8,350
======= =======
</TABLE>
Note F-Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Passbook $ 60,076 $ 57,354
Negotiable Order of Withdrawal accounts:
Non-interest bearing 19,764 18,010
Interest bearing 36,861 36,224
Variable rate insured money market accounts 51,838 50,017
Certificate accounts:
2.00% to 3.99% 1,262 1,801
4.00% to 4.99% 32,483 40,720
5.00% to 5.99% 130,822 191,536
6.00% to 7.99% 146,115 60,283
8.00% to 10.99% 48 24
-------- --------
310,730 294,364
-------- --------
479,269 455,969
Accrued interest 2,519 2,354
-------- --------
$481,788 $458,323
======== ========
Weighted average interest rate 4.61% 4.42%
======== ========
</TABLE>
66
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note F-Deposits (continued)
Aggregate annual maturities of certificate accounts at December 31, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
Maturities during the twelve
months ending December 31:
<S> <C>
1998 $213,580
1999 69,444
2000 9,265
2001 18,152
2002 289
--------
$310,730
========
</TABLE>
Deposit accounts with balances greater than $100,000 were $54,528,000 and
$37,751,000 at December 31, 1997 and 1996, respectively.
67
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note G-Borrowings
Borrowings consist of the following:
<TABLE>
<CAPTION>
Interest Rate at
December 31 December 31
---------------- ------------------
Notes Payable to Maturity Date 1997 1996 1997 1996
- - ---------------------------- ------------------ ----- ----- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FHLB On demand 6.92% 6.95% $ 26,065 $17,255
Federal Reserve Bank On demand 5.27% 5.18% 1,237 367
FHLB February 16, 1997 5.08% 12,500
FHLB March 18, 1997 5.51% 3,000
FHLB May 20, 1997 5.71% 2,000
Reverse repurchase agreement June 20, 1997 5.50% 1,000
FHLB July 29, 1997 5.40% 5,000
FHLB August 7, 1997 5.72% 1,900
FHLB September 15, 1997 6.04% 2,000
Reverse repurchase agreement November 1, 1997 5.75% 500
FHLB November 2, 1997 5.85% 3,000
FHLB January 16, 1998 5.87% 1,000
FHLB May 27, 1998 5.74% 5.74% 5,000 5,000
FHLB June 21, 1998 6.12% 6.12% 5,000 5,000
Reverse repurchase agreement August 20, 1998 5.85% 400
FHLB September 13, 1998 6.18% 6.18% 3,000 3,000
FHLB October 2, 1998 6.08% 6.08% 5,000 5,000
FHLB October 5, 1998 5.65% 5,000
Reverse repurchase agreement November 2, 1998 5.75% 500
FHLB November 19, 1998 6.23% 2,000
FHLB March 28, 1999 6.12% 6.12% 2,000 2,000
FHLB April 30, 1999 5.90% 5,000
FHLB June 2, 1999 6.25% 2,200
FHLB October 16, 1999 6.15% 6.15% 2,000 2,000
FHLB February 21, 2000 5.48% 5,000
FHLB April 29, 2000 6.19% 6.19% 2,700 2,700
FHLB August 4, 2000 6.19% 3,575
FHLB July 9, 2001 6.26% 2,000
FHLB November 12, 2001 6.18% 6.18% 4,050 4,050
FHLB June 18, 2002 5.71% 3,000
FHLB August 8, 2002 5.26% 3,000
FHLB October 2, 2002 6.11% 2,000
FHLB October 30, 2002 5.20% 5,000
FHLB October 30, 2002 5.33% 5,000
FHLB June 11, 2003 6.00% 2,550
-------- -------
$103,277 $77,272
======== =======
</TABLE>
68
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note G-Borrowings (continued)
The Company is required to maintain unencumbered mortgage loans in its portfolio
aggregating at least 167% of the amount of outstanding advances from the FHLB as
collateral. In addition, these advances are collateralized by FHLB stock.
The Company is a Treasury Tax & Loan (TT&L) depository for the Federal Reserve
Bank (FRB), and as such, it accepts TT&L deposits. The Company is allowed to
borrow these deposits from the FRB until they are called. Collateral with a face
value greater than or equal to the amount borrowed is pledged on a condition of
borrowing TT&L deposits. At December 31, 1997 and 1996, U.S. government
securities with a face value of $1,500,000 and $1,000,000, respectively, were
pledged as collateral.
The Company enters into sales of securities under agreements to repurchase
(reverse purchase agreements). Fixed-coupon reverse purchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as a borrowing in the statements of financial condition. The dollar
amount of securities underlying the agreements remains in the asset accounts.
Reverse repurchase agreements entered into with local municipalities did not
require delivery of securities. At December 31, 1997 and 1996, these agreements
had a weighted average interest rate of 5.79% and 5.59%, respectively, and
mature within one year. At December 31, 1997 and 1996, securities sold under
agreements to repurchase involve U.S. government or agency securities with a
book value, including accrued interest, of $1,020,759 and $1,510,190 and a
market value of $1,017,578 and $1,497,657, respectively. Based on the month-end
balances, securities sold under agreements to repurchase averaged $1,216,667,
$1,041,667 and $2,466,667 during the years ended December 31, 1997, 1996 and
1995, respectively. The maximum amount outstanding at any month end during the
years ended December 31, 1997, 1996 and 1995 was $1,500,000, $1,500,000 and
$2,900,000, respectively.
Note H-Income Taxes
The Savings Bank qualified under provisions of the Internal Revenue Code which
previously permitted it to deduct from taxable income an allowance for bad debts
that differs from the provision for such losses charged to income for financial
reporting purposes. At December 31, 1997, retained earnings included
approximately $15,883,000 for which no provision for income tax has been made.
Income taxes of approximately $6,228,000 would be imposed if the Savings Bank
were to use these retained earnings for any purpose other than to absorb bad
debt losses.
The income tax provision for the years ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $2,802 $1,616 $2,163
State 577 324 454
------ ------ ------
3,379 1,940 2,617
Deferred:
Federal 209 (132) 88
State 63 (41) 13
------ ------ ------
272 (173) 101
------ ------ ------
$3,651 $1,767 $2,718
====== ====== ======
</TABLE>
69
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note H-Income Taxes (continued)
The provision for income taxes, for the years ended December 31, differs from
that computed at the federal statutory corporate tax rate, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Income before income taxes $9,687 $5,050 $7,308
====== ====== ======
Income tax expense at federal statutory
rate of 34% $3,294 $1,717 $2,485
Increase (decrease) resulting from:
Nondeductible reorganization costs 26
State income taxes, net of federal
income tax benefits 422 187 310
Other (65) (137) (103)
------ ------ ------
$3,651 $1,767 $2,718
====== ====== ======
</TABLE>
The components of the Savings Bank's deferred tax assets and liabilities as of
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 747 $ 619
Deferred loan fees 197
Loss reserves 554 460
Excess servicing gains 49 62
Tax net operating loss carryforwards 5
Other 6 10
------ ------
Total deferred tax assets 1,356 1,353
Deferred tax liabilities:
Deferred loan fees 140
Mortgage servicing rights 97
FHLB stock dividends 160 160
Depreciation 265 231
Unrealized securities gains 400 251
Other 32 28
------ ------
Total deferred tax liabilities 1,094 670
------ ------
$ 262 $ 683
====== ======
</TABLE>
There is no valuation allowance recognized for financial statement purposes at
December 31, 1997 or 1996.
70
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note I-Stockholders' Equity
The Board of Directors of the Company is authorized to issue cumulative
preferred stock in series and to establish the relative rights and preferences
of each series with respect to rates, redemption rights and prices, conversion
terms, voluntary liquidation rights and voting powers. Cumulative preferred
stock will rank prior to common stock as to dividend rights and liquidation
preferences. Under Wisconsin State law, preferred stockholders are entitled to
vote as a separate class or series in certain circumstances, including any
amendment which would adversely change the specific terms of such series of
stock or which would create or enlarge any class or series ranking prior thereto
in rights and preferences (excluding substituting the surviving entity in a
merger or consolidation of the Company).
The Savings Bank is subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possible additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under federal
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
As of December 31, 1997, the most recent notification from the Office of Thrift
Supervision ("OTS"), categorized the Savings Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as well-
capitalized, the Savings Bank must maintain minimum tangible, core and risk-
based ratios as set forth in the table. As a state-chartered savings
institution, the Savings Bank is also subject to a minimum capital requirement
of the State of Wisconsin. Management believes, as of December 31, 1997, that
the Savings Bank meets all capital adequacy requirements to which it is subject.
There are no conditions or events since that notification that management
believes have changed the Savings Bank's category.
The Savings Bank's required and actual capital amounts and ratios are presented
in the following table.
<TABLE>
<CAPTION>
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Tangible capital
(to tangible assets) $68,073 10.2% $ 9,988 1.5% N/A N/A
Core capital
(to tangible assets) 68,073 10.2% 19,976 3.0% $33,293 5.0%
Risk-based capital
(to risk-weighted assets) 71,250 16.7% 34,232 8.0% 42,790 10.0%
State of Wisconsin capital
(to total assets) 72,318 10.8% 40,062 6.0% 40,062 6.0%
</TABLE>
71
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note I-Stockholders' Equity (continued)
<TABLE>
<CAPTION>
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Tangible capital
(to tangible assets) $64,489 10.5% $ 9,204 1.5% N/A N/A
Core capital
(to tangible assets) 64,489 10.5% 18,409 3.0% $30,681 5.0%
Risk-based capital
(to risk-weighted assets) 67,426 17.8% 30,295 8.0% 37,868 10.0%
State of Wisconsin capital
(to total assets) 68,754 11.2% 36,915 6.0% 36,930 6.0%
</TABLE>
Following are reconciliations of the Bank's stockholder's equity under generally
accepted accounting principles to capital as determined by regulations:
<TABLE>
<CAPTION>
Risk- State of
Core Based Wisconsin
Capital Capital Capital
------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
As of December 31, 1997:
Regulatory capital $68,073 $71,250 $72,318
Unrealized gains on available-for-sale securities 614 614
Investments in and advances to non-includable
subsidiaries 454 454
Allowance for loan losses (3,177) (3,177)
------- ------- -------
Stockholders' equity (First Northern Savings Bank
only) $69,141 $69,141 $69,141
======= ======= =======
Stockholders' equity (First Northern Capital Corp.) $73,817 $73,817 $73,817
======= ======= =======
</TABLE>
72
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note I-Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Risk- State of
Core Based Wisconsin
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
As of December 31, 1996:
Regulatory capital $64,959 $67,896 $68,754
Unrealized gains on available-for-sale securities 385 385
Investments in and advances to non-includable
subsidiaries 473 473
Allowance for loan losses (2,937) (2,937)
------- ------- -------
Stockholders' equity (First Northern Savings Bank
only) $65,817 $65,817 $65,817
======= ======= =======
Stockholders' equity (First Northern Capital Corp.) $70,224 $70,224 $70,224
======= ======= =======
</TABLE>
Applicable rules and regulations of the OTS impose limitations on dividends by
the Savings Bank. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days advance notice. The
safe harbor amounts are based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend are permitted to make capital
distributions during any calendar year up to the greater of (1) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
institution's capital requirements at the beginning of the calendar year, or (2)
75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution which does not meet its capital
requirement before or after a proposed dividend.
Unlike the Savings Bank, the Company is not subject to these regulatory capital
requirements or restrictions on the payment of dividends to its stockholders.
However, the source of its future dividends may depend upon dividends from the
Savings Bank.
On March 20, 1996, the Company began its first stock repurchase program for its
common stock to be used for the exercise of stock options. During 1996, the
Company purchased 456,934 shares at an average price of $7.91 under this
program. A second repurchase program began on October 18, 1996, for up to
438,114 shares to be used for general corporate purposes, including the exercise
of stock options under the stock option plans. The second repurchase program has
been extended to October 20, 1997. A total of 60,800 shares were purchased in
the second stock repurchase program at an average price of $8.62 per share.
Note J-Employee Benefit Plans
The Savings Bank has a participatory defined contribution 401(k) plan. The plan
covers all employees with at least one year of service and who have attained age
twenty-one. The Savings Bank will annually contribute 3% of an employee's cash
compensation and may fund an additional discretionary dollar amount to the plan.
The Savings Bank will contribute 50% of the first 4% of the amount of each
employee's contribution. In addition, each employee may contribute amounts in
excess of the 4% limit, up to the lesser of 15% of compensation or federal tax
limits, with no Savings Bank participation.
73
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note J-Employee Benefit Plans (continued)
The Savings Bank has an unfunded deferred retirement plan for directors. All
members of the Savings Bank's Board of Directors are eligible under the plan.
Directors of a predecessor institution and who are members of an advisory board
are eligible at the discretion of the Savings Bank. Currently, there are four
advisory board members in the plan. The Savings Bank also has supplemental
retirement plans for several of its executives. Total expense relating to these
plans for 1997, 1996 and 1995 was $513,000, $265,000 and $256,000, respectively.
The Savings Bank does not, as a policy, offer post-retirement benefits other
than the plans discussed above.
The Company has elected to continue following Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee and directors' stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation" requires
the use of option valuation models that were not developed for use in valuing
the Company's employee and directors' stock options. Under APB No. 25, because
the exercise price of the Company's employee and directors' stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company has a "1984 Stock Option Plan," a "1989 Executive Stock Option
Plan," a "1989 Directors' Stock Option Plan," a "1989 Stock Option and Incentive
Plan," a "1992 Advisory Directors' Stock Option Plan," a "1994 Directors' Stock
Option Plan" and a "1994 Executive Stock Plan." The 1984 Stock Option Plan had
480,000 shares of common stock reserved for the grant of incentive stock options
or non-qualified stock options to key officers and non-qualified stock options
to directors. The plan provided that incentive stock option prices will not be
less than the fair market value of the stock at the grant date and non-incentive
stock option prices will not be less than 95% nor more than 99% of the fair
value of the stock at the grant date. The 1989 Executive Stock Option Plan had
340,000 shares of common stock reserved for executive officers and the 1989
Directors' Stock Option Plan had 140,000 shares of common stock reserved for
directors. The executive officers were granted incentive stock options. Since
February 1, 1990, directors received 3,600 non-qualified stock options annually
on the first business day of February. The option price for the directors' non-
qualified stock options will be equal to the fair value on the date of the
grant. Upon a director's retirement, the options become fully vested. All
options vest at a maximum of 33 1/3% for each year of completed continuous
service from the grant date and expire no later than ten years from the grant
date.
The 1989 Stock Option and Incentive Plan was acquired with the merger of Prime
Federal and has 22,750 stock options outstanding at December 31, 1997. All
options are vested and will expire no later than ten years from date of grant.
The 1992 Advisory Directors' Stock Option Plan had 48,000 shares of common stock
reserved for the grant of non-qualified stock options to certain advisory
directors. The option price for the 1992 Advisory Directors non-qualified stock
options will be equal to the fair market value on the date of the grant. All
options vest at the end of one year and expire no later than ten years from the
grant date. All options in the 1992 Advisory Directors' Stock Option Plan were
granted in 1992.
The 1994 Directors' Stock Option Plan has 140,000 shares of common stock
reserved for directors. Directors will receive 3,600 non-qualified stock options
on the first business day of February of each year. The option price for the
directors' non-qualified stock options will be equal to the fair market value on
the date of the grant. All options vest at a maximum of 33 1/3% for each year.
Upon a director's retirement, the options become fully vested. Options expire no
later than ten years from the grant date.
74
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note J-Employee Benefit Plans (continued)
The 1994 Executive Stock Plan has 760,000 shares of common stock reserved for
the grant of incentive stock options, nonqualified stock options, stock
appreciation rights ("SARs") or restrictive stock to key executives. The plan
provides that incentive stock option prices will not be less than the fair value
of the stock at the grant date and non-incentive stock option prices will not be
less than 90% of the fair value of the stock at the grant date.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for both 1997 and 1996: risk-free interest rates of 5.75%; dividend
yield of 4.5%; volatility factors of the expected market price of the Company's
common stock of .202; and a weighted-average expected life of the options of 7
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and directors' stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee and directors' stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------ ------
(Dollars In Thousands, Except
Per Share Amounts)
<S> <C> <C>
Net income $6,036 $3,283
====== ======
Pro forma net income $5,953 $3,220
====== ======
Pro forma basic earnings per share $ 0.67 $ 0.36
====== ======
Pro forma diluted earnings per share $ 0.65 $ 0.35
====== ======
</TABLE>
75
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note J-Employee Benefit Plans (continued)
A summary of stock option transactions for each of the three years in the period
ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance at January 1, 1995 697,126 $4.38
Granted 108,000 6.38
Exercised (120,342) 3.67
Expired (21,200) 7.27
-------- -----
Balance at December 31, 1995 663,584 4.74
Granted 91,600 7.88
Exercised (139,564) 4.66
Expired (8,000) 7.88
-------- -----
Balance at December 31, 1996 607,620 5.19
Granted 113,000 8.36
Exercised (121,618) 4.09
-------- -----
Balance at December 31, 1997 599,002 $6.02
======== =====
</TABLE>
At December 31, 1997, options for 432,937 shares were exercisable.
Note K-Commitments
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 and forward
commitments to sell mortgage loans. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statements of financial condition. The contract amounts
reflect the extent of involvement the Company has in the particular class of
financial instrument. The Company's maximum exposure to credit loss for
commitments to extend credit is represented by the contract amount of those
instruments. For forward commitments to sell loans, the contract amounts do not
represent exposure to credit loss.
76
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note K-Commitments (continued)
Off-balance-sheet financial instruments whose contract amounts represent credit
and/or interest rate risk are as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed rate $ 1,279 $ 511
Adjustable 1,665 1,983
Commitments to sell mortgage loans 699 974
Unused overdraft protection lines of credit for
checking accounts 1,488 1,476
Unused equity lines of credit 13,950 12,869
Unused commercial real estate line of credit 906 237
Unused credit card lines of credit 3,364 2,636
</TABLE>
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 credit worthiness of each customer on a
case-by-case basis. The Company generally extends credit only on a secured
basis. Collateral obtained varies, but consists primarily of one- to four-family
residences.
Commitments to extend credit on a fixed rate basis expose the Company to a
certain amount of interest rate risk if market rates of interest substantially
increase during the commitment period.
Forward commitments to sell mortgage loans represent commitments obtained by the
Company from a secondary market agency to purchase mortgages from the Company
and place them in a mortgage-related security pool with a defined yield.
Commitments to sell loans expose the Company to interest rate risk if market
rates of interest decrease during the commitment period. Commitments to sell
loans are made to mitigate interest rate risk on the existing loan portfolio and
on commitments to extend credit.
The Company neither has any investments in nor is a party to transactions
involving derivative investments, except mortgage-related securities which
represent minimal risk to the Company.
Note L-Fair Values of Financial Instruments
Disclosure of fair value information about financial instruments, whether or not
recognized in the statements of financial condition, for which it is practicable
to estimate that value, follows. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement to the instrument. Certain financial instruments and all
nonfinancial instruments are excluded. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
77
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note L-Fair Values of Financial Instruments (continued)
The Company does not routinely measure the market value of financial instruments
because such measurements represent point-in-time estimates of value. It is not
the intent of the Company to liquidate and therefore realize the difference
between market value and carrying value and, even if it were, there is no
assurance that the estimated market values could be realized. Thus, the
information presented is not particularly relevant to predicting the Company's
future earnings or cash flows.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statements of
financial condition for cash and interest-earning deposits approximate those
assets' fair values.
Securities available-for-sale and held-to-maturity: Fair values for securities
available-for-sale and held-to-maturity 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 held for sale and 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 all other loans are estimated
using fair market value of readily saleable loans or discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Accrued interest receivable and payable: The carrying amounts reported in the
statements of financial condition approximate their fair values.
Federal Home Loan Bank stock: Fair value for the Federal Home Loan Bank stock is
based on its redeemable (carrying) value, as a market for this stock is
restricted.
Mortgage servicing rights: The estimated fair value of mortgage servicing rights
is determined using discounted cash flow techniques. Expected cash flows are
adjusted for estimated future loan prepayments as provided by third-party market
sources or as estimated by management using historical prepayment expense.
Servicing rights originated prior to December 31, 1996 are not included.
Deposits: The fair values disclosed for interest and non-interest bearing
negotiable order of withdrawal accounts, passbook accounts and money market
accounts and advances from borrowers for taxes and insurance are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The fair values for fixed-rate certificates of deposit are
estimated using discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
Borrowings: The fair values disclosed for borrowings are based on a discounted
cash flows basis using current offering rates of like-term borrowings.
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet
instruments (lending commitments and unused lines of credit) are based on quoted
market prices or fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the credit standing of
the related counter party. The fair value of these off-balance-sheet items
approximates the recorded amounts of the related fees and is not material at
December 31, 1997 or 1996.
78
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note L-Fair Values of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments
consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 964 $ 964 $ 3,563 $ 3,563
======== ======== ======== ========
Investment and mortgage-related
securities available-for-sale $ 7,731 $ 7,731 $ 7,472 $ 7,472
======== ======== ======== ========
Investment and mortgage-related
securities held-to-maturity $ 31,906 $ 32,002 $ 25,908 $ 25,880
======== ======== ======== ========
Loans receivable $598,825 $599,254 $559,464 $555,171
======== ======== ======== ========
Accrued interest receivable $ 3,646 $ 3,646 $ 3,295 $ 3,295
======== ======== ======== ========
Mortgage servicing rights $ 247 $ 247 $ 101 $ 101
======== ======== ======== ========
Federal Home Loan Bank stock $ 5,250 $ 5,250 $ 3,773 $ 3,773
======== ======== ======== ========
Deposits $479,269 $458,374 $455,969 $416,775
======== ======== ======== ========
Accrued interest on deposits $ 2,519 $ 2,519 $ 2,354 $ 2,354
======== ======== ======== ========
Borrowings $103,277 $103,162 $ 77,272 $ 77,109
======== ======== ======== ========
</TABLE>
79
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note M-Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition as of December 31,
1997 and 1996, and the condensed statements of income and cash flows for the
three years then ended should be read only in conjunction with the consolidated
financial statements and the notes thereto. The statements of income and cash
flows have been presented as if the Company had been formed as of January 1,
1995.
First Northern Capital Corp.
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 4,527 $ 4,337
Equity in net assets of subsidiaries 69,141 65,817
Other assets 156 74
------- -------
$73,824 $70,228
======= =======
LIABILITIES
Other liabilities $ 7 $ 4
------- -------
TOTAL LIABILITIES 7 4
STOCKHOLDERS' EQUITY
Common stock 9,136 9,136
Additional paid-in capital 9,438 9,841
Unrealized gain on securities available-for-sale,
net of taxes 614 385
Treasury stock, at cost (2,316) (2,873)
Retained earnings 56,945 53,735
------- -------
TOTAL STOCKHOLDERS' EQUITY 73,817 70,224
------- -------
$73,824 $70,228
======= =======
</TABLE>
80
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note M-Condensed Parent Company Only Financial Statements (continued)
First Northern Capital Corp.
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Interest income:
Interest-earning deposits $ 170 $ 46
Non-interest income:
Equity in net income of Savings Bank 6,010 3,373 $4,590
Non-interest expense:
Compensation 12 13
Postage 4
Other 115 119
------ ------ ------
Total non-interest expense 127 136
------ ------ ------
Income before taxes 6,053 3,283 4,590
Income taxes 17
------ ------ ------
Net income $6,036 $3,283 $4,590
====== ====== ======
</TABLE>
81
<PAGE>
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note M-Condensed Parent Company Only Financial Statements (continued)
First Northern Capital Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,036 $ 3,283 $ 4,590
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Less equity in earnings of the Savings Bank (6,010) (3,373) (4,590)
Increase in other liabilities 29 2 1
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 55 (88) 1
------- ------- -------
FINANCING ACTIVITIES:
Cash dividends received 2,915 10,205
Cash dividends paid (2,826) (2,667)
Purchase of treasury stock (441) (3,698)
Retirement of common stock (66)
Proceeds from exercise of stock options 487 650
------- ------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 135 4,424
------- ------- -------
INCREASE IN CASH AND CASH
EQUIVALENTS 190 4,336 1
Cash and cash equivalents at beginning of period 4,337 1
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 4,527 $ 4,337 $ 1
======= ======= =======
SUPPLEMENTAL INFORMATION TO THE
STATEMENT OF CASH FLOWS:
Investment in subsidiary swapped for shares in
First Northern Capital Corp. $71,859
</TABLE>
82
<PAGE>
QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth certain unaudited quarterly data for the periods
indicated:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In Thousands Except per Share Amounts)
<S> <C> <C> <C> <C>
1997 (unaudited):
Interest income $11,094 $11,415 $11,857 $12,230
Interest expense 6,231 6,444 6,802 7,014
------- ------- ------- -------
Net interest income 4,863 4,971 5,055 5,216
Provisions for loan losses 75 65 90 90
------- ------- ------- -------
Net income after provisions
for loan losses 4,788 4,906 4,965 5,126
Total non-interest income 736 782 852 906
Total non-interest expenses 3,295 3,334 3,270 3,475
------- ------- ------- -------
Income before income taxes 2,229 2,354 2,547 2,557
Income taxes 844 895 961 951
------- ------- ------- -------
Net income $ 1,385 $ 1,459 $ 1,586 $ 1,606
======= ======= ======= =======
Basic net income per share $ 0.16 $ 0.16 $ 0.18 $ 0.18
======= ======= ======= =======
Diluted net income per share $ 0.15 $ 0.16 $ 0.17 $ 0.18
======= ======= ======= =======
1996 (unaudited):
Interest income $10,046 $10,160 $10,632 $11,038
Interest expense 5,616 5,591 5,862 6,134
------- ------- ------- -------
Net interest income 4,430 4,569 4,770 4,904
Provisions for loan losses 60 60 90 160
------- ------- ------- -------
Net income after provisions
for loan losses 4,370 4,509 4,680 4,744
Total non-interest income 596 667 669 754
Total non-interest expenses 3,310 3,297 6,073/1/ 3,259
------- ------- ------- -------
Income (loss) before income taxes 1,656 1,879 (724) 2,239
Income taxes 567 698 (333) 835
------- ------- ------- -------
Net income (loss) $ 1,089 $ 1,181 $ (391)/2/ $ 1,404
======= ======= ======= =======
Basic net income (loss) per share $ 0.12 $ 0.13 $ (0.04)/2/ $ 0.16
======= ======= ======= =======
Diluted net income (loss) per share $ 0.12 $ 0.13 $ (0.04)/2/ $ 0.16
======= ======= ======= =======
</TABLE>
(1) Includes one-time SAIF special assessment of $2,856,000.
(2) Without the one-time SAIF special assessment net income would have been
$1,342,000 ($0.15 basic earnings per share or $0.15 diluted earnings per
share).
83
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
84
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
Information in response to this item is incorporated herein by reference to
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance"(which does not contain disclosure of any filing delinquencies) in
First Northern's definitive Proxy Statement for its Annual Meeting of
Stockholders on April 22, 1998 (the "1998 Annual Meeting Proxy Statement"). See
also "Executive Officers of the Registrant" in Part I hereof, which is
incorporated herein by reference.
Item 11. Executive Compensation.
Information in response to this item is incorporated by reference to "Director
Compensation", "Executive Compensation" (other than "Compensation Committee
Report on Executive Compensation" thereunder, which is not incorporated by
reference herein) and "Compensation Committee Interlocks and Insider
Participation" in the 1998 Annual Meeting Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information in response to this item is incorporated by reference to "Security
Ownership of Certain Beneficial Owners and Management" in the 1998 Annual
Meeting Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information in response to this item is incorporated by reference to
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions with First Northern" in the 1998 Annual Meeting Proxy Statement.
85
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of the Report:
1. and 2. Financial Statements and Financial Statement Schedules.
The following consolidated financial statements of First Northern Capital Corp.
and subsidiaries are filed as part of this report under Item 8, "Financial
Statements and Supplementary Data":
Consolidated Statements of Financial Condition - December 31, 1997 and
1996.
Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Changes In Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
3. Exhibits. See Exhibit Index following the signature page of this report,
which is incorporated herein by reference. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
report is identified in the Exhibit Index by two asterisks following its
exhibit number.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of 1997.
86
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
FIRST NORTHERN CAPITAL CORP.
March 16, 1998
By: /s/Michael D. Meeuwsen
-------------------------------------
Michael D. Meeuwsen
President and Chief Executive Officer
-----------------
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Michael D.
Meeuwsen, J. Gus Swoboda and Rick B. Colberg, or any of them, as attorneys-in-
fact with full power of substitution, to execute in the name and on behalf of
such person, individually, and in each capacity stated below or otherwise, and
to file, any and all amendments to this report.
----------------
Pursuant to the requirements of 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 indicated.*
<TABLE>
<CAPTION>
Signature and Title
-------------------
<S> <C>
/s/J. Gus Swoboda /s/Thomas J. Lopina, Sr.
- - ---------------------------------------------- ------------------------------------------------
J. Gus Swoboda, Chairman and Director Thomas J. Lopina, Sr., Director
/s/Michael D. Meeuwsen /s/Robert J. Mettner
- - ---------------------------------------------- ------------------------------------------------
Michael D. Meeuwsen, President, Robert J. Mettner, Director
Chief Executive Officer and Director
(Principal Executive Officer)
/s/Rick B. Colberg /s/Robert B. Olson
- - ---------------------------------------------- ------------------------------------------------
Rick B. Colberg, Vice President, Treasurer Robert B. Olson, Director
and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Howard M. Frankenthal /s/Richard C. Smits
- - ---------------------------------------------- ------------------------------------------------
Howard M. Frankenthal, Director Richard C. Smits, Director
- - ---------------
* Each of the above signatures is affixed as of March 16, 1998.
</TABLE>
87
<PAGE>
FIRST NORTHERN CAPITAL CORP.
(the "Registrant")
Commission File No. 0-27982
EXHIBIT INDEX
TO
1997 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description by Reference to Herewith
- - ------ ----------- ------------------- -------------------
<C> <S> <C> <C>
2.1 Agreement and Plan of Reorganization, Appendix A to the Proxy
dated as of August 16, 1995, by and among Statement/Prospectus dated
Registrant, First Northern Savings Bank, November 2, 1995 (the "Proxy
S.A. (the "Savings Bank") and FNGB Interim Statement/Prospectus") contained in
Savings Bank, FSB the Registrant's Registration
Statement on Form S-4 (No. 33-98088)
filed on October 13, 1995, as amended
by Pre-Effective Amendment No. 1
filed on October 31, 1995 ( the "1995
Registration Statement")
3.1 Articles of Incorporation Appendix B to the Proxy
Statement/Prospectus
3.2 Bylaws Appendix C to the Proxy
Statement/Prospectus
4*
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Registrant's Current
Report on Form 8-K dated as of
December 20, 1995 (the "12/20/95 8-K")
4.2 Articles III, IV and VII of Articles of See Exhibit 3.1 above
Incorporation
10.1** Management Incentive Plan of Savings Exhibit 10.1 to Registrant's 12/20/95
Bank 12/20/95 8-K
10.2.1** Employment Agreements, dated as of January Exhibit 10.2.1 to Registrant's
2, 1990, between Savings Bank and each of 12/20/95 8-K
the following executive officers of Savings
Bank: Michael D. Meeuwsen; Rick B. Colberg;
Marla J. Carr; Richard E. Aicher; and John
E. Steinbrecker
10.2.2** Employment Agreement, dated as of January 2, Exhibit 10.2.2 to Registrant's
1992, between Savings Bank and Dale J. 12/20/95 8-K
Darmody
</TABLE>
EI-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description by Reference to Herewith
- - ------- ----------- ------------------- --------
<C> <S> <C> <C>
10.2.3** Employment Agreement, dated as of Exhibit 10.2.3 to Registrant's
June 12, 1992, between Savings Bank and 12/20/95 8-K
Ralph N. Marten
10.2.4** Employment Agreements, dated as of April 28, Exhibit 10.2.4 to Registrant's
1994, between Savings Bank and each of the 12/20/95 8-K
following executive officers of Savings
Bank: Charles R. Albers; Richard C. Smits;
and Steven L. Wilmet
10.2.5** Amendments No. 1 to Employment Agreements, Exhibit (10)-2.5 to Registrant's 1995
dated as of September 20, 1995, between Registration Statement
Savings Bank and each of the following
executive officers of Savings Bank: Michael
D. Meeuwsen; Rick B. Colberg; Marla J. Carr;
Richard E. Aicher; John E. Steinbrecker;
Dale J. Darmody; Ralph N. Marten; Charles R.
Albers; Richard C. Smits; and Steven L.
Wilmet
10.3** Non-Qualified Deferred Retirement Plan for Exhibit 10.3 to Registrant's
Directors of Savings Bank 12/20/95 8-K
10.4.1** 1984 Stock Option Plan (assumed by Exhibit 10.4.1 to Registrant's
Registrant) 12/20/95 8-K
10.4.2** 1989 Executive Stock Option Plan (assumed by Exhibit 10.4.2 to Registrant's
Registrant) 12/20/95 8-K
10.4.3** 1989 Directors' Stock Option Plan (assumed Exhibit 10.4.3 to Registrant's
by Registrant) 12/20/95 8-K
10.4.4** 1989 Stock Option and Incentive Plan Exhibit 10.4.4 to Registrant's
(assumed by Registrant) 12/20/95 8-K
10.4.5** 1994 Executive Stock Plan (assumed by Exhibit 10.4.5 to Registrant's
Registrant) 12/20/95 8-K
10.4.6** 1994 Directors' Stock Option Plan (assumed Exhibit 10.4.6 to Registrant's
by Registrant) 12/20/95 8-K
10.5.1** Executive Employee Salary Continuation Exhibit 10.5.1 to Registrant's
Agreement, dated July 15, 1986, between 12/20/95 8-K
Savings Bank (as successor to New London
Savings and Loan Association) and Ralph N.
Marten
10.5.2** Amendment No. 1 to Executive Employee Salary Exhibit (10)-5.2 to Registrant's 1995
Continuation Agreement, dated as of Registration Statement
September 20, 1995, between Savings Bank and
Ralph N. Marten
10.5.3** Salary Continuation Agreement, dated as of Exhibit 10.5.3 to Registrant's
April 28, 1994, between Savings Bank and 12/20/95 8-K
Richard C. Smits
</TABLE>
EI-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description by Reference to Herewith
- - ---------- ----------- ------------------- --------
<C> <S> <C> <C>
10.5.4** Amendment No. 1 to Salary Continuation Exhibit (10)-5.4 to Registrant's
Agreement, dated as of September 20, 1995, 1995 Registration Statement
between Savings Bank and Richard C. Smits
10.6.1** Supplemental Retirement Agreements, dated as Exhibit 10.6.1 to Registrant's
of January 1, 1994, between Savings Bank and 12/20/95 8-K
each of the following executive officers of
Savings Bank: Richard E. Aicher; Marla J.
Carr; Rick B. Colberg; Dale J. Darmody;
Michael D. Meeuwsen; and John E. Steinbrecker
10.6.2** Supplemental Retirement Agreement, dated as Exhibit (10)-6.2 to Registrant's
of January 1, 1995, between Savings Bank and 1995 Registration Statement
Richard C. Smits
10.6.3** Amendments No. 1 to Supplemental Retirement Exhibit (10)-6.3 to Registrant's
Agreements, dated as of September 20, 1995, 1995 Registration Statement
between Savings Bank and each of the
following executive officers of Savings
Bank: Richard E. Aicher; Marla J. Carr;
Rick B. Colberg; Dale J. Darmody; Michael D.
Meeuwsen; John E. Steinbrecker and Richard
C. Smits
10.7 Agreements in connection with acquisition of Exhibit 10.7 to Registrant's
50% stock interest in Savings Financial 12/20/95 8-K
Corporation
11.1 Statement regarding computation of per share
earnings X
21.1 List of Subsidiaries of Registrant Exhibit 21.1 to Registrant's
12/20/95 8-K
23.1 Consent of Ernst & Young LLP, Registrant's
independent auditors X
24.1 Power of Attorney, contained in the
signature page of this Report X
27.1 Financial Data Schedule, which is submitted X
electronically to the Securities and
Exchange Commission for information only and
not filed.
</TABLE>
- - -------------------------
* Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant agrees
to furnish to the SEC, upon request, a copy of any unfiled instrument
defining the rights of security holders.
** Management contracts and executive compensation plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
EI-3
<PAGE>
Exhibit 11.1
(1997 10-K)
First Northern Capital Corp.
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
BASIC:
Weighted average common shares
outstanding during each period 8,834,937 8,922,526 9,047,380
========== ========== ==========
DILUTED:
Weighted average common shares
outstanding during each period 8,834,937 8,922,526 9,047,380
Incremental share relating to:
Dilutive stock options outstanding at
end of each period (1) 245,300 207,918 225,576
---------- ---------- ----------
9,080,237 9,130,444 9,272,956
========== ========== ==========
NET INCOME FOR EACH PERIOD $6,036,000 $3,283,000 $4,590,000
NET INCOME PER COMMON
SHARE AMOUNTS:
Basic $0.68 $0.37 $0.51
Diluted $0.66 $0.36 $0.49
</TABLE>
- - --------------
Notes:
(1) Based on treasury stock method using average market price.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements No.
333-1326 on Form S-3 dated February 13, 1996, related to the Dividend
Reinvestment Plan; No. 33-80853 on Form S-8, dated December 28, 1995, related to
the 1984 Stock Option Plan; No. 33-80847 on Form S-8, dated December 28, 1995,
related to the 1989 Executive Stock Option Plan; No. 33-80851 on Form S-8, dated
December 28, 1995, related to the 1989 Directors' Stock Option Plan; No.
33-80857 on Form S-8, dated December 28, 1995, related to the 1989 Stock Option
and Incentive Plan; No. 33-80859 on Form S-8, dated December 28, 1995, related
to the 1994 Executive Stock Plan; No. 33-80861 on Form S-8, dated December 28,
1995, related to the 1994 Directors' Stock Option Plan; and No. 33-80863 on Form
S-8 dated December 28, 1995, related to the First Northern Savings Bank, S.A.
401(k) Savings Plan and the related Prospectuses constituting a part thereof of
our report dated January 23, 1998, with respect to the consolidated financial
statements of First Northern Capital Corp. included in the annual report (Form
10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
---------------------
Milwaukee, Wisconsin
March 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 640
<INT-BEARING-DEPOSITS> 324
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,731
<INVESTMENTS-CARRYING> 31,906
<INVESTMENTS-MARKET> 32,002
<LOANS> 598,925
<ALLOWANCE> 3,177
<TOTAL-ASSETS> 667,696
<DEPOSITS> 481,788
<SHORT-TERM> 27,302
<LIABILITIES-OTHER> 4,953
<LONG-TERM> 75,975
<COMMON> 9,136
0
0
<OTHER-SE> 64,681
<TOTAL-LIABILITIES-AND-EQUITY> 667,696
<INTEREST-LOAN> 43,972
<INTEREST-INVEST> 2,624
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,596
<INTEREST-DEPOSIT> 21,437
<INTEREST-EXPENSE> 26,491
<INTEREST-INCOME-NET> 20,105
<LOAN-LOSSES> 320
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,374
<INCOME-PRETAX> 9,687
<INCOME-PRE-EXTRAORDINARY> 9,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,036
<EPS-PRIMARY> .68
<EPS-DILUTED> .66
<YIELD-ACTUAL> 3.26
<LOANS-NON> 440
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,937
<CHARGE-OFFS> 101
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 3,177
<ALLOWANCE-DOMESTIC> 3,177
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
