SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-27982
FIRST NORTHERN CAPITAL CORP.
Exact name of registrant as specified in its charter)
WISCONSIN 39-1830142
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 North Monroe Avenue
P.O. Box 23100
Green Bay, WI 54305-3100
(920) 437-7101
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
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, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock $1.00
par value per share, was 8,704,959 shares, at July 30, 1999.
<PAGE>
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1.
Financial Statements Page No.
Unaudited Consolidated Statements of Financial
Condition as of June 30, 1999
and December 31, 1998 3
Unaudited Consolidated Statements of Income
for the Three Months Ended
June 30, 1999 and June 30, 1998 4
Unaudited Consolidated Statements of Income
for the Six Months Ended
June 30, 1999 and June 30, 1998 5
Unaudited Consolidated Statement of
Changes in Stockholders' Equity
for the Six Months Ended
June 30, 1999 and June 30, 1998 6
Unaudited Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1999 and June 30, 1998 7
Notes to Unaudited Consolidated
Financial Statement 8 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 29
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(In Thousands)
ASSETS
<S> <C> <C>
Cash $ 4,044 $ 6,350
Interest-earning deposits 206 861
-------- --------
CASH AND CASH EQUIVALENTS 4,250 7,211
Securities available-for-sale, at fair value
Investment securities 9,556 9,205
Mortgage-related securities 3,846 996
Securities held-to-maturity
Investment securities
(estimated fair value of
$24,861,000 - 1999;
$23,935,000 - 1998) 25,140 23,741
Mortgage-related securities
(estimated fair value of
$11,743,000 - 1999;
$11,594,000 - 1998) 11,752 11,522
Loans held for sale 464 3,075
Loans receivable 669,848 631,739
Accrued interest receivable 3,907 3,686
Foreclosed properties and repossessed assets 52 106
Office properties and equipment 7,415 7,573
Federal Home Loan Bank stock 5,750 5,250
Life insurance policies 13,021 12,514
Prepaid expense and other assets 3,893 3,095
-------- --------
$758,894 $719,713
======== ========
LIABILITIES
Deposits $551,100 $542,372
Borrowings 118,158 91,977
Advance payments by borrowers for
taxes and insurance 6,916 3,433
Other liabilities 5,897 5,838
-------- --------
TOTAL LIABILITIES 682,071 643,620
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; share issued:
9,134,735 - 1999 and 1998 shares
outstanding: 8,704,959 - 1999;
8,764,945 - 1998 9,135 9,135
Additional paid-in capital 8,835 9,126
Unrealized gains on securities
available-for-sale, net of taxes 726 960
Treasury stock at cost
(429,776 shares - 1999;
369,790 shares - 1998) (4,366) (3,710)
Retained earnings 62,493 60,582
-------- --------
TOTAL STOCKHOLDERS' EQUITY 76,823 76,093
-------- --------
$758,894 $719,713
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
June 30
1999 1998
(In Thousands,
Except Per Share Amounts)
<S> <C> <C>
Interest income:
Loans $11,944 $11,567
Investment securities 559 504
Interest-earning deposits 23 26
Mortgage-related securities 210 152
------- -------
TOTAL INTEREST INCOME 12,736 12,249
Interest expense:
Deposits 5,776 5,743
Borrowings 1,389 1,364
Advance payments by borrowers
for taxes and insurance 30 29
------- -------
TOTAL INTEREST EXPENSE 7,195 7,136
------- -------
NET INTEREST INCOME 5,541 5,113
Provision for loan losses 114 105
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,427 5,008
Non-interest income:
Fees on serviced loans 45 56
Loan fees and service charges 64 78
Deposit account service charges 336 316
Insurance commissions 101 62
Gains on sales of loans 140 258
Other 347 322
------- -------
TOTAL NON-INTEREST INCOME 1,033 1,092
Non-interest expense:
Compensation, payroll taxes and
other employee benefits 1,964 1,864
Federal insurance premiums 79 75
Occupancy 209 215
Data processing 399 371
Furniture and equipment 97 118
Telephone and postage 100 110
Marketing 99 139
Other 721 599
------- -------
TOTAL NON-INTEREST EXPENSE 3,668 3,491
INCOME BEFORE INCOME TAXES 2,792 2,609
Income taxes 917 879
------- -------
NET INCOME $ 1,875 $ 1,730
======= =======
BASIC NET INCOME PER SHARE $0.21 $0.19
===== =====
DILUTED NET INCOME PER SHARE $0.21 $0.19
===== =====
CASH DIVIDENDS PAID PER SHARE $0.10 $0.09
===== =====
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
(In Thousands,
Except Per Share Amounts)
<S> <C> <C>
Interest income:
Loans $23,678 $23,026
Investment securities 1,104 1,001
Interest-earning deposits 41 42
Mortgage-related securities 395 327
------- -------
TOTAL INTEREST INCOME 25,218 24,396
Interest expense:
Deposits 11,506 11,280
Borrowings 2,787 2,894
Advance payments by borrowers
for taxes and insurance 42 41
------- -------
TOTAL INTEREST EXPENSE 14,335 14,215
------- -------
NET INTEREST INCOME 10,883 10,181
Provision for loan losses 174 210
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,709 9,971
Non-interest income:
Fees on serviced loans 81 100
Loan fees and service charges 117 136
Deposit account service charges 652 615
Insurance commissions 161 169
Gains on sales of loans 308 454
Other 634 606
------- -------
TOTAL NON-INTEREST INCOME 1,953 2,080
Non-interest expense:
Compensation, payroll taxes and
other employee benefits 3,818 3,671
Federal insurance premiums 160 151
Occupancy 450 448
Data processing 790 735
Furniture and equipment 200 228
Telephone and postage 221 236
Marketing 214 237
Other 1,303 1,180
------- -------
TOTAL NON-INTEREST EXPENSE 7,156 6,886
INCOME BEFORE INCOME TAXES 5,506 5,165
Income taxes 1,840 1,806
------- -------
NET INCOME $ 3,666 $ 3,359
======= =======
BASIC NET INCOME PER SHARE $0.42 $0.38
===== =====
DILUTED NET INCOME PER SHARE $0.41 $0.37
===== =====
CASH DIVIDENDS PAID PER SHARE $0.20 $0.18
===== =====
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF 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)
For the Six Months Ended June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1999 $9,135 $9,126 $ 960 $(3,710) $60,582 $76,093
Comprehensive income:
Net income 3,666 3,666
Other Comprehensive
Income:
Change in net
unrealized gains
on securities
available-for-
sale, net of
income taxes (234) (234)
Total comprehensive
income 3,432
Cash dividends
($.20 per share) (1,755) (1,755)
Purchase of
treasury stock (1,151) (1,151)
Exercise of
stock options (291) 495 204
------ ------ ----- ------- ------- -------
Balance at
June 30, 1999 $9,135 $8,835 $ 726 $(4,366) $62,493 $76,823
====== ====== ===== ======= ======= =======
For the Six Months Ended June 30, 1998
Balance at
January 1, 1998 $9,136 $9,438 $614 $(2,316) $56,945 $73,817
Comprehensive income:
Net income 3,359 3,359
Other Comprehensive
Income:
Change in net
unrealized gains
on securities
available-for-
sale, net of
income taxes 74 74
-------
Total comprehensive
income 3,433
Cash dividends
($.18 per share) (1,606) (1,606)
Retirement of
common stock (1) (17) (18)
Purchase of
treasury stock (1,028) (1,028)
Exercise of
stock options (207) 817 610
------ ------ ---- ------- ------- -------
Balance at
June 30, 1998 $9,135 $9,214 $688 $(2,527) $58,698 $75,208
====== ====== ==== ======= ======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
(In Thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,666 $ 3,359
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for losses on loans 174 210
Provision for depreciation and amortization 424 428
Gains on sales of loans (308) (454)
Loans originated for sale (15,767) (29,362)
Proceeds from loan sales 18,686 29,934
(Increase) decrease in interest receivable (221) 42
Increase (decrease) in interest payable (38) 279
Other (1,111) (779)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,505 3,657
INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities and interest-earning deposits 8,057 8,657
Purchases of investment securities (9,962) (11,029)
Principal repayments of mortgage-related securities 1,273 2,096
Purchases of mortgage-related securities (4,473)
Net increase in loans receivable (38,323) (16,188)
Purchases of office properties and equipment (266) (218)
(Purchase) sale of Federal Home Loan Bank stock (500) 250
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (44,194) (16,432)
FINANCING ACTIVITIES:
Net increase in deposits 8,766 25,756
Net increase (decrease) in short-term borrowings 19,188 (15,971)
Proceeds from long term borrowings 20,195 19,800
Repayments of long term borrowings (13,202) (11,000)
Cash dividend paid (1,755) (1,606)
Purchase of treasury stock (1,151) (1,028)
Retirement of common stock (18)
Proceeds from exercise of stock options 204 610
Net increase in advance payments by
borrowers for taxes and insurance 3,483 2,753
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,728 19,296
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,961) 6,521
Cash and cash equivalents at beginning of period 7,211 964
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,250 $ 7,485
======== ========
Supplemental Information to the Statement of Cash Flows:
Interest credited and paid on deposits $11,468 $11,039
Interest paid on borrowings 2,726 2,888
Payments for federal and state income taxes 1,970 2,147
Loans transferred to foreclosed properties
and repossessed assets 143 225
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
1. The consolidated financial statements include the accounts of
First Northern Capital Corp. ("First Northern" or the "Company")
and its wholly-owned subsidiary First Northern Savings Bank, S.A.
and its subsidiaries (collectively, the "Savings Bank"): Great
Northern Financial Services Corporation ("GNFSC"), First Northern
Investments Incorporated ("FNII"), Keystone Financial Services,
Incorporated ("Keystone") and First Northern Financial Services,
Incorporated. All significant intercompany balances and
transactions have been eliminated according to generally accepted
accounting principles. The Savings Bank's ownership of Savings
Financial Corporation ("SFC"), a 50% owned subsidiary, is
accounted for by the equity method.
2. The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information, Rule 10-01 of
Regulation S-X and the instructions to Form 10-Q. The financial
statements do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial information. In the opinion of First
Northern, the accompanying Unaudited Consolidated Statements of
Financial Condition, Unaudited Consolidated Statements of Income,
Unaudited Consolidated Statement of Changes in Stockholders'
Equity and Unaudited Consolidated Statements of Cash Flows
contain all adjustments, which are of a normal recurring nature,
necessary to present fairly the consolidated financial position
of the Company and subsidiaries at June 30, 1999 and December 31,
1998, the results of their income for the three and six months
ended June 30, 1999 and 1998, the changes in stockholders' equity
for the six months ended June 30, 1999 and 1998, and their cash
flows for the six months ended June 30, 1999 and 1998, the
accompanying Unaudited Consolidated Financial Statements and
related notes should be read in conjunction with First
Northern's 1998 Annual Report on Form 10-K and operating results
for the three or six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for
the year ending December 31, 1999.
<PAGE>
3. Securities Available-for-Sale
The amortized cost and estimated fair values of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
(In Thousands)
At June 30, 1999:
<S> <C> <C> <C> <C>
Asset Management Funds $ 549 $ (11) $ 538
Federal Home Loan Mortgage
Corporation stock 33 $1,359 1,392
Northwest Equities
Corporation stock 111 3 114
U.S. government and
agency securities 7,533 33 (54) 7,512
------- ------ ---- -------
8,226 1,395 (65) 9,556
Mortgage-related securities 3,969 (123) 3,846
------- ------ ---- -------
$12,195 $1,272 $(65) $13,402
======= ====== ==== =======
At December 31, 1998:
Asset Management Funds $ 535 $(2) $ 533
Federal Home Loan Mortgage
Corporation stock 33 $1,514 1,547
U.S. government and
agency securities 7,041 88 (4) 7,125
------- ------ --- -------
7,609 1,602 (6) 9,205
Mortgage-related securities 998 (2) 996
------- ------ --- -------
$8,607 $1,602 $(8) $10,201
====== ====== === =======
</TABLE>
<PAGE>
4. Securities Held-to-Maturity
The amortized cost and estimated fair values of investment
ecurities held-to-maturity, which consist of U.S. government and
agency securities, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
At June 30, 1999 $25,140 $45 $(324) $24,861
======= === ===== =======
At December 31, 1998 $23,741 $205 $(11) $23,935
======= ==== ==== =======
</TABLE>
At June 30, 1999, these investment securities have the following maturities:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
(In Thousands)
<S> <C> <C>
Due in one year or less $ 4,962 $ 4,975
Due after one year through 5 years 17,436 17,254
Due after 5 years through 10 years 2,742 2,632
------- -------
$25,140 $24,861
======= =======
</TABLE>
The amortized cost and estimated fair values of mortgage-related securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
At June 30, 1999:
Federal Home Loan
Mortgage Corporation $ 7,047 $32 $(32) $ 7,047
Federal National
Mortgage Association 4,705 6 (15) 4,696
------- --- ---- -------
$11,752 $38 $(47) $11,743
======= === ==== =======
At December 31, 1998:
Federal Home Loan
Mortgage Corporation $ 7,347 $61 $ 7,408
Federal National
Mortgage Association 4,175 19 $(8) 4,186
------- --- --- -------
$11,522 $80 $(8) $11,594
======= === === =======
</TABLE>
<PAGE>
5. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
(In Thousands)
<S> <C> <C>
First mortgage loans:
One to four family residential $435,162 $416,974
Five or more family residential 33,056 32,013
Commercial real estate 9,137 7,546
Construction-residential 31,645 25,467
Construction-commercial 9,680 4,470
Other 3,478 3,129
-------- --------
522,158 489,599
Consumer loans:
Consumer 20,070 18,416
Second mortgage 71,793 66,426
Automobile 81,868 73,502
-------- --------
173,731 158,344
Commercial loans 2,765
-------- --------
698,654 647,943
Less:
Undisbursed loan proceeds 24,351 11,750
Allowance for losses 3,657 3,531
Unearned loan fees 798 923
-------- --------
28,806 16,204
-------- --------
$669,848 $631,739
======== ========
</TABLE>
6. The weighted average number of shares outstanding, including
common stock equivalents, for the three months ended June 30, 1999
and 1998 were 8,901,033 and 9,151,623 and for the six months ended
June 30, 1999 and 1998, were 8,943,369 and 9,160,170, respectively.
7. Certain amounts in 1998 financial statements have been reclassified
to conform to the 1999 presentations
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and
Results of Operations.
CAUTIONARY FACTORS
This 10-Q contains 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.
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; unforeseen costs and consequences of the
Year 2000 problem; and changes in the quality or composition of the Savings
Bank's and FNII's loan and investment portfolios.
FINANCIAL CONDITION
BALANCE SHEET
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased $3.0 million
at June 30, 1999, as compared to December 31, 1998, primarily because the
June 30th reporting period did not end on a Friday. If the end of a reporting
period ends on a Friday or near a holiday, customers tend to increase deposits
to their demand deposit accounts thereby increasing cash. Any cash that is not
immediately needed to fund loans or operations is invested in overnight
interest-earning deposits or used to repay short-term borrowings.
SECURITIES AVAILABLE-FOR-SALE. Investment securities available-for-sale
increased $0.4 million as of June 30, 1999, as compared to December 31, 1998,
primarily as the result of the reinvestment of maturing securities and the
interest earnings on securities being invested.
Mortgage-related securities available-for-sale increased $2.9 million at
June 30, 1999, as compared to December 31, 1998, as a result of purchases of
additional mortgage-related securities.
SECURITIES HELD-TO-MATURITY. Investment securities held-to-maturity increased
$1.4 million primarily as a result of purchases of U.S. Government and agency
securities.
Mortgage-related securities held-to-maturity increased $0.2 million as a result
of purchases of mortgage-related securities.
LOANS HELD FOR SALE. At June 30, 1999, First Northern had $0.5 million of
fixed interest rate mortgage and education loans classified as held for sale.
First Northern originates and sells most of its thirty (30) year fixed
interest rate mortgage loans and all of its education loans. Fifteen (15)
year and twenty (20) year fixed interest rate mortgage loan originations are
retained in First Northern's loan portfolio.
LOANS RECEIVABLE. Loans receivable increased $38.1 million at June 30, 1999,
as compared to December 31, 1998, as a result of: (i) mortgage loan
originations and purchases; (ii) reduced prepayments or refinancing of
mortgage loans; (iii) increased automobile and second mortgage loan
originations; and (iv) the initiation of a commercial lending program.
Loan originations and purchases are as follows:
LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(In Thousands) (In Thousands)
Mortgage loans originated and purchased:
<S> <C> <C> <C> <C>
Construction $ 20,822 $13,788 $ 29,643 $ 17,800
Loans on existing property 18,365 20,609 27,072 30,795
Refinancing 18,124 25,415 47,326 63,194
Other loans 1,238 327 1,479 623
-------- ------- -------- --------
Total mortgage loans originated
and purchased 58,549 60,139 105,520 112,412
Consumer loans originated and purchased:
Consumer 4,697 4,134 6,450 5,949
Second mortgage 15,261 12,153 24,390 20,215
Automobile 20,412 12,696 32,269 23,989
Education 71 88 1,021 1,034
-------- ------- -------- --------
Total consumer loans originated
and purchased 40,441 29,071 64,130 51,187
Commercial loans 2,887 2,887
-------- ------- -------- --------
Total loans originated and purchased $101,877 $89,210 $172,537 $163,599
======== ======= ======== ========
</TABLE>
Mortgage loan originations and purchases decreased $1.6 million for the second
quarter of 1999 and $6.9 million for the first six months of 1999, as compared
to the same period in 1998, primarily as the result of decreased refinancing
of existing First Northern mortgage loans. Construction loan originations
primarily increased as a result of increased construction activity in First
Northern's market. Although total mortgage loan originations decreased for the
second quarter of 1999 and for the first six months of 1999, the mortgage loan
portfolio outstanding increased $26.0 million (before deductions for
undisbursed loan proceeds, allowance for loan losses and unearned loan fees)
for the second quarter of 1999 and $32.6 million for the first six months of
1999. The increased mortgage loan portfolio for both periods was primarily
the result of: (i) increased adjustable interest mortgage loan originations;
(ii) reduced prepayments of principal on outstanding loans; and (iii) reduced
refinancing of existing mortgage loans. All of which is likely attributable
to the increase in interest rates on fixed interest rate mortgage loans.
First Northern added commercial banking services to its existing product lines
in the second quarter of 1999. To manage the commercial banking department,
First Northern hired a commercial loan manager with 20 years of commercial
banking experience. At June 30, 1999, First Northern's commercial loan
portfolio outstanding was at $2.8 million and management anticipates that this
segment of its loan portfolio will continue to increase. Management believes
commercial banking will assist First Northern to further its interest earning
asset growth and to assist in its interest rate spread management.
Consumer loan originations and purchases increased $11.4 million in the
second quarter of 1999 and $12.9 million for the first six months of 1999
as compared to the same periods in 1998, primarily as the result of the
increase in second mortgage loan originations and indirect automobile
originations from SFC. Second mortgage originations have increased as a
result of: (i) management's emphasis; (ii) increased marketing; and (iii) the
use of an introductory interest rate for a line-of-credit product secured by a
second mortgage. SFC increased its automobile originations by continued
personalized service and competitive interest rates.
LOAN SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Mortgage Loans $6,753 $15,496 $16,392 $27,240
Education Loans 1,985 1,420 1,986 2,240
------ ------- ------- -------
Total Loans Sold $8,738 $16,916 $18,378 $29,480
====== ======= ======= =======
</TABLE>
Loans sold in the second quarter of 1999 and in the six months ended
June 30, 1999, as compared to the same periods in 1998 decreased as a result
of the reduction in 30 year fixed interest rate mortgage loan originations.
First Northern retains all adjustable interest rate mortgage loan originations
in its portfolio; retains the majority of 15 and 20 year fixed interest rate
mortgage loans; and sells most 30 year fixed interest rate mortgage loans in
the secondary market. First Northern is contractually committed to sell its
current education loan portfolio as well as, future originations.
OFFICE PROPERTIES AND EQUIPMENT. First Northern anticipates that it will
enter into a lease for approximately 14,000 square feet of office space in
the third quarter of 1999. This office space will centralize the loan
servicing, origination processing, information systems, marketing and
customer support services departments. The additional leased space is
needed to accommodate growth in these areas. Anticipated total annual cost
of this office space and its associated equipment is approximately $152,000
(after-tax).
LIFE INSURANCE POLICIES. Life insurance policies or bank owned life insurance
("BOLI") increased $0.5 million in the first six months of 1999 as a result
of the increased value of the policies. BOLI is long-term life insurance on
the lives of certain current and past Savings Bank employees where the
insurance policy benefits and ownership are retained by the Savings Bank.
The cash value accumulation on BOLI is permanently tax deferred if the policy
is held to the participant's death. Management believes this is an effective
method to help offset a portion of future employee costs.
DEPOSITS. Deposits increased $8.7 million for the first six months of 1999
as a result of offering competitive interest rates and the acquisition of
"jumbo" (certificates of deposit in excess of $100,000) deposits.
Jumbo deposits consist of wholesale, retail and municipal deposits and at
times, jumbo deposits are a cheaper source of funds than retail deposits or
borrowing. First Northern's total jumbo deposits were $40.8 million at
June 30, 1999.
BORROWINGS. Federal Home Loan Bank ("FHLB") borrowings increased $26.2
million in the first six months of 1999, primarily to fund purchases of
investment securities and the growth of the loan portfolio. First Northern
will borrow monies if borrowing is a less costly form of funding for loans and
investments than acquiring deposits. First Northern anticipates that it will
continue to utilize borrowings in 1999 if borrowings incrementally add to the
overall profitability of the Company.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE. Advance payments by
borrowers for taxes and insurance ("escrow") increased $3.5 million at
June 30, 1999, as compared to December 31, 1998. The increase in escrow
dollars was the result of the payments received for First Northern's
customers' escrow accounts and increased number of escrow accounts.
STOCKHOLDERS' EQUITY. First Northern paid a cash dividend of $0.10 per share
on May 14, 1999, to stockholders of record on April 30, 1999. The increase
of $0.01 per share represents an 11.1% increase over the second quarter of
1998 cash dividend of $0.09 per share.
On March 20, 1998, First Northern approved a third stock repurchase program
to repurchase up to 446,101 shares (5% of total shares outstanding) in the
open market. These repurchased shares will be used to satisfy exercises of
stock options. On March 19, 1999, the third stock repurchase program was
extended to March 20, 2000, or until the authorized number of shares or dollar
amount is used. At June 30, 1999, 282,200 shares had been purchased at an
average price of $12.34 per share.
<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:
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
At June 30 At December 31
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Non-accrual mortgage loans $534 $223
Non-accrual consumer loans 108 123
---- ----
Total non-performing loans 642 346
Properties subject to foreclosure 68
Foreclosed properties and
repossessed assets 52 38
---- ----
Total non-performing assets $694 $452
==== ====
Non-performing assets as a percent
of total loans 0.10% 0.05%
==== ====
Non-performing loans as a percent
of total assets 0.09% 0.06%
==== ====
</TABLE>
Total non-performing loans decreased as of June 30, 1999, as compared to
December 31, 1998, primarily as a result of a decrease in non-performing
mortgage loans. Management believes non-performing loans and assets,
expressed as a percentage of total loans and assets, are far below state and
national averages for financial institutions. There are no accruing, material
loans which, at June 30, 1999, management has reason to believe will become
non-performing or result in potential losses.
In addition, management believes that the Savings Bank's allowance for loan
losses 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. Furthermore, various
regulatory agencies, as an integral part of their examination process,
periodically review First Northern's allowances for losses on loans and real
estate owned. Such agencies may require First Northern to recognize additions
to the allowances based on the agencies' judgement of information available
to them at the time of their examination.
All of First Northern's loans are domestic, meaning the loans are secured by
real estate or other collateral located in the continental United States.
<PAGE>
A summary of the allowance for losses is shown below.
LOAN LOSS ALLOWANCE
<TABLE>
<CAPTION>
At and for the At and for the
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
(Dollars in Thousands)
<S> <C> <C>
Mortgage Loans:
Balance at the beginning
of the period $1,813 $1,624
Provisions for the period 96 186
Charge-offs:
One-to-four family residential (1)
Recoveries:
One to four family residential 4
------ ------
Net recoveries 3
------ ------
Balance at the end
of the period 1,909 1,813
Consumer Loans:
Balance at the beginning
of the period 1,718 1,553
Provisions for the period 24 234
Charge-offs:
Consumer (34) (47)
Automobile (29) (52)
------ ------
Total charge-offs (63) (99)
Recoveries:
Consumer 9 7
Automobile 6 23
------ ------
Total recoveries 15 30
------ ------
Net charge-offs (48) (69)
------ ------
Balance at the end
of the period 1,694 1,718
------ ------
Commercial Loans:
Balance at the beginning
of the period
Provisions for the period 54
------ ------
Balance at the end of the period 54
------ ------
Total loan loss allowances at
the end of the period $3,657 $3,531
====== ======
Allowance as a percent of total loans 0.55% 0.56%
==== ====
Allowance as a percent of
non-performing loans 569.63% 1,020.52%
====== ========
Allowance as a percent of total assets 0.48% 0.49%
==== ====
Allowance as a percent of
non-performing assets 526.95% 770.96%
====== ======
</TABLE>
<PAGE>
IMPACT OF YEAR 2000
Historically, computer programs generally abbreviated dates by eliminating
the century digits of the year. Many resources, such as software, hardware,
telephones, voicemail, heating, ventilating and air conditioning, alarms, etc.
("Systems") are affected. These Systems were designed to assume a century
value of "19" to save memory and disk space within their programs. In
addition, many Systems use a value of "99" in a year or "99/99/99" in a date
to indicate "no date" or "any date" or even a default expiration date.
As the Year 2000 approaches, this abbreviated date mechanism within Systems
could disrupt operations at nearly every business, including First Northern,
which relies heavily on computer systems for account and other record keeping
functions. If the millennium issue were 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 mission critical computer functions to Fiserv, Inc. ("Fiserv"), a
Brookfield, Wisconsin based financial service bureau. Because of Year 2000
problems could affect Fiserv, and hence the Savings Bank through its
relationship with Fiserv, the Savings Bank has been engaged in ongoing
discussions and tests with Fiserv concerning potential Year 2000 problems.
These discussions and tests have kept the Savings Bank abreast of Fiserv's
progress in anticipating and avoiding Year 2000 problems that could affect
First Northern's operations. At June 30, 1999, Fiserv has advised First
Northern that it has fully tested and renovated its systems for Year 2000
issues. Client testing, in which First Northern participated on October 11,
1998 and February 7, 1999, revaled no unresolved issues.
Due to the interdependence of First Northern's systems with other third party
systems, there are risks of specific service outages if these parties do not
sufficiently secure their systems from Year 2000 issues. First Northern is
corresponding with these vendors regarding the Year 2000 status of their
systems. In addition to internal testing, where possible, coordinated Year
2000 testing will take place with the third party service providers that have
systems interfaced with First Northern's systems. These third parties include,
but are not limited to, telephone/data service providers, public utilities, the
Federal Reserve Bank of Chicago, credit bureaus, credit card servicers, ATM
networks, etc.
First Northern determined that it was required to modify or replace certain
portions of its software and hardware so that its Systems will function
properly with respect to dates on or after September 9th, 1999 ("9/9/99").
It is currently anticipated that these modifications and replacements will
not exceed a total of $170,000 (pre-tax). At the end of June 1999,
approximately $138,000 has been spent on new equipment, software and
miscellaneous expenses for Year 2000. First Northern does not separately
track the internal costs such as payroll for its information systems staff
incurred for the Year 2000 project. First Northern presently believes that
with these modifications and replacements, Year 2000 issues will not pose
significant operational problems for its Systems. However, if such
modifications and replacements are not made, or are not completed in a timely
manner, the Year 2000 could have an adverse impact on the operations of
First Northern.
First Northern has currently completed the inventory, assessment and analysis,
and renovation phases of its Year 2000 project. The testing and contingency
planning phases for critical systems were primarily completed by the end of
the first quarter of 1999. At June 30, 1999, the overall testing phase
(including non-critical systems) is approximately 96% completed and the
overall contingency planning phase (including non-critical systems) is
approximately 95% completed.
Contingency Planning (developing backup procedures to be used in the event of
unforeseen problems) is primarily focused on critical systems. This planning
not only addresses systems issues, but also operational issues such as the
cash needs of our customers.
<TABLE>
<CAPTION>
Year 2000 Initiative
Percent Time
Complete Frame
<S> <C> <C>
Inventory and Assessment (list all systems affected by Y2K) 100% 11/97-04/98
Analysis (Document systems status for Y2K compliance) 100% 01/98-08/98
Renovation (upgrade non-compliant systems to be Y2K ready) 100% 03/98-06/99
Testing (Simulate operations with dates advanced
beyond 01-10-2000) 96% 05/98-09/99
Contingency Planning (Develop backup plans for
critical systems) 95% 06/98-09/99
</TABLE>
Overall, First Northern estimates that 99% of the Year 2000 project has been
completed as of June 30, 1999.
First Northern has used internal resources to reprogram, upgrade or replace
and test its internal Systems. Internal resources have also been used to
renovate Savings Financial Corporation ("SFC"), a partially owned subsidiary
operating in Hales Corners, Wisconsin.
Even though internal resources are being used to prepare for Year 2000 causing
some other projects to be delayed, First Northern believes there will be
benefits to operations through the renovations that have taken place.
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 by 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.
<PAGE>
RESULTS OF OPERATIONS
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's investment portfolio does not contain municipal
securities. Average balances are derived from average daily balances. The
yields and rates are established by dividing income or expense dollars by the
average balance of the asset or liability. The yields and rates for the six
months ended June 30, 1999 and 1998, have been annualized.
<TABLE>
<CAPTION>
Six Months Ended June 30
1999 1998
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in Thousands)
Interest-earning assets (1):
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $485,549 $17,154 7.07% $445,444 $16,474 7.40%
Consumer loans 162,835 6,476 7.95% 159,347 6,552 8.22%
Commercial loans 1,191 48 8.06%
Investment securities (2) 37,222 1,104 5.93% 32,253 1,001 6.21%
Interest-earning deposits 1,836 41 4.47% 1,498 42 5.61%
Mortgage-related
securities (2) 13,113 395 6.02% 10,461 327 6.25%
-------- ------- ---- -------- ------- ----
TOTAL 701,746 25,218 7.19% 649,003 24,396 7.52%
Interest-bearing liabilities:
Passbook accounts 68,865 682 1.98% 62,284 685 2.20%
NOW and variable rate
insured money
market accounts 130,510 1,477 2.26% 112,253 1,388 2.47%
Time deposits 345,218 9,347 5.42% 318,988 9,207 5.77%
Advance payments by
borrowers for taxes
and insurance 3,573 42 2.35% 3,546 41 2.31%
Borrowings 101,085 2,787 5.51% 99,379 2,894 5.82%
-------- ------- ---- -------- ------- ----
TOTAL 649,251 14,335 4.42% 596,450 14,215 4.77%
-------- ------- ---- -------- ------- ----
Net interest-earning assets
balance and interest rate
spread $ 52,495 2.77% $ 52,553 2.75%
======== ==== ======== ====
Average interest-earning
assets, net interest
income and net yield on
average interest-earning
assets $701,746 $10,883 3.10% $649,003 $10,181 3.14%
======== ======= ==== ======== ======= ====
Average interest-earning
assets to interest-bearing
liabilities 108.1% 108.8%
===== =====
</TABLE>
- - ----------------------------
(1) For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
(2) For the purpose of these computations, the available-for-sale
investment securities and mortgage-related securities are
presented and yields calculated based upon the historical cost basis.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
1998
Interest
Average Earned/ Yield/
Balance Paid Rate
(Dollars in Thousands)
Interest-earning assets (1):
<S> <C> <C> <C>
Mortgage loans $456,977 $33,510 7.33%
Consumer loans 160,706 13,273 8.26%
Commercial loans
Investment securities (2) 34,828 2,138 6.14%
Interest-earning deposits 2,623 147 5.60%
Mortgage-related securities (2) 9,996 622 6.22%
-------- ------- ----
TOTAL 655,130 49,690 7.47%
Interest-bearing liabilities:
Passbook accounts 63,643 1,364 2.14%
NOW and variable rate insured
money market accounts 117,944 2,927 2.48%
Time deposits 327,674 18,979 5.79%
Advance payments by borrowers
for taxes and insurance 6,680 155 2.32%
Borrowings 95,890 5,578 5.82%
-------- ------- ----
TOTAL 611,831 29,003 4.74%
-------- ------- ----
Net interest-earning assets balance
and interest rate spread $ 53,299 2.73%
======== ====
Average interest-earning assets, net
interest income and net yield on
average interest-earning assets $665,130 $20,687 3.11%
======== ======= ====
Average interest-earning assets to
interest-bearing liabilities 108.7%
=====
</TABLE>
- - ----------------------------
(1) For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
(2) For the purpose of these computations, the available-for-sale
investment securities and mortgage-related securities are
presented and yields calculated based upon the historical
cost basis.
<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 interest income for the periods
indicated.
<TABLE>
<CAPTION>
Six Month Ended June 30
1999 vs 1998
Increase(decrease) due to:
Rate/
Rate Volume Volume Total
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C>
Mortgage loans $ (735) $1,481 $(66) $ 680
Consumer loans (215) 144 (5) (76)
Commercial loans 48 48
Investments securities (45) 155 (7) 103
Interest-earning deposits (9) 10 (2) (1)
Mortgage-related securities (12) 83 (3) 68
------- ------ ---- -----
TOTAL $(1,016) $1,873 $(35) 822
======= ====== ==== -----
Interest-bearing liabilities:
Passbook accounts $ (69) $ 73 $ (7) (3)
NOW and variable rate
insured money market accounts (118) 226 (19) 89
Time deposits (558) 744 (46) 140
Advance payments by borrowers
for taxes and insurance 1 1
Borrowings (154) 50 (3) (107)
----- ------ ---- -----
TOTAL $(898) $1,093 $(75) 120
===== ====== ==== -----
Net change in net interest income $ 702
=====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Month Ended June 30
1998 vs 1997
Increase(decrease) due to:
Rate/
Rate Volume Volume Total
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C>
Mortgage loans $(171) $2,250 $(12) $2,067
Consumer loans (253) 1,018 (21) 744
Commercial loans
Investments securities (55) 360 (11) 294
Interest-earning deposits (2) 110 (6) 102
Mortgage-related securities (16) (99) 2 (113)
----- ------ ---- ------
TOTAL $(497) $3,639 $(48) 3,094
===== ====== ==== ------
Interest-bearing liabilities:
Passbook accounts $(36) $ 80 $ (2) 42
NOW and variable rate
insured money market accounts 63 320 8 391
Time deposits 215 1,171 14 1,400
Advance payments by borrowers
for taxes and insurance 5 1 6
Borrowings (99) 788 (16) 673
---- ------ ---- ------
TOTAL $148 $2,360 $ 4 2,512
==== ====== ==== ------
Net change in net interest income $ 582
======
</TABLE>
<PAGE>
STATEMENTS OF INCOME
GENERAL. Net income increased 8.4% and 9.1% for the second quarter of 1999
and the first six months of 1999 respectively, as compared to the same periods
in 1998. This increase was primarily the result of increased interest-earning
assets outstanding and a decrease in the effective rate for income taxes.
INTEREST INCOME. Interest income on loans increased $377,000 for the second
quarter of 1999 and $652,000 for the first six months of 1999, as compared to
the same periods in 1998 as a result of the increased dollar amount of
mortgage, consumer and commercial loans outstanding. The average mortgage
loans outstanding for the six months ended June 30, 1998, increased 9.0% as
compared to the same period in 1998 and average consumer loans outstanding
increased 2.2%. Commercial loans, which were introduced to First Northern
customers in the second quarter of 1999, had a balance outstanding as of
June 30, 1999 of $2.8 million. Mortgage loan yields have decreased during the
second quarter of 1999 and for the six months ended June 30, 1999 as compared
to the second quarter of 1998 and the first six months of 1998 as a result of
mortgage loan origination interest rates being less than the yield on the
existing mortgage loan portfolio and reductions to interest rates on existing
adjustable interst rate mortgage loans. The reductions or de-escalations were
in response to the current interest rates offered on fixed and adjustable
interest rate mortgage loans. See Financial Condition--Balance Sheet--Loans
Receivable.
Consumer loan yields also decreased during the second quarter of 1999 and the
first six months of 1999 as compared to the same periods in 1998 as a result
of interest rates on originations and purchases being below the portfolio
average interest rate.
Interest income on investment securities increased $55,000 and $103,000 for
the second quarter of 1999 and for the six months ended June 30, 1999 as a
result of the increase of $5.0 million in average investment securities
outstanding. First Northern purchases investment securities when it
incrementally adds to the overall profitability of the Company and to aid in
its interest rate risk management. The average interest rates on investment
securities decreased as a result of maturities and securities with call
features being called and the proceeds being reinvested at interest rates
below the portfolio average interest rate.
Interest income on interest-earning deposits decreased slightly in the second
quarter of 1999 and for the six months ended June 30, 1999, as a result of
the decrease in the average interest rate earned on short-term and overnight
deposits.
Interest income on mortgage-related securities increased $58,000 for the three
months ended June 30, 1999, and $68,000 for the six months ended June 30, 1999,
as a result of increased mortgage-related securities outstanding.
INTEREST EXPENSE. Interest expense on deposits increased $33,000 in the second
quarter of 1999 and $226,000 in the first six months of 1999 as compared to
the same periods in 1998 as a result of increased deposits outstanding.
First Northern has utilized various time deposit terms and "special" interest
rates on various time deposit terms to attract new deposits. In addition,
the Savings Bank has acquired jumbo deposits to aid its deposit growth
(See Financial Condition - Balance Sheet - Deposits). The average cost of
deposits decreased as a result of overall market interest rates being less than
the cost of maturing deposits and new deposits being at an interest rate below
the average cost of the deposit portfolio.
Interest expense on borrowings increased $25,000 in the second quarter of 1999
and decreased $107,000 for the six months ended June 30, 1999, as compared to
the same periods in 1998. The second quarter increase in borrowing expense
was the result of increased average borrowings outstanding. First Northern's
growth in interest-earning assets outpaced the growth in deposits and hence
the increase in borrowings. The decrease in borrowing expense for the six
months ended June 30, 1999, as compared to the six months ending June 30, 1998
was primarily the result of the reduced cost of borrowings.
First Northern anticipates it will continue to emphasize growth in
interest-earning assets and will fund a portion of this growth with borrowings
if it incrementally adds to the profitability to the Company. First Northern
primarily borrows from the Federal Home Loan Bank of Chicago and staggers the
borrowings' maturities from overnight to 9 years.
PROVISION FOR LOAN LOSSES. First Northern increased its general loan loss
allowances in the second quarter of 1999 and the first six months of 1999 as
a result of changes within the composition of the loan portfolio and growth in
the loan portfolio. The loan loss allowance as of June 30, 1999, was
$3,657,000 or .55% of total loans and 569.6% of non-performing loans.
Management believes that the current loan loss allowance is adequate; however,
the adequacy of the loan loss allowance is reviewed as historical loan loss
experience changes, the size and composition of the loan portfolio changes,
changes occur in the general economy and as may otherwise be deemed necessary.
NON-INTEREST INCOME. Fees on serviced loans for the second quarter of 1999
and the first six months of 1999 decreased primarily as a result of the
amortization of the mortgage servicing asset in accordance with generally
accepted accounting principles. As the principal of a mortgage loan which
was sold (with servicing retained), repays or prepays, the mortgage servicing
asset is reduced and netted from fees on serviced loans, thereby reducing the
income on the serviced loans. First Northern's mortgage loan servicing asset
is $688,500.
Loan fees and service charges decreased in the second quarter of 1999 and for
the six months ended June 30, 1999, primarily as the result of decreased loan
origination fees on mortgage loans and decreased late charges on automobiles.
Deposit account service charges increased $20,000 in the second quarter of
1999 and $37,000 in the first six months of 1999 as compared to the same
periods in 1998 primarily as a result of debit card fee income and income
from the sale of checks to checking customers. Each time First Northern's
debit card 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.
Insurance commissions increased $39,000 in the second quarter of 1999 and
decreased slightly for the first half of 1999. The second quarter increase
was the result of First Northern receiving an insurance bonus after achieving
predetermined thresholds. If First Northern obtains a predetermined
threshold of insurance sales and insurance losses are below another threshold,
insurance bonuses are earned. In 1998, First Northern insurance losses
exceeded the threshold and the level of insurance bonuses were reduced.
Gains on sales of loans decreased substantially in the second quarter of 1999
and for the six months ended June 30, 1999, as compared to the same periods
in 1998, as a result of reduced loan sales. Loan sales decreased as a result
of reduced 30 year fixed interest rate mortgage loan originations, which First
Northern sells in the secondary market. (See Financial Condition -- Balance
Sheet -- Loans Receivable.)
Other non-interest income increased $25,000 in the second quarter of 1999 and
$28,000 in the first six months of 1999 primarily as a result of BOLI and
interest on officers' life insurance.
NON-INTEREST EXPENSE. Compensation expense increased $100,000 in the second
quarter of 1999 and $147,000 in the first six months of 1999 as a result of
increased salaries, education and training costs, and increases in employee
benefit costs.
Data processing expense increased $28,000 in the three months ended
June 30, 1999 and $55,000 in the first six months of 1999 as a result of
increased: (i) service bureau expense; (ii) depreciation of the PC based
teller system; and (iii) data processing supplies.
Furniture and equipment expense decreased $21,000 in the second quarter of
1999 and $28,000 in the first six months of 1999 primarily as a result of a
decrease in the cost of furniture and equipment service contracts and
depreciation expense. Service contract expense decreased as a result of
placing furniture and equipment under an insurance service agreement thereby
eliminating individual service contracts.
Telephone and postage expense decreased in the second quarter of 1999 and in
the first six months of 1999 as a result of negotiating a new long distance
telephone contract at a reduced cost to First Northern.
Marketing expense decreased $40,000 for the three months ended June 30, 1999
and $23,000 for the six months ended June 30, 1999, primarily as a result of
the timing of marketing expenses. It is anticipated that marketing expenses
will increase in the next six months of 1999. First Northern believes that
in order to increase lending and deposit volumes, increased marketing of
those products is required.
Other expenses increased $122,000 in the second quarter of 1999 and $123,000
in the first six months of 1999 primarily as a result of increased costs
associated with the operations of SFC, debit card costs and the reversal by
PECFA (the Petroleum Environmental Cleanup Fund) of a reimbursement, in the
amount of $53,700, for environmental clean-up costs of a lot at a subdivision
owned by GNFSC.
INCOME TAXES. The effective income tax rate for the second quarter of 1999
was 32.8% as compared to 33.7% for the second quarter of 1998 and 33.4% for
the six months ended June 30, 1999, as compared to 35.0% for the same period
in 1998. The decrease in the effective income tax rate was the result of the
purchase of BOLI and an increase in earnings at FNII, which is not subject
to state income taxes. Since First Northern intends to hold the life
insurance policies until the participants' death, BOLI interest income is not
taxable. In additon, First Northern moved its indirect automobile loan
portfolio to FNII at the beginning of the second quarter of 1998, which has
reduced state franchise taxes. In March 1999, First Northern has moved
approximately $56.3 million in mortgage loan participations to FNII to
further reduce its state franchise tax.
Under current law, the state of Wisconsin imposes a corporate franchise tax
of 7.9% on the separate taxable incomes of the members of First Northern's
consolidated income tax group except FNII, which is located in Nevada.
Presently the income of FNII is only subject to taxation in Nevada, which
currently does not impose a corporate income or franchise tax. The proposed
Wisconsin 1999-2001 State Budget Bill contained a proposal for the adoption
of combined corporate reporting in Wisconsin beginning in the Year 2000.
This provision would have eliminated the benefit of having FNII located in
Nevada however; this provision of the State Budget Bill has been eliminated.
If the state legislature would reinstate the proposal, then substantially all
of the income of all of the members of First Northern's consolidated federal
income tax group, including FNII, will be subject to Wisconsin corporate
franchise tax.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Historically, federal regulations have required the Savings Bank to maintain
a minimum percentage of liquid assets to net withdrawable accounts plus
short-term borrowings. The required percentage (liquidity ratio) has varied
from time to time based upon economic conditions and deposit flows.
The liquidity ratio is set by the Office of Thrift Supervision ("OTS") and it
is currently 4% of average of net withdrawable accounts plus short-term
borrowings payable on demand or in one year or less during the current calendar
quarter. In general, liquid assets, for the purposes of calculating the
liquidity ratio, include cash, certain time deposits, and U.S. government and
agency obligations. The Savings Bank has historically maintained a liquidity
ratio that exceeds the OTS requirement. The Savings Bank's quarterly average
liquidity ratio at June 30, 1999, was 5.53%. At December 31, 1998, when the
Savings Bank calculated its liquidity according to the regulation then in
effect, its monthly average liquidity ratio was 5.49%. The slight improvement
in the liquidity ratio at June 30, 1999, is mainly attributable to a broader
definition for liquid assets. The Savings Bank believes that its maintenance
of excess liquidity, above the 4% federally required liquidity ratio, is an
appropriate strategy to aid in proper asset/liability management.
Liquidity management is both a daily and long-term responsibility of
management. The Savings Bank 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 invested generally in interest-earning overnight deposits and
other short-term government and agency obligations. When the Savings Bank
requires funds beyond its ability to generate them internally, it can borrow
funds from the FHLB of Chicago or other sources. The FHLB of Chicago limits
advances to member institutions to an aggregate amount no to exceed 35% of
the member institution's total assets. Wisconsin law permits First Northern,
without the prior written approval of the Wisconsin Department of Financial
Institutions --- Division of Savings Institutions, to borrow an aggregate
amount not to exceed 50% of its total assets.
CAPITAL RESOURCES AND REGULATORY INFORMATION
First Northern's net worth to total assets ratio at June 30, 1999, for State
of Wisconsin regulatory requirements was 9.91% or 3.91% over the Wisconsin
minimum legal requirement of 6.00% of total assets established by the Division
of Savings Institutions of the Department of Financial Institutions, which
regulates First Northern. The OTS capital rules require savings associations
to meet three separate capital standards: (i) Tangible capital equal to 1.5%
of adjusted total assets; (ii) Core capital equal to 3% of adjusted total
assets; and (iii) Risk-based capital equal to 8.0% of the value of risk
weighted assets.
As of June 30, 1999, the most recent notification from the OTS categorized the
Savings Bank as well capitalized under the regulatory framework from 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-charted savings institution, the Savings Bank is also
subject to a minimum capital requirement of the State of Wisconsin. Management
believes, as of June 30, 1999, that the Savings Bank exceeds 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 categorization as well capitalized.
<PAGE>
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)
As of June 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $70,381 9.29% $11,369 1.50% $37,897 5.00%
(to Tangible Assets)
Core Capital 70,381 9.29% 30,318 4.00% 45,477 6.00%
(to Tangible Assets)
Risk-Based Capital 74,038 15.01% 39,469 8.00% 49,337 10.00%
(to Risk-Weighted Assets)
State of Wisconsin Capital 75,262 9.91% 45,584 6.00% N/A N/A
(to Total Assets)
As of December 31, 1998:
Tangible Capital $68,524 9.55% $10,761 1.50% $35,872 5.00%
(to Tangible Assets)
Core Capital 68,524 9.55% 28,697 4.00% 43,046 6.00%
(to Tangible Assets)
Risk-Based Capital 72,054 15.74% 36,620 8.00% 45,775 10.00%
(to Risk-Weighted Assets)
State of Wisconsin Capital 73,413 10.20% 43,181 6.00% N/A N/A
(to Total Assets)
</TABLE>
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See item 7A. Quantitative and Qualitative Disclosures
about Market Risk in 1998 Form 10-K.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At First Northern's Annual Meeting of Stockholders held
on April 28, 1999, all of the Board of Directors' nominees
named in the tabulation of votes below were elected as
directors, by the votes cast for and withheld with respect
to each nominee indicated, to serve for a three year term
for the class of directors whose terms expire in 2002. There
was no solicitation in opposition to the nominees proposed
in the Proxy Statement and there were no abstentions
or broker non-votes with respect to the election of directors.
Name For Withheld
Directors with terms expiring in 2002
Howard M. Frankenthal 7,278,942 254,075
Richard C. Smits 7,303,759 252,858
Messrs. Thomas J. Lopina, Sr. and Robert B. Olson terms
as directors continue until 2000. Messrs. Michael D. Meeuwsen
and J. Gus Swoboda terms as directors continue until 2001.
The First Northern 1999 Stock Plan was approved by the
stockholders at the annual meeting by a vote of 4,928,442
for such approval, 1,214,093 against such approval and
82,159 abstentions. There were 173,993 broker non-votes
with respect to such approval. Further information
concerning these matters is contained in Proxy
Statement/1998 Form 10-K Annual report with respect
to First Northern's 1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
See Exhibit Index following the signature page of this
report, which is incorporated herein by reference.
b) Reports on Form 8-K:
No Form 8-K was filed during the quarter for which
this report is filed.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
FIRST NORTHERN CAPITAL CORP.
----------------------------
(Registrant)
Date: August 13, 1999 /s/Rick B. Colberg
--------------------- -----------------------------
Rick B. Colberg
Vice President and Chief
Financial Officer
(Mr. Colberg is also duly
authorized to sign on
behalf of registrant)
<PAGE>
FIRST NORTHERN CAPITAL CORP
(the "Registrant")
Commission File No. 0-27982
* * * *
EXHIBIT INDEX
TO
SECOND QUARTER 1999 REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed or Submitted
Number Description By Reference To Herewith
<S> <C> <C> <C>
11.1 Statement regarding computation
of per share earnings X
27.1 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission
for information only and not filed X
<PAGE>
Exhibit 11.1
First Northern Capital Corp.
Computation of Net Income Per Common Share
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
BASIC:
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding during each period 8,733,146 8,893,787 8,762,082 8,900,048
========= ========= ========= =========
DILUTED:
Weighted average common shares
outstanding during each period 8,733,146 8,893,787 8,762,082 8,900,048
Incremental shares relating to:
dilutive stock options outstanding
at end of each period (1) 167,887 257,836 181,287 260,122
--------- --------- --------- ---------
8,901,033 9,151,623 8,943,369 9,160,170
========= ========= ========= =========
NET INCOME FOR EACH PERIOD $1,874,785 $1,730,089 $3,666,125 $3,359,501
========== ========== ========== ==========
PER COMMON SHARE AMOUNTS:
Basic net income $0.21 $0.19 $0.42 $0.38
===== ===== ===== =====
Diluted net income $0.21 $0.19 $0.41 $0.37
===== ===== ===== =====
</TABLE>
- - --------------------------------------------------
Notes:
(1) Based on treasury stock method using average market price.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,044
<INT-BEARING-DEPOSITS> 206
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,402
<INVESTMENTS-CARRYING> 36,892
<INVESTMENTS-MARKET> 36,604
<LOANS> 673,969
<ALLOWANCE> 3,657
<TOTAL-ASSETS> 758,894
<DEPOSITS> 551,100
<SHORT-TERM> 27,340
<LIABILITIES-OTHER> 5,897
<LONG-TERM> 90,818
0
0
<COMMON> 9,135
<OTHER-SE> 67,688
<TOTAL-LIABILITIES-AND-EQUITY> 758,894
<INTEREST-LOAN> 11,944
<INTEREST-INVEST> 792
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,736
<INTEREST-DEPOSIT> 5,776
<INTEREST-EXPENSE> 7,195
<INTEREST-INCOME-NET> 5,541
<LOAN-LOSSES> 114
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,668
<INCOME-PRETAX> 2,792
<INCOME-PRE-EXTRAORDINARY> 2,792
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,875
<EPS-BASIC> .21
<EPS-DILUTED> .21
<YIELD-ACTUAL> 3.12
<LOANS-NON> 542
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,566
<CHARGE-OFFS> 31
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 3,657
<ALLOWANCE-DOMESTIC> 3,657
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
