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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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
-----------------------------
(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
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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. [ ]
As of February 26, 1999, 8,807,659 shares of Common Stock were outstanding,
and the aggregate market value of the Common Stock (based upon the $11.50 last
sale price quotation on The Nasdaq Stock Market, Inc./National Market as
reported in the Wall Street Journal) held by non-affiliates (excludes a total of
1,187,937 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 $87,626,803.
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 28, 1999 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, 1998
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TABLE OF CONTENTS
ITEM PAGE
PART I
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1. Business........................................................................................1-29
2. Properties.....................................................................................29-30
3. Legal Proceedings.................................................................................30
4. Submission of Matters to a Vote of Security Holders...............................................30
Executive Officers of the Registrant...........................................................31-32
PART II
5. Market for Registrant's Common Equity and Related Stockholders Matters............................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....................................................54-85
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................................................86
PART III
10. Directors and Executive Officers of the Registrant................................................86
11. Executive Compensation............................................................................86
12. Security Ownership of Certain Beneficial Owners and Management....................................86
13. Certain Relationships and Related Transactions....................................................86
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................87
Signatures........................................................................................88
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PART I.
ITEM 1. BUSINESS
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 relate 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
and purchases automobile loans from Savings Financial Corporation ("SFC"). The
Savings Bank's 50% owned subsidiary, SFC, originates, services and sells
automobile loans to FNII, the Saving Bank and its other parent corporation.
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;
unforeseen costs and consequences of the year 2000 problem; 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.
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, also created further competition
and concentration in the financial services 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, 1998, approximately 76% of First
Northern's mortgage loan portfolio was interest rate adjustable as compared to
89% at December 31, 1997.
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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 anticipates that it will start a commercial banking
division in 1999 which would originate commercial loans. First Northern has
hired an experienced commercial banking person to guide the development of this
division.
First Northern lends primarily in its eight county market area in
Northeastern Wisconsin. At December 31, 1998, approximately 99.1% of the total
dollar amount of First Northern's mortgage loans outstanding were on properties
located in Wisconsin with the other 0.9% representing properties located
primarily in other Midwestern states.
First Northern's loan portfolio of $647.9 million before deductions at
December 31, 1998 was 90.0% by dollar volume of its total assets. As of that
date, approximately 68.3% by dollar volume of the loan portfolio consisted of
conventional first mortgage loans secured by one- to four-family residences,
with an additional 24.4% by dollar volume in consumer loans, 4.9% by dollar
volume in multi-family (more than four) residential properties, 1.9% by dollar
volume in commercial real estate properties and 0.5% 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
25% of the mortgage portfolio in fixed interest rate mortgage loans. The
percentage of fixed mortgage loans held in the loan portfolio was increased from
20% to 25% in 1998 as a result of First Northern's asset and liability position
which allowed for some additional interest rate risk and other investment
opportunities in the market. 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, 1998, consumer loans (second mortgage, automobile and other consumer loans)
outstanding totaled $158.3 million. Consumer loan originations and purchases for
the year ended December 31, 1998 were $99.6 million, of which $32.8 million or
32.9% were interest rate adjustable. Consumer loan originations and purchases in
1997 were $98.2 million, of which $29.2 million or 29.7% were interest rate
adjustable, and in 1996 originations and purchases were $88.3 million, of which
$25.0 million or 28.3% were interest rate adjustable.
Since February 1985, First Northern has originated mortgage loans using
contracts which contain interest
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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, 1998, First Northern had only 101
loans secured by out-of-state properties, representing $4.4 million or 0.9% 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 approved 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, 1998, First Northern serviced for others $150.2 million
of whole loans and participation interests in mortgage loans. In addition, as of
December 31, 1998, First Northern had approximately $116.0 million of 15, 20 and
30 year fixed interest rate mortgages in its mortgage investment portfolio. See
"Loan Interest Rates and Terms" above. In 1998, 1997 and 1996, First Northern
sold $63.2, $18.7, and $11.1 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 1998, First Northern purchased $15.0 million of single-family
home loans, $1.7 million in multi-family loans and $0.6 million in commercial
real estate loans from others. In 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. 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 for loans originated after January 31, 1983 and is secured by
one- to four-family, owner-occupied residences. The interest rate is based on
the annual average of passbook interest rates paid by all Wisconsin financial
institutions (2.83% for 1998). Currently, approximately 86.7% 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 1999 is 2.74%.
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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. First
Northern adjusted its policy in 1998 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, automobile, boat, recreational vehicles,
credit card and other loans, to obtain higher yields, to serve the needs of its
customers and to aid in the management of interest rate risk. 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.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
First Northern's loan portfolio (excluding loans held for sale) by type of
collateral 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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1998 1997 1996 1995 1994
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(Dollars In Thousands)
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Mortgage loans:
One- to four-family
residential $416,974 64.36% $393,563 64.74% $376,189 66.72% $352,449 69.08% $350,291 69.54%
Five or more family
residential 32,013 4.94 24,506 4.03 20,154 3.57 17,591 3.45 18,478 3.67
Commercial real estate 7,546 1.16 9,269 1.52 9,975 1.77 10,028 1.97 9,501 1.89
Construction-residential 25,467 3.93 19,192 3.16 16,306 2.89 10,782 2.11 6,916 1.38
Construction-commercial 4,470 0.69 2,156 0.35 1,701 0.30 1,225 0.24 1,533 0.30
Other 3,129 0.48 2,226 0.37 1,900 0.34 1,788 0.35 1,533 0.30
------- ------ -------- ------- -------- ------- -------- ------ ------- -------
Total mortgage loans 489,599 75.564 50,912 74.17 426,225 75.59 393,863 77.20 388,252 77.08
Consumer loans:
Consumer 18,416 2.84 18,200 2.99 18,179 3.22 20,307 3.982 1,756 4.32
Second mortgage 66,426 10.25 68,596 11.28 59,148 10.49 46,528 9.12 29,454 5.85
Automobile 73,502 11.35 70,276 11.56 60,339 10.70 49,504 9.70 53,527 10.63
Education 10,677 2.12
Total consumer loans 158,344 24.44 157,072 25.83 137,666 24.41 116,339 22.80 115,414 22.92
------- ------ -------- ------- -------- ------- -------- ------ ------- -------
Gross total loans 647,943 100.00% 607,984 100.00% 563,891 100.00% 510,202 100.00% 503,666 100.00%
====== ====== ====== ======= ======
Less:
Undisbursed loan
proceeds 11,750 10,290 5,942 6,071 3,146
Allowance for losses 3,531 3,177 2,937 2,608 2,400
Unearned loan fees 923 988 1,017 988 1,059
------- ------- -------- ------- -------
Net loans receivable $631,739 $593,529 $553,995 $500,535 $497,061
======= ======= ======= ======= =======
</TABLE>
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CONTRACTUAL MATURITIES OF LOANS. The following table presents information as of
December 31, 1998 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
2002- 2004- 2008- AFTER
1999 2000 2001 2003 2007 2012 2012 TOTAL
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(In Thousands)
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Loans:
Mortgage $ 574 $ 410 $ 2,408 $ 7,160 $25,311 $72,935 $350,864 $459,662
Mortgage
construction(1) 5,273 650 4,100 19,914 29,937
Consumer loans 24,478 22,636 22,829 32,998 33,514 18,326 3,563 158,344
-------- -------- -------- -------- -------- -------- ----------- ---------
Total $30,325 $23,696 $25,237 $44,258 $58,825 $91,261 $374,341 $647,943
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</TABLE>
(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 $617.6 million of loans contractually due after December 31,
1999, approximately $226.0 million have fixed interest rates and approximately
$391.6 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
1998 1997 1996 1995 1994
--------- --------- ---------- -------- ----------
(IN THOUSANDS)
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Mortgage loans originated and purchased:
Construction - Residential $ 31,115 $ 25,709 $ 25,695 $ 17,265 $17,912
Construction - Commercial 5,930 901 51 794
Loans on existing property 59,021 51,536 49,017 37,491 51,652
Refinancing (1) 153,614 42,166 35,497 15,130 33,068
Other loans 2,049 2,398 2,668 2,560 1,316
----------- ----------- ----------- ----------- --------
Total mortgage loans originated
and purchased 251,729 121,809 113,778 72,497 104,742
Consumer loans originated and purchased:
Other consumer 9,912 8,670 7,615 8,773 11,150
Second mortgage 38,747 36,896 32,548 30,474 25,340
Automobile 48,661 50,059 45,722 26,109 39,842
Education 2,317 2,568 2,382 2,895 3,290
----------- ----------- ----------- ----------- ---------
Total consumer loans originated
and purchased 99,637 98,193 88,267 68,251 79,622
---------- ---------- ---------- ---------- --------
Mortgage loans sold (63,180) (18,668) (11,065) (11,583) (18,174)
Education loans sold (2,391) (2,491) (3,187) (10,489)
Loan repayments and other credits (247,586) (154,750) (134,104) (112,140) (97,167)
--------- --------- --------- --------- --------
Net increase in real estate
loans and other loans $ 38,209 $ 44,093 $ 53,689 $ 6,536 $69,023
========= ========= ========= ========== =======
</TABLE>
(1) Refinanced mortgage loans are stated as gross dollars. Net new refinanced
dollars for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
were $42.2 million, $25.7 million, $24.9 million, $10.8 million, and $21.7
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, 1998, consumer loans represented 24.4% 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.
7
<PAGE> 10
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 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 originated both unindexed and indexed adjustable
interest rate mortgages. 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 adjustable interest rate 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.
First Northern has been able to exercise its escalation and
de-escalation rights under the interest rate adjustments clauses on its mortgage
loan portfolio. The use of the adjustment clause gives First Northern greater
control over its income and portfolio retention due to its ability to increase
or decrease 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 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
8
<PAGE> 11
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 OTS 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 allowance for
loan 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
1998 1997 1996
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Substandard $441 $578 $905
Doubtful 6 16 21
Loss 14 9
------ -------- -------
Total Classified Assets $461 $594 $935
==== ==== ====
</TABLE>
The decrease in the amount of total classified assets in 1998 was the
result of a decrease in overall delinquencies.
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 indirect automobile loan portfolio) has increased. It
is this increase which primarily resulted in the increase in the loan loss
allowance.
At December 31, 1994, First Northern's automobile loan portfolio was
$53.5 million as compared to $73.5 million at December 31, 1998. This increase
of $20.0 million represents a 37.4% growth in the automobile loan portfolio
while the allowance for all loan losses increased from $2.4 million to $3.5
million.
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> 12
All of First Northern's loans are domestic. A summary of the allowance
for loan losses is shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Balance, beginning of year $1,624 $1,453 $1,578 $1,499 $1,426
Provisions 186 170 10 79
Charge-offs:
One- to four-family residential (1) (20)
Recoveries:
One- to four-family residential 4 24
Commercial real estate 1 1
------ ------ ------ ------ ------
Net recoveries 3 1 1 4
------ ------ ------ ------ ------
Transfer of loss reserve (136)
Adjustment to conform pooled
companies' fiscal year ends 69
------ ------ ------ ------ ------
Balance, end of year 1,813 1,624 1,453 1,578 1,499
Consumer loans:
Balance, beginning of year 1,553 1,484 1,030 901 880
Provisions 234 150 360 161 145
Charge-offs:
Consumer (47) (44) (23) (30) (59)
Automobile (52) (57) (43) (41) (68)
------ ------ ------ ------ ------
Total charge-offs (99) (101) (66) (71) (127)
------ ------ ------ ------ ------
Recoveries:
Consumer 7 8 11 21 5
Automobile 23 12 13 18 16
------ ------ ------ ------ ------
Total recoveries 30 20 24 39 21
------ ------ ------ ------ ------
Net charge-offs (69) (81) (42) (32) (106)
------ ------ ------ ------ ------
Transfer of loss reserve 136
Adjustment to conform pooled
companies' fiscal year ends (18)
------ ------ ------ ------ ------
Balance, end of year 1,718 1,553 1,484 1,030 901
------ ------ ------ ------ ------
Total allowance for loan losses $3,531 $3,177 $2,937 $2,608 $2,400
====== ====== ====== ====== ======
Foreclosed properties & repossessed assets:
Balance, beginning of year $ - $ - $ 1 $ 1 $ 1
Provisions, charged to
non-interest expense 10 13
Charge-offs:
One- to four-family residential (4) (14)
------ ------ ------ ------ ------
Balance, end of year $ 6 $ - $ - $ 1 $ 1
====== ====== ====== ====== ======
Total charge-offs
to average loans outstanding 0.02% 0.02% 0.01% 0.01% 0.02%
====== ====== ====== ====== ======
Net charge-offs to average
loans outstanding 0.01% 0.01% 0.01% 0.01% 0.02%
====== ====== ====== ====== ======
</TABLE>
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
10
<PAGE> 13
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, 1998
-------------------------------------------------------
% 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 $1,475 0.35% 64.36%
Five or more family residential 150 0.47 4.94
Commercial real estate 141 1.87 1.16
Construction 4.62
Other 38 1.21 0.48
Classified mortgage loans 9 3.00
------- ----- ------
Total mortgage loans 1,813 0.37 75.56
Consumer loans:
Consumer 96 0.52 2.84
Second mortgage 269 0.41 10.25
Automobile 1,340 1.82 11.35
Education
Classified consumer loans 13 2.00
------- ----- ------
Total consumer loans 1,718 1.08 24.44
------- ----- ------
Total allowance for loans $3,531 0.54% 100.00%
====== ==== ======
</TABLE>
(1) Percentages are calculated on gross loan balances.
11
<PAGE> 14
<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 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.
<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.
12
<PAGE> 15
<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.
<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.
13
<PAGE> 16
The following table is a summary of non-performing loans and assets.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
----------- ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans
(90 days or more past due) $223 $333 $509 $266 $407
Non-accrual consumer loans 123 107 235 152 139
--- ----- ----- ----- -----
Total non-performing loans 346 440 744 418 546
Foreclosed properties, properties
subject to foreclosure and
repossessed assets 106 153 189 136 120
----- ----- ----- ----- -----
Total non-performing assets $452 $593 $933 $554 $666
==== ==== ==== ==== ====
Non-performing loans as a
percentage of total loans .05% .07% .13% .08% .11%
=== === === === ===
Non-performing assets as a
percentage of total assets .06% .09% .15% .10% .12%
=== === === === ===
Loan loss allowances as
a percentage of non-
performing loans 1,020.52% 722.05% 394.76% 623.92% 439.56%
======== ====== ====== ====== ======
Loan loss allowances as
a percentage of non-
performing assets 781.19% 535.75% 314.79% 470.76% 360.36%
====== ====== ====== ====== ======
Interest income that would have
been recognized if non-accrual
loans had been current (1) $9 $13 $25 $12 $19
== === === === ===
</TABLE>
(1) No accrued interest income was included in net income in any of the years
presented 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> 17
The following table sets forth the composition of First Northern's
investment and mortgage-related securities portfolio at December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
INVESTMENT AND MORTGAGE-RELATED SECURITIES PORTFOLIO COMPOSITION
AT DECEMBER 31
1998 1997 1996
------------------------ ---------------------- --------------------
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 $ 861 1.86% $ 324 0.81% $ 1,598 4.57%
Securities available-for-sale:
U. S. government securities 3,303 7.13 3,290 8.24 2,517 7.20
Federal agency obligations 3,822 8.25 2,002 5.01 1,985 5.67
Mortgage-related securities 996 2.15 932 2.33 1,837 5.25
Asset Management Fund 534 1.15 500 1.25 471 1.35
FHLMC stock 1,546 3.34 1,007 2.52 662 1.89
--------- -------- --------- -------- --------- -------
Total securities available-for-sale 10,201 22.02 7,731 19.35 7,472 21.36
Securities held-to-maturity:
U.S. Government securities 1,000 2.50 3,004 8.59
Federal agency obligations 23,741 51.25 20,231 50.63 13,579 38.82
Mortgage-related securities 11,522 24.87 10,675 26.71 9,325 26.66
-------- ------- -------- ------- -------- ------
Total securities held-to-maturity 35,263 76.12 31,906 79.84 25,908 74.07
-------- ------- -------- ------- ------- ------
Total $46,325 100.00% $39,961 100.00% $34,978 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing for interest-earning
deposits, securities
available-for-sale and held-to-
maturity (1) 23 months 18 months 12 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> 18
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, 1998
----------------------------------------------------------------------------------------
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 $ 499 6.24% $2,744 6.10%
Federal agency obligations 2,302 5.60 1,496 5.98
Mortgage-related securities $998 5.56%
Asset Management Fund 535 5.49
FHLMC stock 33 35.02
-------- ----------------- -------- ---------- --------- --------- ----------
Total investment and
mortgage-related securities
available-for-sale $2,834 6.06% $4,775 6.00% $998 5.56% $ - - %
====== ===== ====== ===== ==== ==== ======= =========
HELD-TO-MATURITY:
Investment and
Mortgage-related Securities
U.S. government obligations
Federal agency obligations $6,520 5.85% $12,220 5.71% $5,001 6.07%
Mortgage-related securities 1,150 5.99 4,507 5.96 $5,865 6.24%
----------- --------- ------- ------- ------- ----- ------ ------
Total investment and
mortgage-related securities
held-to-maturity $6,520 5.85% $13,370 5.73% $9,508 6.02% $5,865 6.24%
====== ===== ======= ===== ====== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT December 31, 1998
-------------------------------
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 $3,243 $3,303 6.12%
Federal agency obligations 3,798 3,822 5.75
Mortgage-related securities 998 996 5.56
Asset Management Fund 535 534 5.49
FHLMC stock 33 1,546 35.02
--------- ------- ------
Total investment and
mortgage-related securities
available-for-sale $8,607 $10,201 5.96%
======= ======= =======
HELD-TO-MATURITY:
Investment and
Mortgage-related Securities
U.S. government obligations
Federal agency obligations $23,741 $23,935 5.82%
Mortgage-related securities 11,522 11,594 6.10
-------- --------- ------
Total investment and
mortgage-related securities
held-to-maturity $35,263 $35,529 5.91%
========= ======= =====
</TABLE>
16
<PAGE> 19
The following table sets forth the composition of First Northern's
mortgage-related held-to-maturity securities portfolio at December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
MORTGAGE-RELATED PORTFOLIO COMPOSITION
AT DECEMBER 31
----------------------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ 7,347 $ 7,028 $4,715
Federal National Mortgage Association 4,175 3,647 3,730
Other 880
------------ ----------- --------
Total mortgage-related securities $11,522 $10,675 $9,325
======= ======= ======
Average remaining contractual life or term to
repricing for mortgage-related securities 150 months 139 months 157 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 currently 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 Money Market Account $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> 20
The following tables set forth the distribution of the average balances
of the Company's deposit accounts and the weighted average effective interest
rates on each category of deposits presented for the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
WEIGHTED
PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CORE DEPOSITS:
Non-interest bearing NOW checking $22,899 4.50%
Interest bearing NOW checking 37,232 7.31 1.06%
Money market 57,813 11.35 4.38
Passbook 63,643 12.50 2.14
---------- ------- -----
Total core deposits 181,587 35.66 2.04
Certificate of deposit accounts 327,674 64.34 5.79
--------- ------- -----
Total deposits $509,261 100.00% 4.57%
======== ====== ====
</TABLE>
<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%
======== ====== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
WEIGHTED
PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%
======== ====== ====
</TABLE>
18
<PAGE> 21
The following table presents certificates of deposits in amounts of $100,000 or
more by maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maturity:
3 months or less $17,619 $ 9,164
Greater than 3 months - 6 months 7,350 6,530
Greater than 6 months - 12 months 10,499 12,505
Greater than 12 months 10,225 7,189
------- -------
$45,693 $35,388
======= =======
</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,
1998, First Northern had no borrowings under repurchase agreements as compared
to $0.9 million of borrowings under repurchase agreements at December 31, 1997.
The weighted average rate of the repurchase agreements as of December 31, 1998,
1997 and 1996 was 0.0%, 5.79% and 5.59%, respectively. See Note G of the Notes
to Consolidated Financial Statements.
19
<PAGE> 22
The following table sets forth certain information regarding borrowings
by First Northern at the end of and during the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
----- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance outstanding at end of year:
Securities sold under agreement
to repurchase $ 900 $ 1,500
Fixed interest rate notes
payable to FHLB $83,825 75,075 58,150
Overnight borrowings from FHLB 7,675 26,065 17,255
Other borrowings 477 1,237 367
Weighted average interest rate at
end of year:
Securities sold under agreements
to repurchase 5.79% 5.59%
Fixed interest rate notes
payable to FHLB 5.71% 5.85% 5.73%
Overnight borrowings from FHLB 5.13% 6.92% 6.95%
Other borrowings 4.12% 5.27% 5.18%
Maximum amount outstanding during the year:
Securities sold under agreements
to repurchase $900 $ 1,500 $ 1,500
Fixed interest rate notes
payable to FHLB 97,750 75,525 58,150
Overnight borrowings from FHLB 37,220 33,400 29,360
Other borrowings 3,500 1,312 1,044
Average amount outstanding during
the year:
Securities sold under agreements
to repurchase $ 650 $ 1,217 $ 1,042
Fixed interest rate notes
payable to FHLB 84,339 65,830 35,957
Overnight borrowings from FHLB 9,982 15,264 11,264
Other borrowings 919 314 142
Weighted average interest rate
during the year:
Securities sold under agreements
to repurchase 5.79% 5.65% 5.69%
Fixed interest rate notes
payable to FHLB 5.83% 5.97% 5.82%
Overnight borrowings from FHLB 5.79% 5.80% 5.68%
Other borrowings 5.21% 5.49% 5.18%
</TABLE>
Borrowings decreased to $92.0 million at December 31, 1998, as
compared to $103.3 million at December 31, 1997, primarily as a result of
moderate loan portfolio growth, good deposit growth and increased loan sales.
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> 23
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
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average yield earned:
Mortgage loans 7.03% 7.34% 7.16% 7.06% 6.69%
Consumer loans 8.32 8.56 8.56 8.66 8.18
Mortgage and consumer loans 7.35 7.66 7.51 7.44 7.03
Investment securities 5.92 6.41 6.14 6.33 6.44
Mortgage-related securities 6.06 6.37 6.44 7.02 7.12
Total loan portfolio,
investment securities, and
mortgage-related securities 7.25 7.57 7.43 7.39 7.01
Weighted average rate paid:
Deposits 4.35 4.61 4.42 4.56 4.03
FHLB and other borrowings 5.66 5.87 5.71 6.02 6.24
Total deposits and FHLB and other borrowings 4.54 4.83 4.60 4.63 4.23
Interest rate spread at the end of the year 2.71 2.74 2.83 2.76 2.78
</TABLE>
21
<PAGE> 24
The following table shows average yields earned and rates paid using
daily averages during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average yield earned during the year:
Mortgage loans 7.33% 7.37% 7.18% 6.99% 6.91%
Consumer loans 8.26 8.43 8.50 8.44 7.93
Investment securities 6.10 6.31 6.23 6.47 6.13
Mortgage-related securities 6.22 6.36 6.50 7.06 6.91
All interest-earning assets 7.47 7.55 7.42 7.28 7.08
Average rate paid during the year:
Deposits 4.54 4.51 4.43 4.42 3.73
Borrowings 5.82 5.94 5.78 6.79 5.14
All interest-bearing liabilities 4.74 4.72 4.56 4.59 3.79
Average interest rate spread (1) 2.73 2.83 2.86 2.69 3.29
Net yield on average interest-
earning assets (2) 3.11 3.26 3.31 3.17 3.71
Net yield on total interest-
earning assets (3) 3.02 3.14 3.14 3.17 3.51
</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 for the
year.
(3) Net interest earned divided by total interest-earning assets for the year.
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, 1998,
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, 1998, 1997,
1996, 1995 and 1994 the Savings Bank's average equity to average assets ratio
was 10.83%, 11.24%, 12.14%, 12.99%, and 13.25%, respectively.
22
<PAGE> 25
CASH DIVIDENDS. The following schedule sets forth the cash dividends paid per
year:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash Dividends Paid Per Share $0.36 $0.32 $0.30 $0.28 $0.26
===== ===== ===== ===== =====
Cash Dividends Payout Ratio 46.8% 47.1% 81.1%(1) 54.9% 55.3%
==== ==== ==== ==== ====
(dividends declared per share
divided by basic net income per share)
</TABLE>
- - -----------
(1) 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 investment in GNFSC as of December 31, 1998 was $399,000.
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. In April 1998, FNII began to purchase loans originated by SFC and the
Savings Bank moved its indirect loan portfolio to FNII. FNII managed
approximately $33.3 million of investments for First Northern at December 31,
1998. First Northern's investment in FNII as of December 31, 1998 was
$99,673,000.
In March 1992, First Northern acquired a 50% stock interest in SFC from
another financial institution. SFC originates, sells, and services indirect
automobile loans. As a result of this acquisition, SFC will on a regular basis,
sell such loans to First Northern or FNII but retain the servicing of the loans.
In April 1998, SFC began selling such loans to FNII but retains the servicing of
the loans. FNII purchased $29.0 million of such loans, First Northern purchased
$41.3 million of such loans in 1997 and $38.0 million in 1996. First Northern's
investment in SFC as of December 31, 1998 was $36,000.
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 investment
in Keystone as of December 31, 1998 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, 1998 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 federally chartered savings 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> 26
EMPLOYEES. At December 31, 1998, First Northern employed 194 full-time and 53
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 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 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
24
<PAGE> 27
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. However, Section 22(h) does not apply to holding
companies 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 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
25
<PAGE> 28
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.
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."
26
<PAGE> 29
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
$500 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 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.
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
27
<PAGE> 30
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%. 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, 1998, First Northern's net worth ratio for
Wisconsin regulatory purposes was 10.2%.
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.
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 did not have a material
impact on First Northern's financial condition or results of operations. See
Note H of the Notes to First Northern's Consolidated Financial Statement.
28
<PAGE> 31
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. 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
recently-introduced Wisconsin 1999-2001 State Budget Bill contains a proposal
for the adoption of combined corporate reporting in Wisconsin beginning in the
year 2000. If the state legislature approves the proposal, then 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.
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.
<TABLE>
<CAPTION>
<S> <C>
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
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
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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 $6,228,000 at December 31, 1998.
All of First Northern's locations are designed for use and operation as
a savings bank, are well maintained and suitable for current operations.
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.
30
<PAGE> 33
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 45 Director, President 1988 ( 2)
and Chief Executive Officer
of First Northern and the
Savings Bank
Rick B. Colberg 46 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 43 Vice President and Secretary 1980 ( 4)
of First Northern and
Senior Vice President-Human
Resources and Secretary
of the Savings Bank
John E. Steinbrecker 48 Senior Vice President-Retail 1984 ( 5)
Deposits and Brokerage Services
of the Savings Bank
Richard E. Aicher 48 Senior Vice President-Lending of 1979 ( 6)
the Savings Bank
Dale J. Darmody 50 Senior Vice President-Director of 1990 ( 7)
Branch Development of the
Savings Bank
Steven L. Wilmet 52 Senior Vice President-Operations and 1994 ( 8)
Branch Development of the
Savings Bank
</TABLE>
(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 he was named President and Chief Operating Officer and in January, 1990 he
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 27 years.
(4) Ms. Carr has been Human Resources Director of the Savings Bank since 1976.
She was elected Vice
31
<PAGE> 34
President, Secretary in 1980 and designated Senior Vice President in 1997.
Ms. Carr has been with the Savings Bank for 25 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 19 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 25 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.
32
<PAGE> 35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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 28, 1999, there were 8,807,659 shares of common stock
outstanding and approximately 2,457 stockholders of record of the Company's
common stock. The chart below represents the cash dividends paid for each of the
stated quarters.
<TABLE>
<CAPTION>
CASH DIVIDENDS PAID
QUARTER 1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ --------
<C> <C> <C> <C> <C> <C> <C>
1st Quarter $.10* $.09 $.08 $.075 $.07 $.065
2nd Quarter -- .09 .08 .075 .07 .065
3rd Quarter -- .09 .08 .075 .07 .065
4th Quarter -- .09 .08 .075 .07 .065
------ ----- ----- ------ ----- -----
Total -- $.36 $.32 $.300 $.28 $.260
====== ==== ==== ===== ==== =====
</TABLE>
* The Company's Board of Directors raised the regular quarterly cash dividend
from $0.09 to $0.10 per share, an 11.1% increase, which was paid on February 15,
1999 to stockholders of record on February 1, 1999.
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.
<TABLE>
<CAPTION>
COMMON STOCK TRADING PRICE RANGE
(High and Low Sales Price)
1998 1997 1996 1995 1994
--------------- ---------------- ---------------- ---------------- ----------------
High Low High Low High Low High Low High Low
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 14 12 1/4 10 8 1/8 8 3/8 7 5/8 6 7/8 5 7/8 7 3/4 6 3/8
2nd Quarter 14 13 11 9 1/8 8 1/4 7 9/16 7 1/4 6 1/2 7 1/4 6 3/8
3rd Quarter 13 7/8 9 3/4 14 1/4 10 9/16 8 3/4 7 9/16 8 7/16 6 5/8 7 1/2 6 5/8
4th Quarter 13 3/4 9 1/2 14 1/8 12 3/4 9 1/2 8 8 1/4 7 3/8 7 1/8 5 7/8
</TABLE>
During the first two months of 1999, the Company's common stock sales price
ranged between $13.00 to $10.875 per share, and closed on February 26, 1999 at
$11.50 per share.
33
<PAGE> 36
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
- - --------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest Income $49,690 $46,596 $41,876 $39,025 $35,409
Interest Expense 29,003 26,491 23,203 22,036 16,854
Net Interest Income 20,687 20,105 18,673 16,989 18,555
Provision for Loan Losses 420 320 370 240 145
Non-Interest Income 4,239 3,276 2,686 3,210 2,258
Non-Interest Expense 14,071 13,374 15,939(1) 12,651 13,278
Net Income 6,829 6,036 3,283(2) 4,590 4,198(3)
Basic Net Income Per Share 0.77 0.68 0.37(2) 0.51 0.47(3)
Diluted Net Income per Share 0.75 0.66 0.36(2) 0.49 0.46(3)
Dividends Declared (Historical) 0.36 0.32 0.30 0.28 0.26
</TABLE>
(1) Non-interest expense includes 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 the after tax effect of the one-time special SAIF
assessment of $1,733,000, $0.19 and $0.19, respectively.
(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
- - -------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Assets $719,713 $667,696 $615,503 $553,467 $546,923
Securities Available-for-Sale 10,201 7,731 7,472 4,991 4,861
Securities Held-to-Maturity 35,263 31,906 25,908 23,388 22,210
Loans Receivable 631,739 593,529 553,995 500,535 497,061
Loans Held for Sale 3,075 2,119 2,532 2,989
Deposits 542,372 481,788 458,323 449,954 423,793
Borrowings 91,977 103,277 77,272 21,000 42,900
Stockholders' Equity 76,093 73,817 70,224 72,579 70,007
Book Value Per Share 8.68 8.35 8.01 7.97 7.79
Shares Outstanding
Net of Treasury Stock 8,765 8,846 8,775 9,110 8,990
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
KEY RATIOS & OTHER DATA AT OR FOR THE YEAR ENDED DECEMBER 31
- - --------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest Rate Spread Information:
Weighted Average Interest Rates
Loans/Investments Yield 7.25% 7.57% 7.43% 7.39% 7.01%
Cost of Money 4.54% 4.83% 4.60% 4.63% 4.23%
Spread at December 31 2.71% 2.74% 2.83% 2.76% 2.78%
Average Spread Earned
During the Year 2.73% 2.83% 2.86% 2.69% 3.29%
Non-performing Assets to
Total Assets 0.06% 0.09% 0.15% 0.10% 0.12%
Return on Average Assets 0.98% 0.94% 0.56%(1) 0.83% 0.81%
Return on Average
Stockholders' Equity 9.08% 8.38% 4.61%(1) 6.43% 6.09%
Stockholders' Equity to
Total Assets 10.57% 11.06% 11.41% 13.11% 12.80%
Net Interest Margin 3.11% 3.26% 3.31% 3.17% 3.71%
Number of Offices 19 19 20 20 20
Number of Employees -
Full-Time Equivalents 221 216 214 213 206
</TABLE>
(1) Excluding the 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> 38
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 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 and purchases automobile
loans from Savings Financial Corp. ("SFC"). SFC, which is 50% owned by the
Savings Bank, originates, services and sells automobile loans to FNII and its
other parent corporation.
In connection with the following discussion, see the financial data in
Item 1 and "Cautionary Factors" in Item 1 of this document 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, 1998 was
5.49% and 5.67% at December 31, 1997. The liquidity ratio decreased at year-end
1998 as compared to year-end 1997 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- to
intermediate-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").
INVESTMENT AND MORTGAGE-RELATED SECURITIES. A substantial portion of the
Company's investment securities (approximately $33.3 million at December 31,
1998 and $28.5 million at December 31, 1997) are held and managed by FNII. (See
Notes to Consolidated Financial Statements -- Note B and Note C -- Securities
Available-for-Sale
36
<PAGE> 39
and Securities Held-to-Maturity.)
Interest-earning deposits increased $537,000 in 1998 as a result of
placing excess funds in overnight deposits until the funds (usually a day) are
needed.
The dollar amount of both the securities available-for-sale and
securities held-to-maturity increased in 1998 as compared to 1997 as a result of
reinvesting interest earned on the investment portfolio into additional
securities and the 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
loans 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-
to four-family and multi-family mortgage loans from other sources primarily
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, 1998, approximately 76% of First Northern's mortgage loan portfolio
was interest rate adjustable as compared to 89% at December 31, 1997.
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,
1998, 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. In 1998, First
Northern adjusted interest rates on indexed mortgage loans downward at or before
the contractual interest rate adjustment date in response to decreasing market
interest rates. If the adjustable indexed mortgage loans interest rates had not
been decreased, these mortgage loans would have refinanced to a fixed interest
rate mortgage loan or another indexed mortgage loan at a lesser interest rate.
In 1998, First Northern decreased interest rates on approximately $86.0 million
of its mortgage loans.
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 and offer a higher yield. 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, 1998 and 1997, approximately 35% of First Northern's
consumer loan portfolio was interest rate adjustable.
37
<PAGE> 40
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
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans originated and purchased :
Construction - residential $ 31,115 $ 25,709
Construction - commercial real estate 5,930
Loans on existing property 59,021 51,536
Refinancing 153,614 42,166
Other loans 2,049 2,398
----------- -----------
Total mortgage loans originated and purchased 251,729 121,809
Consumer loans originated and purchased:
Consumer 9,912 8,670
Second mortgage 38,747 36,896
Automobile 48,661 50,059
Education 2,317 2,568
----------- -----------
Total consumer loans originated and purchased 99,637 98,193
---------- ----------
Total loans originated and purchased $351,366 $220,002
======== ========
</TABLE>
The dollar volume of First Northern's mortgage loan originations and
purchases substantially increased in 1998 as compared to 1997 primarily as a
result of favorable market interest rates which fostered home purchases, new
home construction and refinancing of existing mortgage loans. In addition, First
Northern continued to purchase mortgage loans in 1998 primarily from other
Wisconsin financial institutions. In 1998, First Northern purchased $15.0
million of one- to four-family residential loans, $1.7 million of multi-family
loans and $0.6 million of commercial real estate loans as compared to $7.8
million of one- to four-family residential, $3.7 million of multi-family and
$1.0 million of commercial real estate loans in 1997. First Northern purchases
loans when interest rates on these loans 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 $38.7 million or 8.6% for 1998 as compared to $24.7 million or
5.8% in 1997. The increase in the 1998 mortgage loan portfolio was the result of
the substantial increase of mortgage loan originations.
In 1998, First Northern re-evaluated its asset and liability management
strategy (interest rate risk) and increased its percentage of fixed interest
rate mortgage loans in its mortgage portfolio from approximately 20% to
approximately 25%. This increase was implemented after a review of its asset and
liability gap position (See "Asset and Liability Management") and other
investment opportunities in the market. At December 31, 1998, First Northern had
approximately $116.0 million fixed interest rate mortgage loans in its mortgage
loan portfolio, compared to approximately $51.2 million of fixed interest rate
mortgage loans at December 31, 1997.
In 1998, First Northern sold $63.2 million of fixed interest rate
mortgage loans as compared to $18.7 million in 1997. This increase was the
result of the origination and subsequent sale of 30 year fixed interest rate
mortgage loans.
The consumer loan portfolio at December 31, 1998, increased $1.3
million as compared to December 31, 1997 as a result of increased consumer loan
originations and purchases. The moderate increase in consumer loan originations
of $1.4 million was the result of customers and individuals consolidating their
consumer loan needs into the refinancing of their mortgage loan and a slight
decrease in the dollar amount of loan purchases from SFC. In 1998, First
Northern and FNII purchased $40.9 million of automobile loans from SFC as
compared to $41.3 million in 1997. This decrease in purchases from SFC was the
result of additional competition in the indirect automobile loan market. SFC
originates indirect automobile loans in the State of Wisconsin and sells these
loans to the Savings Bank or FNII 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, 1998 was $36,479.
38
<PAGE> 41
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
--------------------------------
1998 1997
------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual mortgage loans $223 $333
Non-accrual consumer loans 123 107
----- -----
Total non-performing loans 346 440
Properties subject to foreclosure 68 135
Foreclosed properties and repossessed assets 38 18
------ ------
Total non-performing assets $452 $593
==== ====
Non-performing loans as a percent of total loans .05% .07%
=== ===
Non-performing assets as a percent of total assets .06% .09%
=== ===
</TABLE>
Total non-performing loans and assets decreased in 1998 as compared to
1997 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 1998
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
-----------------------------------------------
1998 1997 1996
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of the year $3,177 $2,937 $2,608
Provisions 420 320 370
Charge-offs (99) (101) (66)
Recoveries 33 21 25
--------- --------- ---------
Balance at the end of the year $3,531 $3,177 $2,937
====== ====== ======
Allowance as a percent of
total loans .56% .53% .53%
=== === ===
Allowance as a percent of
non-performing loans 1,020.52% 722.05% 394.76%
======== ====== ======
Allowance as a percent of
total assets .49% .48% .48%
=== === ===
Allowance as a percent of
non-performing assets 781.19% 535.75% 314.79%
====== ====== ======
</TABLE>
LIFE INSURANCE POLICIES. Life insurance policies or bank owned life insurance
("BOLI") increased $1.0 million in 1998 primarily as a result of the increased
value. 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
39
<PAGE> 42
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 benefit costs.
DEPOSITS. Deposits increased a record $60.6 million or 12.6% in 1998 as compared
to $23.5 million or 5.1% in 1997. As of December 31, 1998, deposits totaled
$542.4 million or 84.3% of total liabilities. This record deposit growth was the
result of various factors including the following: (i) many stock market
investors deposited money into First Northern deposit accounts as a safe haven
for their funds during the 1998 stock market turmoil; (ii) Northeastern
Wisconsin continuing to have good economic growth which has created new
customers and hence new First Northern deposits; and (iii) the utilization of
wholesale and jumbo deposits. 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 interest rate
spread. 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. At December 31, 1998, First Northern had a
total of $32.1 million of wholesale brokered, corporate and municipal jumbo
deposits as compared to $19.9 million at the end of 1997. Jumbo and wholesale
deposits accounted for 20% of the deposit increase for 1998 and were obtained at
a lower cost than retail deposits. This strategy of acquiring wholesale and
jumbo deposits will be an integral part of the Savings Bank's deposit
acquisition strategy for 1999.
First Northern believes that the household checking account is the
basic account upon which further customer banking relationships can be
developed. First Northern utilized aggressive pricing and marketing of the
checking account and has been able to become the "primary financial institution"
for many households. First Northern will continue to emphasize checking accounts
and services in 1999.
To enhance this checking account relationship and to increase
non-interest fee income, First Northern expanded its First Northern CheckCard
base. The First Northern CheckCard offers 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
1998 and 1997 and 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 continues to offers investors and
homeowners 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. First Northern had
anticipated at the beginning of 1998, that the new Roth and Education Individual
Retirement Account would result in higher deposit growth. First Northern did not
experience a significant deposit growth in these new retirement accounts in
1998. Additional educational efforts will be made to communicate the advantages
of the Roth and Education Individual Retirement Account to existing and
potential customers.
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
fourth year of profitability. Profits for 1998 were less than 1997 as a result
of adding an additional salesperson to the staff in 1998. 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.
40
<PAGE> 43
BORROWINGS. Borrowings, primarily from the FHLB of Chicago, decreased $11.3
million at December 31, 1998, as compared to December 31, 1997, as a result of
the Savings Bank's ability to increase deposits, the increased loan sales and
moderate loan growth. The borrowings have maturities ranging from overnight to
approximately nine 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 1999.
STOCKHOLDERS' EQUITY. First Northern's stockholders' equity to total assets
ratio at December 31, 1998, was 10.6%, as compared to 11.1% at December 31,
1997. 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, which 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 which 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. A third
stock repurchase program was implemented in March of 1998 which authorized the
repurchase of up to 446,101 shares. At December 31, 1998, 179,500 shares at an
average cost of $13.00 per share has been repurchased in the third stock
repurchase program. 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 six percent 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).
41
<PAGE> 44
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, 1998:
<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) $ 40,945 $194,516 $167,719 $76,582 $479,762
Consumer loans (b) 54,826 53,177 44,828 6,675 159,506
Investment securities (c) 11,785 7,964 16,851 36,600
Mortgage-related securities (d) 525 1,924 9,804 267 12,520
Interest-earning deposits 762 99 861
----------- -------------------------- ------------------------
Total rate-sensitive assets 108,843 257,680 239,202 83,524 689,249
Interest-bearing liabilities:
Passbook accounts (e) 4,998 6,405 24,052 30,432 65,887
NOW & variable rate insured
money market accounts (e) 57,354 5,029 21,059 50,769 134,211
Time deposits (e) 95,057 154,115 90,389 339,561
Advance payments by borrowers
for taxes and insurance 1,716 1,717 3,433
Borrowings 39,152 12,200 39,600 1,025 91,977
--------- ---------- ---------- ---------- -----------
Total rate-sensitive liabilities 198,277 179,466 175,100 82,226 635,069
-------- --------- --------- --------- ----------
Gap $(89,434) $ 78,214 $ 64,102 $ 1,298 $ 54,180
======== ========= ======== ======== =========
Cumulative gap $(89,434) $(11,220) $52,882 $54,180
======== ======== ======= =======
Cumulative gap as a percentage
of total assets (12.4)% (1.6)% 7.3% 7.5%
===== ==== === ===
</TABLE>
- - ----------
(a) Excludes undisbursed loan proceeds of $11,750; includes $1,913 of mortgage
loans held for sale.
(b) Includes $1,162 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 $2,713 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 - based upon contractual maturities, repricing date, if
applicable, scheduled repayments of principal and projected prepayments of
principal based upon the Company's historical experience; (iii) mortgage-related
securities - based upon an average of Wall Street estimates for prepayment
speeds; and (iv) 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 First Northern.
42
<PAGE> 45
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 most 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.
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 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
outsources a majority of its mission critical computer functions to a
Brookfield, 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. Fiserv has advised First Northern that it
has fully tested and renovated their systems for Year 2000 issues. First
Northern participated in client testing on October 11, 1998, which revealed no
significant issues. First Northern will also be performing additional tests with
Fiserv during the first quarter of 1999.
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, credit bureaus, credit card servicers, ATM networks, etc.
Based on recent assessments, First Northern 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
total cost of these modifications will not exceed a total of $170,000 (pre-tax).
At the end of December, 1998, approximately $115,000 has been spent on new
equipment, software and miscellaneous expenses for Year 2000. First Northern
does not separately track the internal costs incurred for the Y2K project, and
that such costs are principally the payroll costs for its information systems
group. First Northern currently believes that with these modifications, the Year
2000 will not pose a significant operational problems for its Systems. If such
modifications and conversions 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 phases of its Year 2000 project. The renovation, testing
and contingency planning phases are expected to be completed by the end of the
first quarter of 1999. At December 31, 1998, the renovation is approximately 87%
completed, the testing phase is approximately 64% completed and the contingency
planning phase is approximately 50% completed.
43
<PAGE> 46
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 its customers.
<TABLE>
<CAPTION>
Percent Time
Year 2000 Initiative Complete Frame
- - -------------------- ------------ ------------
<S> <C> <C>
Inventory and Assessment (List all systems affected by Year 2000).............100% 11/97-04/98
Analysis (Document systems status for Year 2000 compliance)...................100% 01/98-08/98
Renovation (Upgrade non-compliant systems to be Year 2000 ready)................87% 03/98-06/99
Testing (Simulate operations with dates advanced beyond 01/01/2000).............64% 05/98-06/99
Contingency Planning (Develop backup plans for critical systems)................50% 06/98-06/99
</TABLE>
Overall, First Northern estimates that 90% of the Year 2000 project has
been completed, as of December 31, 1998.
First Northern expects to use internal resources to reprogram, upgrade
or replace and test its internal Systems. Internal resources are also being used
to renovate Savings Financial Corporation (SFC), a partially owned subsidiary
operating in Hales Corner, Wisconsin.
Even though internal resources are being used to prepare for Year 2000
causing some other non-critical projects to be delayed, First Northern believes
there are 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 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.
44
<PAGE> 47
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 daily 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
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
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 $456,977 $ 33,510 7.33% $426,748 $31,443 7.37% $401,652 $28,831 7.18%
Consumer loans 160,706 13,273 8.26 148,614 12,529 8.43 126,177 10,725 8.50
Investment securities 34,828 2,138 6.14 29,154 1,844 6.33 25,215 1,582 6.27
Interest-earning deposits 2,623 147 5.60 762 45 5.91 1,220 66 5.41
Mortgage-related securities 9,996 622 6.22 11,558 735 6.36 10,344 672 6.50
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL 665,130 49,690 7.47 616,836 46,596 7.55 564,608 41,876 7.42
Interest-bearing liabilities:
Passbook accounts 63,643 1,364 2.14 60,057 1,322 2.20 58,744 1,313 2.24
NOW and variable rate insured
money market accounts 117,944 2,927 2.48 104,665 2,536 2.42 102,338 2,388 2.33
Time deposits 327,674 18,979 5.79 307,423 17,579 5.72 292,477 16,543 5.66
Advance payments by borrowers
for taxes and insurance 6,680 155 2.32 6,652 149 2.24 7,142 162 2.27
Borrowings 95,890 5,578 5.82 82,644 4,905 5.94 48,393 2,797 5.78
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL 611,831 29,003 4.74 561,441 26,491 4.72 509,094 23,203 4.56
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net interest earning assets
and interest rate spread $ 53,299 2.73% $ 55,395 2.83% $ 55,514 2.86%
========= ========= ========= ========= ========= =========
Average interest-earning
assets, net interest income
and net yield on average
interest-earning assets $665,130 $ 20,687 3.11% $616,836 $ 20,105 3.26% $564,608 $ 18,673 3.31%
========= ========= ========= ========= ========= ========= ========= ========= =========
Average interest-earning assets
to interest-bearing liabilities 108.7% 109.9% 110.9%
========= ========= =========
</TABLE>
(1) For the purpose of these computations, non-accruing loans and loans
held-for-sale are included in the average loan amounts outstanding.
45
<PAGE> 48
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
1998 VS 1997
---------------------------------------------------------
INCREASE (DECREASE) DUE TO:
---------------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------ ------------ ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $(171) $2,250 $(12) $2,067
Consumer loans (253) 1,018 (21) 744
Investment 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>
46
<PAGE> 49
<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>
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
YEAR ENDED DECEMBER 31
1996 VS 1995
---------------------------------------------------------
INCREASE (DECREASE) DUE TO:
---------------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------ --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
47
<PAGE> 50
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997.
GENERAL. Net income increased $793,000 in 1998 primarily as a result of the
dollar increase in interest-earning assets, gains from the sales of loans and a
reduction in the effective income tax rate.
INTEREST INCOME. Interest income on mortgage loans increased $2,067,000 as a
result of increased dollars outstanding in the mortgage loan portfolio. The
average interest rate earned decreased as a result of: (i) mortgage loans being
originated at interest rates below the existing mortgage loan portfolio yield;
(ii) downward interest rate adjustments to certain mortgage loans in its
portfolio before their scheduled adjustment dates in response to the refinancing
of existing adjustable interest rate mortgage loans; and (iii) the prepayments
of mortgage loans with higher than market interest rates.
Interest income on consumer loans increased $744,000 as a result of
an increase of $12.1 million of consumer loans outstanding throughout 1998. The
average interest rate earned on the consumer portfolio decreased to 8.26% in
1998 as compared to 8.43% in 1997 as a result of: (i) consumer loan originations
at interest rates that were below the existing yield on the consumer loan
portfolio; (ii) decreases in some of First Northern's consumer loans which use
the prime interest rate as an index; and (iii) prepayments to consumer loans
that are at interest rates above market interest rates.
Investment securities and interest-earning deposits interest income
increased $294,000 and $102,000 respectively, as a result of increased dollars
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 increase in the dollar amount of interest-earning deposits is the
result of excess funds above the funding needs for loans and operations, being
invested in short-term certificates of deposits or in overnight investments.
These additional funds were created by strong deposit gains and sales of loans.
Interest on mortgage-related securities decreased $113,000 as a
result of prepayment and repayments to the underlying collateral (mortgage
loans). The average interest rate earned on mortgage-related securities
decreased to 6.22% from 6.36% primarily as the result of prepayments and
repayments to higher than market interest rate securities and the purchase of
mortgage-related securities at lower interest rates than existing yields on the
mortgage-related securities portfolio.
INTEREST EXPENSE. Interest expense on deposits increased $1,833,000 as a result
of increased deposits. First Northern utilizes various time deposit terms and
interest rates to attract new deposits and in 1998, utilized wholesale deposits
as a method to acquire less expensive deposits. There are times when wholesale
deposits are a more cost effective method to acquire funds than retail deposits
or borrowings.
Interest expense on borrowings increased $673,000 in 1998 primarily
as a result of increased average borrowings outstanding. First Northern
primarily borrows from the FHLB of Chicago and anticipates that it will continue
to borrow to fund its growth in interest-earning assets in 1999.
Advance payments by borrowers for taxes and insurance ("escrow")
interest expense increased modestly in 1998 as a result of the increased number
of escrow accounts that were interest-bearing. Although the interest rate paid
on escrow accounts of 2.83% was the same in 1998 as it was in 1997, and the
average dollars in escrow were approximately equal, a number of non
interest-bearing escrow accounts were replaced by interest-bearing escrow
accounts thus increasing interest expense. The escrow interest rate for 1999 is
2.74%.
PROVISIONS FOR LOAN LOSSES. First Northern provided an additional $420,000 to
loan loss allowances in 1998. The total loan loss allowance at December 31,
1998, is $3,531,000 or .56% of the total loan portfolio at December 31, 1998, as
compared to $3,177,000 or .53% of the total loan portfolio at December 31, 1997.
48
<PAGE> 51
NON-INTEREST INCOME. Fees on serviced loans decreased $146,000 primarily as the
result of the amortization of the mortgage servicing asset in accordance with
Financial Accounting Standards ("FASB") No. 122, "Accounting for Mortgage
Servicing Rights." As the principal of a mortgage loan which was sold with
servicing retained repays or prepays, the mortgage servicing asset is reduced
and netted against the fees on serviced loans, thereby reducing the income on
serviced loans. In 1998, the amortization of the mortgage loan servicing asset
amounted to $215,000 and $38,900 in 1997.
Deposit account service charges increased $73,000 primarily as the
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.
Insurance commissions decreased $32,000 primarily as a result of a
reduction in the bonus received from insurance carriers. If First Northern
obtains a predetermined threshold of insurance sales and insurance losses are
below another threshold, insurance bonuses can be earned. In 1998, First
Northern insurance losses exceeded the threshold and the level of insurance
bonuses were reduced.
Gains on the sales of loans increased $683,000 as a result of
increased loan sales. Loan sales in 1998 were $65.6 million as compared to
$21.2 million in 1997. (See Financial Condition--Balance Sheet--Loans
Receivable).
Other non-interest income increased $359,000 primarily as the result
of BOLI. In December 1997, First Northern purchased $7.4 million of life
insurance to partially offset the future cost of employee benefits. Interest
earned on the $7.4 million of life insurance in 1998 was $396,000.
NON-INTEREST EXPENSE. Compensation expense increased $538,000 as a result of
normal salary increases, the addition of 5 full-time equivalent employees and
increased accruals for the director deferred retirement plan and supplemental
executive retirement plan.
Federal deposit insurance premiums increased $17,000 as a result of
increased deposits and in 1997, the receipt of a $15,000 refund of deposit
insurance premiums paid from prior periods.
Data processing expense increased $73,000 primarily from increased
depreciation expense and service contract expense on data processing equipment.
Furniture and equipment expense decreased $21,000 as a result of a
number of pieces of furniture and equipment being fully depreciated at the end
of 1997.
Telephone and postage expenses decreased $33,000 by negotiating a
reduction to the cost of long distance calls and an increase in expense
deferrals associated with the substantial increase in loan originations.
Incremental telephone and postage expenses associated with loan originations are
deferred and amortized back against interest income over the life of the loan,
which results in an adjustment to the loan yield.
Marketing expense increased $39,000 as a result of increased
advertising and marketing of deposit and loan products. First Northern believes
the growth in lending and deposit volumes is facilitated by increased marketing
of those products and hence, increased costs.
Other expenses increased $96,000 as a result of increased costs
associated with the operations of SFC, costs associated with the issuance and
operations of the debit card and an increase in bad checks and customer fraud.
INCOME TAXES. The effective income tax rate for 1998 is 34.6% as compared to
37.7% for 1997. This decrease in the effective income tax rate is primarily the
result of earnings on BOLI for which no income tax provision is provided and the
increase in earnings at FNII which is not subject to state income taxes. Both
activities have reduced state franchise taxes.
49
<PAGE> 52
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
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.
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.
Advance payments by borrowers 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.
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. There was no such amortization in 1996.
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.
50
<PAGE> 53
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) accrued 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.
51
<PAGE> 54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
First Northern's financial performance is affected 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 Net Portfolio Value ("NPV") 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 NPV and First Northern's Gap analysis. If First
Northern's change to NPV 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 adjustable interest rate mortgages, 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 intermediate-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 NPV of its cash
flows from assets, liabilities and off-balance sheet items in the event of an
increase or decrease of 100 basis points of assumed changes in market interest
rates up to 300 basis points. NPV 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 NPV in the event of sudden and
sustained increases and decreases in market interest rates. The following table
presents the Company's projected change in NPV for a 100 basis point to a 300
basis point shock level as of December 31, 1998, 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>
ACTUAL PERCENT BOARD
CHANGE IN INTEREST RATE NPV CHANGE CHANGE LIMIT
----------------------- -------- --------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
300 basis point rise $ 82,452 $(13,908) (14.4)% (35.0)%
200 basis point rise $ 86,937 $ (9,423) (9.8)% (25.0)%
100 basis point rise $ 91,542 $ (4,818) (5.0)% (15.0)%
Base Scenario $ 96,360 $ 0 0.0% 0.0%
100 basis point decline $ 102,204 $ 5,844 6.1% (15.0)%
200 basis point decline $ 110,220 $ 13,860 14.4% (25.0)%
300 basis point decline $ 122,178 $ 25,818 26.8% (35.0)%
</TABLE>
The preceding table indicated that at December 31, 1998, in the
event of a sudden and sustained increase or decrease in prevailing market
interest rates, the Company's NPV would be expected to decrease. At December 31,
1998, the Company's estimated changes in NPV were within the targets established
by the Board of Directors.
NPV is calculated based on the net present value of estimated cash
flows utilizing First Northern's prepayment assumptions and market prepayment
assumptions and market rates of interest provided by independent
52
<PAGE> 55
broker quotations and other public sources.
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 NPV analysis. Actual cash flows and values may differ from
those projections presented, should market conditions vary from assumptions used
in the calculation of the NPV 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 NPV 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> 56
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
January 22, 1999
Milwaukee, Wisconsin
54
<PAGE> 57
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 6,350 $ 640
Interest-earning deposits 861 324
-------- --------
CASH AND CASH EQUIVALENTS 7,211 964
Securities available-for-sale, at fair value:
Investment securities 9,205 6,799
Mortgage-related securities 996 932
Securities held-to-maturity:
Investment securities (estimated fair value of
$23,935--1998; $21,313--1997) 23,741 21,231
Mortgage-related securities (estimated fair value
of $11,594--1998; $10,689--1997) 11,522 10,675
Loans held for sale 3,075 2,119
Loans receivable 631,739 593,529
Accrued interest receivable 3,686 3,646
Foreclosed properties and repossessed assets 106 153
Office properties and equipment 7,573 8,004
Federal Home Loan Bank stock 5,250 5,250
Life insurance policies 12,514 11,523
Prepaid expenses and other assets 3,095 2,871
-------- --------
$719,713 $667,696
======== ========
</TABLE>
55
<PAGE> 58
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------- -----------------
(In Thousands)
<S> <C> <C>
LIABILITIES
Deposits $542,372 $481,788
Borrowings 91,977 103,277
Advance payments by borrowers for taxes and insurance 3,433 3,861
Other liabilities 5,838 4,953
-------- --------
TOTAL LIABILITIES 643,620 593,879
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: 9,134,735--1998;
9,136,104--1997; shares outstanding:
8,764,945--1998; 8,845,676--1997 9,135 9,136
Additional paid-in capital 9,126 9,438
Unrealized gain on securities available-for-sale,
net of taxes 960 614
Treasury stock at cost (369,790 shares--1998;
290,428 shares--1997) (3,710) (2,316)
Retained earnings 60,582 56,945
-------- --------
TOTAL STOCKHOLDERS' EQUITY 76,093 73,817
-------- --------
$719,713 $667,696
======== ========
</TABLE>
See accompanying notes.
56
<PAGE> 59
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------- -------------- ------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Interest income:
Mortgage loans $33,510 $31,443 $28,831
Consumer loans 13,273 12,529 10,725
Investment securities 2,138 1,844 1,582
Interest-earning deposits 147 45 66
Mortgage-related securities 622 735 672
--------- ---------- ----------
TOTAL INTEREST INCOME 49,690 46,596 41,876
Interest expense:
Deposits 23,270 21,437 20,244
Borrowings 5,578 4,905 2,797
Advance payments by borrowers for taxes and insurance 155 149 162
---------- ---------- ----------
TOTAL INTEREST EXPENSE 29,003 26,491 23,203
-------- -------- --------
NET INTEREST INCOME 20,687 20,105 18,673
Provision for loan losses 420 320 370
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 20,267 19,785 18,303
Non-interest income:
Fees on serviced loans 167 313 354
Loan fees and service charges 268 251 234
Deposit account service charges 1,300 1,227 960
Insurance commissions 292 324 320
Gains on sales of loans 1,042 359 259
Gain on sale of securities 9
Other 1,161 802 559
--------- ---------- ----------
TOTAL NON-INTEREST INCOME 4,239 3,276 2,686
Non-interest expense:
Compensation, payroll taxes and other employee benefits 7,804 7,266 6,729
Federal insurance premiums 301 284 985
SAIF special assessment 2,856
Occupancy 862 875 832
Data processing 1,476 1,403 1,166
Furniture and equipment 459 480 510
Telephone and postage 438 471 449
Marketing 409 370 351
Other 2,322 2,225 2,061
--------- --------- ----------
TOTAL NON-INTEREST EXPENSE 14,071 13,374 15,939
-------- -------- ---------
Income before income taxes 10,435 9,687 5,050
Income taxes 3,606 3,651 1,767
--------- --------- ---------
NET INCOME $ 6,829 $ 6,036 $ 3,283
======== ======== ========
BASIC NET INCOME PER SHARE $.77 $.68 $.37
==== ==== ====
DILUTED NET INCOME PER SHARE $.75 $.66 $.36
==== ==== ====
CASH DIVIDENDS PAID PER SHARE $.36 $.32 $.30
==== ==== ====
</TABLE>
See accompanying notes.
57
<PAGE> 60
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, 1996 $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 ($.32 per share) (2,826) (2,826)
Purchase of treasury stock (441) (441)
Exercise of stock options (403) 998 595
------ ------- ---- ------- ------- -------
Balance at December 31, 1997 9,136 9,438 614 (2,316) 56,945 73,817
Comprehensive income:
Net income 6,829 6,829
Other comprehensive income -
Change in net unrealized gain
on securities available-for-sale,
net of income taxes 346 346
------ ------- ---- ------- ------- -------
Total comprehensive income 346 6,829 7,175
Cash dividends ($.36 per share) (3,192) (3,192)
Retirement of common stock (1) (17) (18)
Purchase of treasury stock (2,333) (2,333)
Exercise of stock options (295) 939 644
------ ------- ---- ------- ------- -------
Balance at December 31, 1998 $9,135 $ 9,126 $960 $(3,710) $60,582 $76,093
====== ======= ==== ======= ======= =======
</TABLE>
See accompanying notes.
58
<PAGE> 61
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $6,829 $6,036 $3,283
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for losses on loans 420 320 370
Provision for depreciation and amortization 859 873 756
Gains on sales of loans (1,042) (359) (259)
Gain on sale of securities (9)
Loans originated for sale (66,527) (20,746) (13,795)
Proceeds from loan sales 66,613 21,159 14,252
Increase in interest receivable (40) (351) (221)
Increase in interest payable 194 165 75
Other (392) (6,598) (318)
--------- ---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 6,905 499 4,143
INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities and interest-earning deposits 18,201 6,800 11,150
Proceeds from the sale of securities 2,251
Purchases of investment securities (24,776) (12,211) (10,782)
Principal repayments of mortgage-
related securities 2,882 1,522 556
Purchases of mortgage-related securities (3,777) (1,977) (5,697)
Net increase in loans receivable (38,774) (39,963) (54,086)
Purchases of office properties and equipment (428) (839) (745)
Purchase of Federal Home Loan Bank stock (1,477) (5)
------------- -------- ------------
NET CASH USED BY INVESTING
ACTIVITIES (44,421) (48,145) (59,609)
</TABLE>
See accompanying notes.
59
<PAGE> 62
First Northern Capital Corp. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits $ 60,390 $ 23,300 $ 8,294
Net increase (decrease) in short-term borrowings (20,050) 9,080 18,122
Proceeds from long-term borrowings 35,750 63,825 51,150
Repayment of long-term borrowings (27,000) (46,900) (13,000)
Cash dividends (3,192) (2,826) (2,667)
Purchase of treasury stock (2,333) (441) (3,698)
Retirement of common stock (18) (66)
Proceeds from exercise of stock options 644 595 723
Net decrease in advance payments by borrowers
for taxes and insurance (428) (1,586) (1,103)
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,763 45,047 57,755
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,247 (2,599) 2,289
Cash and cash equivalents at beginning of year 964 3,563 1,274
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,211 $ 964 $ 3,563
======== ======== ========
SUPPLEMENTAL INFORMATION TO THE STATEMENTS OF CASH FLOWS:
Interest credited and paid on deposits $ 22,911 $ 21,273 $20,169
Interest paid on borrowings 5,515 4,799 2,539
Payments for federal and state income taxes 3,842 3,212 2,193
Loans transferred to foreclosed properties and
repossessed assets 315 387 411
</TABLE>
60
<PAGE> 63
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: First Northern Capital Corp. (the Company) provides a full range of
financial services to individual customers in Northeastern Wisconsin through its
wholly owned subsidiary bank, First Northern Savings Bank, S.A. (the Savings
Bank). 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 balances of the Company, the Savings Bank and the
Savings Bank's wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Investment in its fifty
percent owned subsidiary, which is not material, is accounted for on the equity
method.
The accounting and reporting policies of the Company, the Savings Bank and the
Savings Bank's subsidiaries conform to generally accepted accounting principles
and to general practices within the financial services industry. In preparing
the financial statements, 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: Debt 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
61
<PAGE> 64
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
contractual principal and interest is no longer in doubt.
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 and certain direct loan origination costs are deferred and recorded
as an adjustment of the sales price.
MORTGAGE SERVICING RIGHTS: Effective January 1, 1997, 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. Valuation adjustments, if any, are also included in "Fees on
Serviced Loans." In previous periods, costs were fully allocated to the loan and
servicing income was recognized as received over the life of the loan.
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 1998 or 1997.
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.
62
<PAGE> 65
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
LIFE INSURANCE POLICIES: Investments in life insurance policies owned by the
Company are carried at the amount that could be realized under the insurance
contract.
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 8,851,486, 8,834,937 and 8,922,526 for the years ended
December 31, 1998, 1997 and 1996, respectively. The number of shares used in
computing diluted earnings per share is 9,092,653, 9,080,237 and 9,130,444, for
the years ended December 31, 1998, 1997 and 1996, respectively.
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.
NEW AND PENDING ACCOUNTING PRONOUNCEMENTS: Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information," requires public companies to
report financial and descriptive information about their operating segments
using a "management approach." Operating segments are defined as
revenue-producing components of the enterprise for which separate financial
information is produced internally and are subject to evaluation by the chief
operating decision maker in deciding how to allocate resources to segments.
Statement No. 131 is effective for 1998; however, the Company has determined
that its only operating and reportable segment is community banking and
therefore it is not required to present any further information under Statement
No. 131.
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The new
Statement resolves the inconsistencies that currently exist with respect to
derivatives accounting, and dramatically changes the way many derivatives
transactions and hedged items are reported. Statement No. 133 is effective for
years beginning after June 15, 1999. This Statement is not expected to have an
impact on the Company.
RECLASSIFICATIONS: Certain amounts in the 1997 and 1996 financial statements
have been reclassified to conform to the 1998 presentations.
63
<PAGE> 66
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, 1998:
U.S. Treasury Notes $7,041 $ 88 $(4) $ 7,125
Asset Management Funds 535 (1) 534
FHLMC stock 33 1,513 1,546
------ ------ ---- -------
7,609 1,601 (5) 9,205
Mortgage-related securities 998 (2) 996
------ ------ ---- -------
$8,607 $1,601 $(7) $10,201
====== ====== ==== =======
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
====== ====== ==== ======
</TABLE>
Proceeds from sale of securities available-for-sale in 1998, 1997 and 1996 were
$2,251,000, $0 and $0, respectively. Gross gains of $9,000, $0 and $0,
respectively, were realized on those sales.
64
<PAGE> 67
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE B-SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
At December 31, 1998, 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>
At December 31, 1998:
U.S. Government and
agency securities $23,741 $205 $(11) $23,935
======= ===== ==== =======
At December 31, 1997:
U.S. Government and
agency securities $21,231 $101 $(19) $21,313
======= ==== ==== =======
</TABLE>
At December 31, 1998, 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 $ 6,520 $ 6,555
Due after one year through five years 12,220 12,382
Due after five years through ten years 5,001 4,998
-------- ---------
$23,741 $23,935
======== =========
</TABLE>
65
<PAGE> 68
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE C-SECURITIES HELD-TO-MATURITY (CONTINUED)
The amortized cost and estimated fair values of mortgage-related securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Estimated
Cost Gains Losses Fair Value
----------- --------- ----------------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
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
======= === === =======
At December 31, 1997:
Federal Home Loan
Mortgage Corporation $ 7,028 $59 $(36) $ 7,051
Federal National Mortgage
Association 3,647 19 (28) 3,638
--------- ---- ----- ---------
$10,675 $78 $(64) $10,689
======= === ==== =======
</TABLE>
66
<PAGE> 69
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE D-LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------- ----------------
(In Thousands)
<S> <C> <C>
First mortgage loans:
One- to four-family residential $416,974 $393,563
Five or more family residential 32,013 24,506
Commercial real estate 7,546 9,269
Construction, primarily one- to four-family residential 29,937 21,348
Other 3,129 2,226
----------- -----------
489,599 450,912
Consumer loans:
Consumer 18,416 18,200
Second mortgage 66,426 68,596
Automobile 73,502 70,276
---------- ----------
158,344 157,072
647,943 607,984
Less:
Undisbursed loan proceeds 11,750 10,290
Allowance for losses on loans 3,531 3,177
Unearned loan fees 923 988
------------ ------------
16,204 14,455
---------- ----------
$631,739 $593,529
======== ========
</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 $150,161,000, $126,980,000 and $120,999,000 at
December 31, 1998, 1997 and 1996, respectively. These loans are not reflected in
the consolidated financial statements.
67
<PAGE> 70
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE D-LOANS RECEIVABLE (CONTINUED)
Activity in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------- ----------------- --------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $3,177 $2,937 $2,608
Provisions 420 320 370
Charge-offs (99) (101) (66)
Recoveries 33 21 25
--------- --------- ---------
Balance at end of year $3,531 $3,177 $2,937
====== ====== ======
</TABLE>
NOTE E-OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Land $ 2,045 $ 2,045
Office buildings 7,052 7,032
Furniture and equipment 2,891 2,896
Leasehold improvements 74 74
---------- ----------
12,062 12,047
Less allowance for depreciation and amortization 4,489 4,043
--------- ---------
$ 7,573 $ 8,004
======= =======
</TABLE>
68
<PAGE> 71
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE F-DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------ ------------------
(In Thousands)
<S> <C> <C>
Passbook $ 65,887 $ 60,076
Negotiable Order of Withdrawal accounts:
Non-interest bearing 25,747 19,764
Interest bearing 43,526 36,861
Variable rate insured money market accounts 64,938 51,838
Certificate accounts:
2.00% to 3.99% 1,262
4.00% to 4.99% 42,348 32,483
5.00% to 5.99% 206,600 130,822
6.00% to 7.99% 90,613 146,115
8.00% to 10.99% 48
-------- --------
339,561 310,730
-------- --------
539,659 479,269
Accrued interest 2,713 2,519
-------- --------
$542,372 $481,788
======== ========
</TABLE>
Aggregate annual maturities of certificate accounts at December 31, 1998, are as
follows (in thousands):
<TABLE>
<CAPTION>
Maturities during the twelve
months ending December 31:
<S> <C> <C>
1999 $219,798
2000 82,550
2001 21,910
2002 12,933
2003 1,870
Thereafter 500
--------
$339,561
========
</TABLE>
Deposit accounts with balances greater than $100,000 were $68,685,000 and
$54,528,000 at December 31, 1998 and 1997, respectively.
69
<PAGE> 72
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE G-BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
------------- ------------- ------------- ----------
(Dollars in Thousands)
Federal Home Loan Bank advances maturing in
<S> <C> <C> <C> <C>
1998 $ 26,000 5.95%
1999 $15,200 5.88% 11,200 6.05
2000 20,375 5.69 11,275 5.88
2001 10,900 5.88 6,050 6.21
2002 18,000 5.43 18,000 5.43
2003 11,325 5.75 2,550 6.00
2008 8,025 4.99
Open line of credit 7,675 5.13 26,065 6.92
------- --------
Total FHLB advances 91,500 101,140
Federal reserve bank line of credit 477 4.12 1,237 5.27
Reverse repurchase agreements 900 5.79
------- --------
Total $91,977 $103,277
======= ========
</TABLE>
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) depositary 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, 1998 and 1997, U.S. government
securities with a face value of $4,000,000 and $1,500,000, 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, 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 a market value of
$1,017,578. Based on the month-end balances, securities sold under agreements to
repurchase averaged $650,000, $1,216,667 and $1,041,667 during the years ended
December 31, 1998, 1997 and 1996, respectively. The maximum amount outstanding
at any month end during the years ended December 31, 1998, 1997 and 1996 was
$900,000, $1,500,000 and $1,500,000, respectively.
70
<PAGE> 73
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE G-BORROWINGS (CONTINUED)
At December 31, 1998, the Company had an irrevocable letter of credit
outstanding with the FHLB for $1,497,850. This letter of credit is pledged
against a municipal deposit with the Savings Bank. No amounts have been drawn
against the letter of credit by the Savings Bank.
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 differed from the provision for such losses charged to income for financial
reporting purposes. At December 31, 1998, retained earnings includes
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>
1998 1997 1996
-------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $3,333 $2,802 $1,616
State 432 577 324
------- ------- -------
3,765 3,379 1,940
Deferred:
Federal (127) 209 (132)
State (32) 63 (41)
------- ------- -------
(159) 272 (173)
------- ------- -------
$3,606 $3,651 $1,767
====== ====== ======
</TABLE>
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>
1998 1997 1996
-------------- -------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Income before income taxes $10,435 $9,687 $5,050
======= ====== ======
Income tax expense at federal statutory
rate of 34.0416% (34% for 1997 and 1996) $3,552 $3,294 $1,717
Increase (decrease) resulting from:
State income taxes, net of federal
income tax benefits 264 422 187
Other (210) (65) (137)
-------- --------- --------
$3,606 $3,651 $1,767
====== ====== ======
</TABLE>
71
<PAGE> 74
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE H-INCOME TAXES (CONTINUED)
The components of the Savings Bank's deferred tax assets and liabilities as of
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Deferred compensation $1,010 $ 747
Loss reserves 830 554
Excess servicing gains 41 49
Other 4 6
--------- ---------
Total deferred tax assets 1,885 1,356
Deferred tax liabilities:
Deferred loan fees 429 140
Mortgage servicing rights 262 97
FHLB stock dividends 164 160
Depreciation 174 265
Unrealized securities gains 632 400
Other 35 32
-------- ---------
Total deferred tax liabilities 1,696 1,094
------ -------
$ 189 $ 262
====== =======
</TABLE>
There is no valuation allowance relative to deferred tax assets recognized for
financial statement purposes at December 31, 1998 or 1997.
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).
72
<PAGE> 75
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE I-STOCKHOLDERS' EQUITY (CONTINUED)
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, 1998, 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, 1998, 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.
73
<PAGE> 76
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE I-STOCKHOLDERS' EQUITY (CONTINUED)
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, 1998:
Tangible capital
(to tangible assets) $68,524 9.55% $10,761 1.50% $35,872 5.00%
Core capital
(to tangible assets) 68,524 9.55% 28,697 3.00% 43,046 6.00%
Risk-based capital
(to risk-weighted assets) 72,054 15.74% 36,620 8.00% 45,775 10.00%
State of Wisconsin capital
(to total assets) 73,413 10.20% 43,181 6.00% N/A N/A
As of December 31, 1997:
Tangible capital
(to tangible assets) $68,073 10.20% $ 9,988 1.50% $33,293 5.00%
Core capital
(to tangible assets) 68,073 10.20% 19,976 3.00% 39,951 6.00%
Risk-based capital
(to risk-weighted assets) 71,250 16.70% 34,232 8.00% 42,790 10.00%
State of Wisconsin capital
(to total assets) 72,318 10.80% 40,062 6.00% N/A N/A
</TABLE>
74
<PAGE> 77
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE I-STOCKHOLDERS' EQUITY (CONTINUED)
Following are reconciliations of the Bank's stockholders' 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, 1998:
Regulatory capital $68,524 $72,055 $73,414
Unrealized gains on available-for-sale securities 960 960
Investments in and advances to non-includable
subsidiaries 399 399
Allowance for loan losses (3,531) (3,531)
------------ -------- -------
Stockholders' equity (First Northern Savings
Bank only) $69,883 $69,883 $69,883
======= ======= =======
Stockholders' equity (First Northern Capital Corp.) $76,093 $76,093 $76,093
======= ======= =======
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>
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
75
<PAGE> 78
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
calendar year,
NOTE I-STOCKHOLDERS' EQUITY (CONTINUED)
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 and concluded on 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. A third stock repurchase program began March 20, 1998, for up to
446,101 shares and will conclude March 20, 1999. As of December 31, 1998,
179,500 shares had been repurchased at an average price of $13.00 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, up to 4%. 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. Total expense relating
to this plan for 1998, 1997 and 1996 was $442,000, $379,000 and $358,000,
respectively.
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 1998, 1997 and 1996 was $809,000, $513,000 and $265,000, respectively.
The Savings Bank does not, as a policy, offer post-retirement benefits other
than the plans discussed above.
76
<PAGE> 79
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE J-EMPLOYEE BENEFIT PLANS (CONTINUED)
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 331/3% for each year.
Upon a director's retirement, the options become fully vested. Options expire no
later than ten years from the grant date.
The 1994 Executive Stock Plan has 760,000 shares of common stock reserved for
the grant of incentive stock options, non-qualified 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 price.
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.
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 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 1998 and 1997: risk-free interest rates of 5.41% and 5.57%,
respectively; dividend yield of 3.00% and 4.50%, respectively; volatility
factors of the expected market price of the Company's common stock of .222 and
.202, respectively; 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.
77
<PAGE> 80
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE J-EMPLOYEE BENEFIT PLANS (CONTINUED)
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
1998 1997
------------------ ------------------
(Dollars In Thousands, Except Per
Share Amounts)
<S> <C> <C>
Net income $6,829 $6,036
====== ======
Pro forma net income $6,665 $5,953
====== ======
Pro forma basic earnings per share $ 0.75 $ 0.67
====== ======
Pro forma diluted earnings per share $ 0.73 $ 0.65
====== ======
</TABLE>
A summary of stock option transactions for each of the three years in the period
ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price Per Exercise
Shares Share Price
----------- ----------------- -----------
<S> <C> <C> <C>
Balance at January 1, 1996 663,584 $1.77 - 7.88 $4.74
Granted 91,600 7.88 7.88
Exercised (139,564) 1.77 - 7.63 4.66
Expired (8,000) 7.88 7.88
---------- ------
Balance at December 31, 1996 607,620 $1.77 - 8.38 5.19
Granted 113,000 1.77 - 7.88 8.36
Exercised (121,618) 1.77 - 7.88 4.09
-------- ------
Balance at December 31, 1997 599,002 $1.77 - 8.25 6.02
Granted 95,600 12.75 - 13.25 13.14
Exercised (100,138) 1.77 - 8.38 5.34
-------- ------
Balance at December 31, 1998 594,464 $1.77 - 13.25 $7.27
======= =====
</TABLE>
78
<PAGE> 81
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE J-EMPLOYEE BENEFIT PLANS (CONTINUED)
At December 31, 1998, 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.
Off-balance-sheet financial instruments whose contract amounts represent credit
and/or interest rate risk are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------- ----------------
(In Thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed rate $4,656 $ 1,279
Adjustable 3,618 1,665
Commitments to sell mortgage loans 4,103 699
Unused overdraft protection lines of credit for
checking accounts 1,522 1,488
Unused home equity lines of credit 15,819 13,950
Unused commercial real estate line of credit 943 906
Unused credit card lines of credit 4,577 3,364
</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.
79
<PAGE> 82
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE K-COMMITMENTS (CONTINUED)
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.
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.
80
<PAGE> 83
First Northern Capital Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NOTE L-FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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, 1998 or 1997.
81
<PAGE> 84
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>
1998 1997
------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,211 $ 7,211 $ 964 $ 964
========== ========== =========== ===========
Investment and mortgage-related
securities available-for-sale $ 10,201 $ 10,201 $ 7,731 $ 7,731
========= ========= ========== ==========
Investment and mortgage-related
securities held-to-maturity $ 35,263 $ 35,529 $ 31,906 $ 32,002
========= ========= ========= =========
Loans receivable $631,183 $636,243 $598,825 $599,254
======== ======== ======== ========
Accrued interest receivable $ 3,686 $ 3,686 $ 3,646 $ 3,646
========== ========== ========== ==========
Mortgage servicing rights $ 654 $ 654 $ 247 $ 247
=========== =========== =========== ===========
Federal Home Loan Bank stock $ 5,250 $ 5,250 $ 5,250 $ 5,250
========== ========== ========== ==========
Deposits $539,659 $504,914 $479,269 $458,374
======== ======== ======== ========
Accrued interest on deposits $ 2,713 $ 2,713 $ 2,519 $ 2,519
========== ========== ========== ==========
Borrowings $ 91,977 $ 92,522 $103,277 $103,162
========= ========= ======== ========
</TABLE>
82
<PAGE> 85
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,
1998 and 1997, 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.
First Northern Capital Corp.
Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------- --------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 5,998 $ 4,527
Equity in net assets of subsidiaries 69,883 69,141
Other assets 228 156
---------- ----------
$76,109 $73,824
======= =======
LIABILITIES
Other liabilities $ 16 $ 7
---------- ----------
TOTAL LIABILITIES 16 7
STOCKHOLDERS' EQUITY
Common stock 9,135 9,136
Additional paid-in capital 9,126 9,438
Unrealized gain on securities available-for-sale, net of taxes 960 614
Treasury stock, at cost (3,710) (2,316)
Retained earnings 60,582 56,945
-------- --------
TOTAL STOCKHOLDERS' EQUITY 76,093 73,817
-------- --------
$76,109 $73,824
======= =======
</TABLE>
83
<PAGE> 86
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
1998 1997 1996
----------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
INTEREST INCOME:
Interest-earning deposits $ 249 $ 170 $ 46
NON-INTEREST INCOME:
Equity in net income of Savings Bank 6,751 6,010 3,373
NON-INTEREST EXPENSE:
Compensation 12 12 13
Postage 4
Other 109 115 119
------- -------- --------
TOTAL NON-INTEREST EXPENSE 121 127 136
-------- -------- --------
Income before taxes 6,879 6,053 3,283
Income taxes 50 17
--------- --------- -----------
NET INCOME $6,829 $6,036 $3,283
====== ====== ======
</TABLE>
84
<PAGE> 87
NOTE M-CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
First Northern Capital Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,829 $ 6,036 $ 3,283
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Less equity in earnings of the Savings Bank (6,751) (6,010) (3,373)
Other (63) 29 2
------- -------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 15 55 (88)
------- -------- -------
FINANCING ACTIVITIES:
Cash dividends received 6,355 2,915 10,205
Cash dividends paid (3,192) (2,826) (2,667)
Purchase of treasury stock (2,333) (441) (3,698)
Retirement of common stock (18) (66)
Proceeds from exercise of stock options 644 487 650
------- -------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,456 135 4,424
------- -------- -------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,471 190 4,336
Cash and cash equivalents at beginning of period 4,527 4,337 1
------- ------ -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,998 $ 4,527 $ 4,337
======= ======= =======
</TABLE>
85
<PAGE> 88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
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" in First Northern's definitive Proxy Statement for its Annual
Meeting of Stockholders on April 28, 1999 (the "1999 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 1999 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 1999 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 1999 Annual Meeting Proxy Statement.
86
<PAGE> 89
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, 1998 and
1997.
Consolidated Statements of Income - Years Ended December 31, 1998, 1997
and 1996.
Consolidated Statements of Changes In Stockholders' Equity - Years Ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997 and 1996.
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 1998.
87
<PAGE> 90
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 18, 1999
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.*
SIGNATURE AND TITLE
<TABLE>
<CAPTION>
<S> <C> <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/Richard C. Smits
------------------------------------- -----------------------------------
Michael D. Meeuwsen, President, Richard C. Smits, 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
-------------------------------------
Howard M. Frankenthal, Director
</TABLE>
- - ---------------
* Each of the above signatures is affixed as of March 18, 1999.
88
<PAGE> 91
FIRST NORTHERN CAPITAL CORP.
(THE "REGISTRANT)
COMMISSION FILE NO. 0-27982
EXHIBIT INDEX
TO
1998 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO HEREWITH
- - -------- ------------ -------------------- ----------
<S> <C> <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 Statement/Prospectus") contained in
Interim 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
Bank 12/20/95 8-K
10.2.1** Employment Agreements, dated as of Exhibit 10.2.1 to Registrant's
January 2, 1990, between Savings Bank and 12/20/95 8-K
each of 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 Exhibit 10.2.2 to Registrant's
January 2, 1992, between Savings Bank and 12/20/95 8-K
Dale J. Darmody
</TABLE>
EI-1
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT Incorporated Herein Filed
NUMBER Description by Reference to Herein
- - ----------- ------------ -------------------- -------
<S> <C> <C> <C>
10.2.3** Employment Agreements, dated as of Exhibit 10.2.4 to Registrant's
April 28, 1994, between Savings Bank and 12/20/95 8-K
each of the following executive officers of
Savings Bank: Charles R. Albers; Richard
C. Smits; and Steven L. Wilmet
10.2.4** Amendments No. 1 to Employment Exhibit (10)-2.5 to Registrant's
Agreements, dated as of September 20, 1995 Registration Statement
1995, between 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;
Charles R. Albers; Richard C. Smits; and
Steven L. Wilmet
10.3.1** Non-Qualified Deferred Retirement Plan Exhibit 10.3 to Registrant's
for Directors of Savings Bank 12/20/95 8-K
10.3.2** Resolutions Amending the Non-Qualified X
Deferred Retirement Plan for Directors of
Savings Bank.
10.4.1** 1999 Stock Plan Appendix A to the Proxy
Statement for Annual Meeting of
Stockholders' on April 28, 1999
10.4.2** 1989 Executive Stock Option Plan Exhibit 10.4.2 to Registrant's
(assumed by Registrant) 12/20/95 8-K
10.4.3** 1989 Directors' Stock Option Plan Exhibit 10.4.3 to Registrant's
(assumed 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 Exhibit 10.4.6 to Registrant's
(assumed by Registrant) 12/20/95 8-K
10.5.1** Salary Continuation Agreement dated as Exhibit 10.5.3 to Registrant's
of April 28, 1994, between Savings Bank 12/20/95 8-K
and Richard C. Smits
10.5.2** 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
</TABLE>
EI-2
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT Incorporated Herein Filed
NUMBER Description by Reference to Herein
- - ------- ------------ -------------------- -------
<S> <C> <C> <C>
10.6.2** Supplemental Retirement Agreement, Exhibit (10)-6.2 to Registrant's
dated as of January 1, 1995, between 1995 Registration Statement
Savings Bank and Richard C. Smits
10.6.3** Amendments No. 1 to Supplemental Exhibit (10)-6.3 to Registrant's
Retirement Agreements, dated as of 1995 Registration Statement
September 20, 1995, 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; Richard C. Smits;
and John E. Steinbrecker
10.6.4** Form of Amendment to Supplemental X
Retirement Agreements dated as of October
15, 1998, 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; and John E. Steinbrecker
10.7 Agreements in connection with acquisition Exhibit 10.7 to Registrant's
of 50% stock interest in Savings Financial 12/20/95 8-K
Corporation
11.1 Statement regarding computation of per X
share earnings
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, X
Registrant's independent auditors
24.1 Power of Attorney, contained in the X
signature page of this Report
27.1 Financial Data Schedule, which is X
submitted 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> 1
Exhibit 10.3.2
(1998 10-K)
FIRST NORTHERN SAVINGS BANK, S.A.
AMENDMENT NUMBER 1 TO
NONQUALIFIED DEFERRED RETIREMENT PLAN FOR DIRECTORS
WHEREAS, First Northern Savings Bank, S.A. (hereinafter "First Northern")
has previously established the First Northern Savings Bank, S.A. Non-Qualified
Deferred Retirement Plan for Directors (the "Plan"); and
WHEREAS, First Northern desires to amend the eligibility and benefit rules.
NOW, THEREFORE, BE IT RESOLVED, that the First Northern Savings Bank, S.A.
Non-Qualified Deferred Retirement Plan for Directors is hereby amended as
follows:
1. The first sentence of Article I is amended to read as follows:
"For purposes of this Plan, a director eligible to participate
in the Plan shall be any individual who, on or after the
Effective Date set forth herein, is serving as a member of the
Board of Directors of First Northern (an "Eligible Director")
and who has been designated by First Northern as an Eligible
Director."
2. The second sentence of Article II, Section 1 shall be amended
to read as follows:
"For purposes of the Plan, the term Board Service shall mean
service as an Eligible Director, including service both before
and after the Effective Date of the Plan and, to the extent
designated by First Northern, including service as a director
of a predecessor institution."
3. Article II, Section 2 is amended to read as follows:
"An Eligible Director who terminates Board Service for any
reason before attaining age 62 shall be entitled to a monthly
retirement benefit from the Plan if, as of the date the
Eligible Director terminates Board Service, his age plus his
full years of Board Service equal or exceed 70."
<PAGE> 1
Exhibit 10.6.4
(1998 10-K)
AMENDMENT TO
SUPPLEMENTAL RETIREMENT AGREEMENT
This Amendment is made and entered into as of __________________________,
19____ between First Northern Savings Bank, S.A. (the "Employer") and
_________________________________ (the "Executive").
WHEREAS, Employer and Executive entered into a Supplemental Retirement
Agreement dated as of the __________ day of _______________________, 1994 (the
"Supplemental Retirement Agreement"); and
WHEREAS, Executive and Employer have agreed to modify Executive's benefits
under the Supplemental Retirement Agreement in order to encourage Executive's
continued employment.
NOW, THEREFORE, for good and valuable consideration which is acknowledged
by Executive and Employer, the parties hereto hereby agree as follows:
1. Section 2.1(a) of the Supplemental Retirement
Agreement is amended to read as follows:
(a) such time as the sum of Executive's Age and Years
of Service total 70.
2. Section 2.3(a) of the Supplemental Retirement
Agreement is amended to read as follows:
(a) such time as the sum of Executive's Age and Years
of Service total 70.
3. All other terms and conditions of the Supplemental
Retirement Agreement shall remain in effect and
unchanged.
IN WITNESS WHEREOF, the parties have executed this amendment to the
Supplemental Retirement Agreement as of the day and year first above written.
FIRST NORTHERN SAVINGS BANK, S.A.
By: ______________________________
______________________________
Executive
<PAGE> 1
Exhibit 11.1
(1998 10-K)
FIRST NORTHERN CAPITAL CORP.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
BASIC:
Weighted average common shares
outstanding during each period 8,851,486 8,834,937 8,922,526
========= ========= =========
DILUTED:
Weighted average common shares
outstanding during each period 8,851,486 8,834,937 8,922,526
Incremental share relating to:
Dilutive stock options outstanding at
end of each period (1) 241,167 245,300 207,918
---------- ---------- ----------
9,092,653 9,080,237 9,130,444
========= ========= =========
NET INCOME FOR EACH PERIOD $6,829,000 $6,036,000 $3,283,000
NET INCOME PER COMMON
SHARE AMOUNTS:
Basic $0.77 $0.68 $0.37
Diluted $0.75 $0.66 $0.36
</TABLE>
Notes:
(1) Based on treasury stock method using average market price.
<PAGE> 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. 33-80847 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 22, 1999, 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, 1998.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF FIRST NORTHERN CAPITAL CORP. FOR THE FISCAL
YEAR ENDED 12-31-98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,350
<INT-BEARING-DEPOSITS> 861
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,201
<INVESTMENTS-CARRYING> 35,263
<INVESTMENTS-MARKET> 35,529
<LOANS> 638,345
<ALLOWANCE> 3,531
<TOTAL-ASSETS> 719,713
<DEPOSITS> 542,372
<SHORT-TERM> 8,152
<LIABILITIES-OTHER> 5,838
<LONG-TERM> 83,825
9,135
0
<COMMON> 0
<OTHER-SE> 66,598
<TOTAL-LIABILITIES-AND-EQUITY> 719,713
<INTEREST-LOAN> 46,783
<INTEREST-INVEST> 2,907
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 49,690
<INTEREST-DEPOSIT> 23,270
<INTEREST-EXPENSE> 29,003
<INTEREST-INCOME-NET> 20,687
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 14,071
<INCOME-PRETAX> 10,435
<INCOME-PRE-EXTRAORDINARY> 10,435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,829
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 3.11
<LOANS-NON> 346
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,177
<CHARGE-OFFS> 99
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 3,531
<ALLOWANCE-DOMESTIC> 3,531
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
