<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended...................................March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition quarter from......................to.........................
Commission file number...................................................0-18046
FIRST FEDERAL CAPITAL CORP
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Wisconsin 39-1651288
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
605 State Street
La Crosse, Wisconsin 54601
- --------------------------------------- ----------
(Address of principal executive office) (Zip code)
605 State Street, La Crosse, Wisconsin 54601
--------------------------------------------------
(Address of principal executive office) (Zip code)
(608) 784-8000
----------------------------------------------------
(Registrant's Telephone Number, including area code)
Not applicable
-----------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
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 quarter that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock--$.10 Par Value Outstanding at May 3, 1996: 6,281,868
---------------------------- ---------
<PAGE> 2
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 1996, and December 31, 1995
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 23,387,994 $ 30,384,484
Interest-bearing deposits 8,813,570 4,051,288
Investment securities available for sale, at
fair value 72,762,713 80,325,428
Mortgage-backed and related securities:
Available for sale, at fair value 77,974,534 84,172,997
Held for investment, at cost (fair value of
$162,600,067 and $169,365,825,
respectively) 166,852,539 171,493,244
Loans held for sale, net 30,622,878 23,976,063
Loans held for investment, net 927,899,627 932,083,879
Federal Home Loan Bank stock 14,764,000 16,855,100
Accrued interest receivable, net 10,426,848 10,133,211
Office properties and equipment 26,707,746 27,176,063
Mortgage servicing rights, net 10,884,451 10,292,604
Intangible assets 5,537,175 5,642,719
Other assets 5,434,425 5,891,607
--------------- --------------
Total assets $ 1,382,068,500 $1,402,478,687
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit liabilities $ 995,273,597 $ 969,422,519
Federal Home Loan Bank advances and
other borrowings 277,409,228 322,295,781
Advance payments by borrowers for taxes and
insurance 4,875,607 3,740,518
Accrued interest payable 2,646,813 2,632,658
Other liabilities 7,191,350 5,448,217
--------------- --------------
Total liabilities 1,287,396,595 1,303,539,693
--------------- --------------
Preferred stock, $.10 par value, 5,000,000
shares authorized, none outstanding -- --
Common stock, $.10 par value, 20,000,000
shares authorized, 6,623,535 and 6,612,305
shares issued and outstanding, respectively 662,354 661,231
Additional paid-in capital 35,375,852 35,192,795
Unearned restricted stock (685,343) (817,250)
Securities valuation allowance, net (2,722,487) (1,609,161)
Retained earnings 68,522,342 66,370,129
Treasury stock, at cost (6,480,813) (858,750)
--------------- --------------
Total stockholders' equity 94,671,905 98,938,994
--------------- --------------
Commitments and contingencies (Note 3)
--------------- --------------
Total liabilities and stockholders' equity $ 1,382,068,500 $1,402,478,687
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $ 20,007,859 $ 15,014,273
Interest on mortgage-backed and related
securities 3,872,652 4,067,933
Interest and dividends on investments 1,462,369 1,676,493
-------------- --------------
Total interest income 25,342,880 20,758,699
-------------- --------------
Interest on deposit liabilities 11,455,934 8,323,193
Interest on FHLB advances and other borrowings 4,332,650 4,219,094
-------------- --------------
Total interest expense 15,788,584 12,542,287
-------------- --------------
Net interest income 9,554,296 8,216,412
-------------- --------------
Retail banking fees and service charges 2,303,555 1,791,766
Commissions on annuity and insurance sales 489,213 276,661
Loan servicing fees 204,575 637,480
Gain on sales of loans 1,546,541 141,032
Loss on sale of investment securities (53,729) --
Other income 344,478 230,933
-------------- --------------
Total non-interest income 4,834,633 3,077,872
-------------- --------------
Compensation and employee benefits 4,806,325 4,378,186
Occupancy and equipment 1,677,074 1,451,547
Advertising and marketing 266,508 563,485
Federal deposit insurance premiums 562,004 436,741
Other expenses 2,175,527 1,618,693
-------------- --------------
Total non-interest expense 9,487,438 8,448,652
-------------- --------------
Income before income taxes 4,901,491 2,845,632
Income tax expense 1,832,166 973,318
-------------- --------------
Net income $ 3,069,325 $ 1,872,314
============== ==============
Primary earnings per share $ 0.45 $ 0.32
Fully-diluted earnings per share 0.45 0.32
Dividends paid per share 0.14 0.13
</TABLE>
2
<PAGE> 4
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,069,326 $ 1,872,314
Adjustments to reconcile net income to net
cash provided (used) by operations:
Net loan fees deferred 37,225 14,569
Depreciation and amortization 1,867,167 1,016,808
Gain on sales of loans (1,492,812) (141,032)
Increase in accrued interest receivable (293,637) (690,496)
Increase in accrued interest payable 14,155 134,328
Increase in current and deferred income taxes 1,789,214 797,713
Other, net (532,139) (1,046,841)
------------- -------------
Net cash provided by operations before loan
originations and sales 4,458,499 1,957,363
Loans originated for sale (89,882,113) (13,235,296)
Sales of loans originated for sale 79,141,375 9,877,332
------------- -------------
Net cash used by operations (6,282,239) (1,400,601)
------------- -------------
Cash flows from investing activities:
Net increase in interest-bearing deposits (4,762,282) (1,128,370)
Purchases of investment securities (5,059,299) --
Sales of investment securities 3,009,139 --
Maturities of investment securities 9,162,749 1,201,640
Mortgage-backed and related securities
principal repayments 9,240,890 6,669,835
Loans originated for investment (77,532,634) (61,583,373)
Loans purchased for investment (2,000) (1,868,075)
Loan principal repayments 78,420,393 34,422,227
Sales of loans originated for investment 7,366,264 471,476
Additions to office properties and equipment (188,221) (1,491,459)
Other, net 2,816,801 (1,847,090)
------------- -------------
Net cash provided (used) by investing activities 22,471,800 (25,153,189)
------------- -------------
</TABLE>
3
<PAGE> 5
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $ 25,851,078 $ 30,110,722
Deposits purchased -- 5,336,084
Long-term advances from Federal Home Loan Bank 100,000,000 --
Repayment of long-term Federal Home Loan
Bank advances (92,750,000) (22,950,000)
Net increase (decrease) in short-term
Federal Home Loan Bank borrowings (53,135,000) 6,675,000
Increase in advance payments by
borrowers for taxes and insurance 1,135,089 1,116,398
Purchase of treasury stock (5,622,063) --
Dividends paid (917,113) (749,265)
Other, net 2,261,958 168,618
------------- -------------
Net cash provided (used) by financing activities (23,176,051) 19,707,557
------------- -------------
Net decrease in cash and due from banks (6,986,490) (6,846,233)
Cash and due from banks at beginning of period 30,384,484 26,359,452
------------- -------------
Cash and due from banks at end of period $ 23,397,994 $ 19,513,219
============= =============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments 25,049,243 20,068,203
Interest paid on deposits and borrowings 15,774,429 12,407,959
Income taxes paid 304,902 179,425
Income taxes refunded 272,075 --
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances of
First Federal Capital Corp (the "Corporation"), First Federal Savings Bank
La Crosse-Madison (the "Bank"), and the Bank's wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Unconsolidated partnership interests are accounted for using the equity
method.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited and
do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles. However, in the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three month period
ended March 31, 1996, are not necessarily indicative of the results which
may be expected for the entire year ending December 31, 1996.
Certain 1995 balances have been reclassified to conform with the 1996
presentation.
(3) Contingencies
The Corporation and its subsidiaries are engaged in various routine legal
proceedings occurring in the ordinary course of business which in the
aggregate are believed by management to be immaterial to the consolidated
financial condition of the Corporation.
In November 1995, the United States Congress passed the Balanced Budget Act
of 1995 (the "Act"). Title II of the Act provides, among other things, that
the Federal Deposit Insurance Corporation ("FDIC") impose a one-time special
assessment against the deposits of financial institutions whose deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which would
include the deposits of the Bank. Although the Act has been vetoed by the
President, it is anticipated that substantially all of the provisions of
Title II will be incorporated into final legislation. Management of the
Corporation cannot predict, however, whether such legislation will become
effective and, if so, when and in what form. However, if the current
provisions of Title II of the Act are included in the final legislation, the
special assessment
5
<PAGE> 7
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
against the Bank's deposits is expected to be between 70 and 85 basis points
per $100 of SAIF-insured deposits. Based on the Bank's deposits as of March
31, 1996, the special assessment could amount to as much as $5.1 million, net
of income taxes. Payment of this assessment would have the effect of reducing
the Bank's earnings and capital by the amount of the assessment, net of income
taxes. Following the payment of the special assessment, management anticipates
that the Bank would benefit from a reduction in the ongoing insurance premiums
paid by SAIF-insured institutions, although there can be no assurances. Such
premium is currently 23 basis points per $100 in deposits, but is expected to
be lower after the payment of the special assessment, although there can be no
assurances.
6
<PAGE> 8
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis
March 31, 1996
Results of Operations
Net Income The Corporation's earnings for the three month periods ended
March 31, 1996, and 1995, were $3.07 million or $0.45 per share and $1.87
million or $0.32 per share, respectively. The increase in earnings between
these two periods was primarily attributable to a $1.4 million increase in
gain on sales of mortgage loans and a $1.3 million increase in net interest
income. These developments were only partially offset by a $1.0 million
increase in total non-interest expense and a $0.9 million increase in income
tax expense. Earnings for these two periods represented a return on average
assets of 0.89% and 0.64%, respectively, and a return on average equity of
12.58% and 9.49%, respectively.
The following paragraphs discuss the aforementioned changes in the
Corporation's earnings in more detail as well as changes in other components
of earnings during the three month periods ended March 31, 1996 and 1995.
Net Interest Income Net interest income increased by $1.3 million or 16.3%
during the three month period ended March 31, 1996, as compared to the same
period in the previous year. Net interest income was favorably impacted by
a $188.2 million or 16.9% increase in the Corporation's average
interest-earning assets during the current period as compared to the same
period in the previous year. This increase was primarily due to the
purchase of Rock Financial Corp ("RFC") in December 1995. Also contributing
to the increase in interest-earning assets were increases in originations of
mortgage and consumer loans which were primarily funded by increases in
deposit liabilities. Mortgage and consumer loan originations have increased
in recent periods as a result of a declining interest rate environment
during 1995.
The impact of these developments was partially offset by a nine basis point
decline in the Corporation's average interest rate spread during the most
recent period as compared to the same period in the previous year.
Management attributes this decline to a flatter yield curve environment in
the current period relative to the same period in the previous year. In
general, a flatter yield curve environment will result in a narrower
interest rate spread for the Corporation due to the tendency of the
Corporation's interest-earning assets to price off a longer end of the yield
curve than its interest-bearing liabilities.
The table on the next page sets forth information regarding (i) the total
dollar amount of interest income from interest-earning assets and the
resultant average yields, (ii) the total dollar amount of interest expense
from interest-bearing liabilities and the resultant average costs, (iii) net
interest income, (iv) interest rate spread, (v) net
7
<PAGE> 9
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
interest margin, and (vi) the ratio of average interest-earning assets to
average interest-bearing liabilities. The information is based on average
monthly balances during the three month periods ended March 31, 1996, and
1995, respectively.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Dollars in thousands March 31, 1996 March 31, 1995
---------------------------------------------- -------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans held for investment and
loans held for sale $ 952,842 $20,008 8.40% $ 740,094 $15,014 8.11%
Mortgage-backed and related securities 251,015 3,873 6.17 266,221 4,068 6.11
Investment securities 77,069 1,138 5.91 88,550 1,394 6.30
Interest-bearing deposits 3,939 55 5.59 2,884 43 5.96
Other earning assets 16,630 269 6.47 15,500 239 6.17
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,301,495 25,343 7.79% 1,113,249 20,758 7.46%
------- ====== ------- ======
Non-interest-earning assets:
Office properties and equipment, net 27,055 23,300
Real estate, net 98 100
Other non-interest-earning assets 53,848 38,822
---------- ----------
Total assets $1,382,496 $1,175,471
========== ==========
Interest-bearing liabilities:
Deposit liabilities $ 895,776 $11,456 5.12% $ 740,235 $ 8,323 4.50%
FHLB advances 301,276 4,247 5.64 297,116 4,210 5.67
Other borrowed funds 8,244 85 4.12 3,986 9 0.90
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 1,205,296 15,789 5.24% 1,041,337 12,542 4.82%
------- ====== ------- ======
Non-interest-bearing liabilities:
Non-interest-bearing deposits 69,798 49,246
Other liabilities 9,818 6,006
---------- ----------
Total liabilities 1,284,912 1,096,589
Stockholders' equity 97,584 78,882
---------- ----------
Total liabilities and
stockholders' equity $1,382,496 $1,175,471
========== ==========
Net interest income $ 9,554 $ 8,216
======= =======
Interest rate spread 2.55% 2.64%
====== ======
Net yield on interest-earning assets 2.94% 2.95%
====== ======
Average earning assets to average
interest-bearing liabilities 107.98% 106.91%
====== ======
</TABLE>
8
<PAGE> 10
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Provision for Loan Losses Management of the Corporation elected to not
record additional loan loss provisions during the first three months of 1996
and 1995 as a result of reduced levels of non-performing and other
classified assets (refer to "Financial Condition" for additional
discussion).
As of March 31, 1996, and December 31, 1995, the Corporation's allowance for
loan losses were $8.1 million and $8.2 million, respectively. Although
management believes that the Corporation's present level of allowance for
loan losses is adequate, there can be no assurance that future adjustments
to the allowance won't be necessary, which could adversely affect the
Corporation's results of operations.
Non-Interest Income Non-interest income increased by $1.8 million or 57.1%
during the three months ended March 31, 1996, compared to the same period in
the previous year. This increase was principally due to a $1.4 million
increase in gain on sales of mortgage loans due primarily to the recognition
of $0.9 million in gains from the Corporation's adoption of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"). The Corporation adopted SFAS 122 in the second
quarter of 1995.
Excluding the effect of SFAS 122, gain on sales of mortgage loans increased
by $551,000 or approximately 390% during the three months ended March 31,
1996, compared to the same period in the previous year. This increase was
due to a $76.2 million increase in the Corporation's mortgage loan sales
during the most recent period. This increase was primarily attributable to
a declining interest rate environment during 1995, as previously described,
which increased consumer demand for fixed-rate loans. The Corporation sells
substantially all of its fixed-rate loan production in the secondary market.
Recent increase in market interest rates, however, may reduce consumers'
preferences for fixed-rate mortgage loans which could reduce the
Corporation's gains on sales of mortgage loans in future periods.
Retail banking fees increased by $512,000 or 28.6% during the three months
ended March 31, 1996, compared to the same period in the previous year.
This increase was due primarily to a general increase in deposit-related
service charges and a 21.5% increase since December 31, 1994, in the number
of checking accounts serviced by the Corporation. Approximately 42% of this
growth came from banking offices opened or acquired in 1995 and 1996.
Commissions on annuity and insurance sales increased by $213,000 or 76.8%
during the three months ended March 31, 1996, compared to the same period in
the previous year. This increase was primarily attributable to an increase
in sales of tax deferred annuity products and the receipt during the most
recent period of a commission bonus for credit life insurance policies sold
in 1995.
9
<PAGE> 11
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Loan servicing fees decreased by $433,000 or 67.9% during the three months
ended March 31, 1996, compared to the same period in the previous year.
This decrease was primarily caused by losses related to the Corporation's
mortgage servicing rights. A declining interest rate environment in 1995
resulted in an increase in mortgage refinance activity during the most
recent period which resulted in increased loan prepayment activity. As a
result of this activity, the value of the Corporation's mortgage servicing
rights was estimated to have declined by $523,000. Recent increases in
market interest rates, however, may slow prepayment activity which could
result in reduced losses on the Corporation's mortgage servicing rights in
future periods, although there can be no assurances.
Excluding the effects of the aforementioned loss, loan servicing fees would
have increased by $91,000 or 14.2%. This increases was primarily
attributable to a $342.2 million or 42.7% increase in average mortgage loans
serviced for third parties during the most recent period compared to the
same period in the previous year. This growth was primarily attributable to
the Corporation's purchase of mortgage servicing rights relating to $287.7
million of mortgage loans during the second quarter of 1995. Also
contributing to the growth, however, was the Corporation's own originations
of fixed-rate, single-family residential loans which were sold in the
secondary market. As is the Corporation's normal practice, the servicing
rights to such loans were generally retained after the sale.
Other non-interest income increased by $114,000 or 49.2% during the three
months ended March 31, 1996, compared to the same period in the previous
year. This increase was due primarily to the recognition of gains under
SFAS 122 on mortgage loans the Corporation originated as agent for the
Wisconsin State Veterans Administration ("State VA") and Wisconsin Housing
Economic Development Authority ("WHEDA").
Non-Interest Expense Non-interest expense increased by $1.0 million or 12.3%
during the three months ended March 31, 1996, compared to the same period in
the previous year. The following paragraphs discuss the primary reasons for
this change.
Compensation and employee benefits increased by $428,000 or 9.8% during the
three months ended March 31, 1996, compared to the same period in the
previous year. This increase was due in part to normal annual merit
increases as well as the Corporation's recent purchase of RFC, which added
42 employees and four banking locations to the Corporation's operations. In
addition, since the first quarter of 1995 the Corporation has opened grocery
store banking facilities in Neenah, Sheboygan, Green Bay, and Eau Claire,
Wisconsin. Within the next several months, the Corporation intends to open
up to three retail banking facilities in new
10
<PAGE> 12
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
and existing market areas of Wisconsin, although there can be no assurances.
As of March 31, 1996, the Corporation employed 626 full-time equivalent
employees. This compares to 623 and 586 at December 31, 1995, and March 31,
1995, respectively.
During the most recent quarter the Corporation closed two retail banking
facilities located in La Crosse and West Salem, Wisconsin. The Corporation
transferred the customer accounts serviced at these locations to other
nearby facilities.
Occupancy and equipment expense increased by $226,000 or 15.5% during the
three months ended March 31, 1996, compared to the same period in the
previous year. This increase was primarily attributable to the RFC purchase
and the opening of the aforementioned grocery store banking facilities in
the Corporation's market areas. In addition, in July 1995 the Corporation
completed the construction of a separate facility located in La Crosse,
Wisconsin, which houses a large portion of the Corporation's retail support
operations.
Advertising and marketing expense decreased by $297,000 or 52.7% during the
three months ended March 31, 1996, compared to the same period in the
previous year. This decrease was due primarily to a decrease in
expenditures related to savings and certificate of deposit promotions, check
promotions, and other customer mailings.
Federal insurance premiums increased by $126,000 or 15.5% during the three
months ended March 31, 1996, compared to the same period in the previous
year. This increase was primarily attributable to increases in the
Corporation's deposit liabilities (refer to "Financial Condition" for
additional discussion). Also, refer to Note 3 of the Corporation's
Consolidated Financial Statements for a discussion of a significant expense
that could be incurred by the Corporation as a result of pending federal
legislation relating to the recapitalization of the Savings Association
Insurance Fund ("SAIF").
Other non-interest expenses increased by $557,000 or 34.4% during the three
months ended March 31, 1996, compared to the same period in the previous
year. This increase was due primarily to increased usage by the
Corporation's customers of automated teller machines ("ATMs") owned by other
financial institutions and an increase in fees paid to originate education
loans due principally to an increase in the origination of such loans. Also
contributing to the increase, however, were goodwill amortization, computer
system conversion expenses, and various professional fees related to the RFC
acquisition.
11
<PAGE> 13
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Income Tax Expense Income tax expense for the three months ended March 31,
1996 and 1995, was $1.8 million and $1.0 million, respectively, on pretax
income of $4.9 million and $2.8 million, respectively. The effective tax
rates for the three months ended March 31, 1996 and 1995, were 37.4% and
34.2%, respectively. The Corporation's effective tax rate has increased in
recent periods due to a higher mix of taxable earnings in the State of
Wisconsin relative to the State of Nevada, where the Corporation has
established a wholly-owned investment subsidiary. The change in mix was due
in part to the acquisition of RFC and increased earnings from certain of the
Corporation's Wisconsin-based subsidiaries.
Financial Condition
The Corporation's total assets declined by $20.4 million or 1.5% during the
three months ended March 31, 1996. This decline was primarily the result of
an $18.4 million or 5.5% decrease in the aggregate of the Corporation's
investment and mortgage-backed security portfolios. These decreases were
principally due to periodic maturities or normal amortization of the
mortgage loans that support the mortgage-backed securities. The proceeds
from such maturities and/or amortization were used to reduce overnight
borrowings at the Federal Home Loan Bank ("FHLB") of Chicago.
The Corporation's loans held for investment also decreased by $4.2 million
or 0.5% during the three month period ended March 31, 1996, but such was
offset by a $6.6 million or 27.7% increase in loans held for sale during the
same period. These changes were primarily the result of a significant
decrease in market interest rates during 1995, as previously described,
which encouraged borrowers to refinance existing fixed-rate mortgage loans
at lower rates of interest and to refinance adjustable-rate mortgage loans
into fixed-rate mortgage loans. Since the Corporation generally sells all
of its fixed-rate loan production, the Corporation experienced an increase
in loans held for sale and a decline in loans held for investment. Recent
increases in market interest rates, however, may slow or reverse this trend
in future periods.
Deposit liabilities increased by $25.9 million or 2.7% during the three
months ended March 31, 1996. The majority of this growth occurred in the
Corporation's certificate of deposit accounts. Also contributing to the
increase, however, was an increase in non-interest-bearing deposits and
custodial accounts.
FHLB advances and other borrowings decreased by $44.9 million or 13.9%
during the three months ended March 31, 1996. This decrease was due
primarily to increases in the Corporation's deposit liabilities and
decreases in its investment and mortgage-backed security portfolios, as
previously described.
12
<PAGE> 14
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
The Corporation's non-performing assets (consisting of non-accrual loans,
real estate acquired through foreclosure or deed-in-lieu thereof, and real
estate in judgement) were $1.5 million or 0.11% of total assets at March 31,
1996, compared to $1.4 million or 0.10% at December 31, 1995. The
Corporation's other classified assets were $9.2 million or 0.66% of total
assets at March 31, 1996, compared to $10.0 million or 0.72% at December 31,
1995.
Asset/Liability Management
The Corporation manages the exposure of its operations to changes in
interest rates by monitoring its ratio of interest-earning assets to
interest-bearing liabilities within specified maturities and/or repricing
dates. Management has sought to control this ratio, thereby improving the
Corporation's ability to adjust its operations to changes in interest rates,
by, among other things, selling substantially all new originations of
long-term, fixed-rate, single-family mortgage loans in the secondary market,
investing in adjustable-rate or medium-term, fixed-rate, single-family
residential loans, investing in short- to medium-term CMOs, and to a lesser
degree, investing in consumer loans, which generally have shorter terms to
maturity and higher interest rates than mortgage loans.
The Corporation also originates multi-family residential and commercial real
estate loans, which generally have adjustable or floating interest rates
and/or shorter terms to maturity than conventional single-family residential
loans. It is management's intent to hold the percentage of mix of
multi-family residential and commercial real estate loans in the
Corporation's portfolio near current levels.
Long-term, fixed-rate, single-family mortgage loans originated for sale in
the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans pose little
interest rate risk to the Corporation.
Although management believes that its asset/liability management strategies
have reduced the potential effects of changes in interest rates on the
Corporation's operations, material and prolonged changes in interest rates
would adversely affect the Corporation's operations because the
Corporation's interest-bearing liabilities which mature or reprice within
one year are greater than the Corporation's interest-earning assets which
mature or reprice within the same period. Alternatively, material and
prolonged decreases in interest rates may benefit the Corporation's
operations.
The table on the next page summarizes the anticipated maturities or
repricing of the Corporation's interest-earning assets and interest-bearing
liabilities as of March 31, 1996.
13
<PAGE> 15
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year to 3 years to Over
Dollars in thousands or Less to 1 Year 3 Years 5 years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1):
Mortgage and other loans:
Fixed $ 67,609 $ 23,704 $ 46,019 $ 29,129 $ 34,353 $ 200,814
Variable 147,067 149,516 207,849 5,345 - 509,777
Consumer loans 154,917 21,089 56,725 16,362 5,771 254,864
Mortgage-backed and related securities 25,928 19,026 62,807 60,161 79,626 247,548
Investment securities and other earning assets 63,711 2,827 13,994 2,000 14,764 97,296
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 459,232 $ 216,162 $ 387,394 $ 112,997 $ 134,514 $ 1,310,299
===================================================================================================================================
Interest-bearing liabilities (2):
Deposit liabilities:
Regular savings and checking accounts (3) 144,181 - - - - 144,181
Money market deposit accounts 113,646 - - - - 113,646
Variable-rate IRA accounts 3,761 - - - - 3,761
Time deposits 444,081 111,151 81,987 17,141 31 654,391
Borrowings 181,562 63,634 28,962 3,214 37 277,409
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 887,231 $ 174,785 $ 110,949 $ 20,355 $ 68 $ 1,193,388
===================================================================================================================================
Excess (deficiency) of earning assets over
interest-bearing liabilities $ (427,999) $ 41,377 $ 276,445 $ 92,642 $ 134,446
===================================================================================================================================
Cumulative excess (deficiency) of earning
assets over interest-bearing liabilities $ (427,999) $ (386,622) $ (110,177) $ (17,535) $ 116,911
===================================================================================================================================
Cumulative excess (deficiency) of earning
assets over interest-bearing liabilities as
a percentage of total assets -30.97% -27.97% -7.97% -1.27% 8.46%
===================================================================================================================================
Cumulative interest-sensitive assets as a
percentage of interest-sensitive liabilities 51.76% 63.60% 90.61% 98.53% 109.80%
===================================================================================================================================
</TABLE>
(1) The mortgage prepayment assumptions used reflect the Corporation's
historical experience which is more conservative than the OTS's
prepayment assumptions. Non-accrual loans totaling $1.2 million have
been excluded from the loan categories. Loans held for sale totaling
$30.6 million are included in the "six months or less" loan category.
(2) Does not include non-interest-bearing checking accounts.
(3) If regular savings and checking accounts were deemed to reprice after one
year, rather than within six months, the Corporation's one-year
cumulative interest sensitivity gap would have been $(242.4) million or
-17.54% of total assets.
14
<PAGE> 16
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of liquid investments in qualifying types of U.S.
Government, federal agency, and other securities. Regulations currently in
effect require the Bank to maintain liquid assets maturing in five years or
less of not less than 5% of its net withdrawable accounts and short-term
borrowings, of which liquid assets maturing in one year or less must consist
of not less than 1%. The Bank's long-term regulatory liquidity ratio
averaged 5.4% during the three months ended March 31, 1996, and was 5.1% on
March 31, 1996.
The Corporation's stockholder's equity ratio as of March 31, 1996, was 6.85%
of total assets. The Corporations long-term objective is to maintain its
stockholders' equity ratio in a range of approximately 6.7% to 7.2%, which
is consistent with return on asset and return on equity goals of 1% and 15%,
respectively.
The Corporation paid cash dividends of $917,000 and $749,000 during the
three months ended March 31, 1996, and 1995, respectively. These amounts
equated to dividend payout ratios of 29.9% and 40.0% of the net income in
such periods, respectively. It is the Corporation's long-term objective to
maintain its dividend payout ratio in a range of 25% to 35% of net income.
However, the Corporation's dividend policy and/or dividend payout ratio will
be impacted by considerations such as the level of stockholders' equity in
relation to the Corporation's stated goal, as previously described,
regulatory capital requirements for the Bank, described in a subsequent
paragraph, and certain dividend restrictions in effect for the Bank.
Furthermore, unanticipated or non-recurring fluctuations in earnings may
impact the Corporation's ability to pay dividends and/or maintain a given
dividend payout ratio.
On April 26, 1996, the Board of Directors of the Corporation declared a
$0.16 dividend payable on June 7, 1996, to shareholders of record on May 17,
1996.
On January 24, 1995, and January 23, 1996, the Corporation's Board of
Directors authorized the repurchase of up to 288,000 and 328,000 shares
respectively, of the Corporation's outstanding common stock (the "1995 plan"
and "1996 plan", respectively). Such repurchases may be made from
time-to-time in open market transactions during the next twelve months as
conditions permit (the 1995 plan was extended on additional twelve months on
January 23, 1996). The repurchased shares will be held as treasury stock
and will be available for general corporate purposes. During 1995, the
Corporation repurchased 47,500 shares under the 1995 plan at an average cost
of $18.08. Furthermore, as of March 31, 1996, the Corporation had purchased
an additional 278,300 shares under the 1995 and 1996 Plans at an average
cost of $20.20. As of March 31, 1996, all shares authorized under the 1995
Plan had been repurchased.
15
<PAGE> 17
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
The Bank is also required to maintain specified amounts of capital pursuant
to regulations promulgated by the Office of Thrift Supervision ("OTS"). The
Bank's long-term objective is to maintain its regulatory capital in an
amount sufficient to be classified in the highest regulatory capital
category (i.e., as a "well capitalized" institution). At March 31, 1996,
the Bank's regulatory capital exceeded all regulatory minimum requirements
as well as the minimum amount required to be classified as a "well
capitalized" institution.
The OTS has developed a new regulatory capital requirement which will add an
interest rate risk component to the current risk-based capital requirements.
Thrift institutions with a greater than normal interest rate risk exposure,
as computed by the OTS, will be required to take a deduction from their
total capital to meet their risk-based capital requirement. The OTS has
delayed, until further notice, the implementation of the interest rate risk
component pending the testing of the OTS appeals process. Estimates
received by the Bank from the OTS for the quarter ended December 31, 1995,
indicated that the Bank did not have a greater than normal exposure to
interest rate risk. Given this estimate, it is not expected that the Bank
will be required to take a deduction against its risk-based capital on
future filings, although there can be no assurances.
Forward-Looking Statements
The discussion in this report includes certain forward-looking statements
based on current management expectations. Factors which could cause future
results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and
fiscal policies of the Federal government; deposit flows; the cost of funds;
general market rates of interest; interest rates on competing investments;
demand for loan products; demand for financial services; changes in
accounting policies or guidelines; and changes in the quality or composition
of the Corporation's loan and investment portfolios. Additional factors are
described in the Corporation's other reports filed with the Securities and
Exchange Commission.
16
<PAGE> 18
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Part II--Other Information
March 31, 1996
Item 1--Legal Proceedings.
Refer to Note 3 of the Corporation's Consolidated Financial Statements.
Item 2--Changes in Securities.
Not applicable.
Item 3--Defaults Upon Senior Securities.
Not applicable.
Item 4--Submission of Matters to Vote of Security Holders.
The Corporation held its Annual Meeting of Shareholders on April 26, 1996.
The following matters were voted upon at the Annual Meeting of Shareholders:
1. The election of four nominees for the Board of Directors, who will serve
for a three-year term, and one director, who will serve for a one-year
term, in each case until their successors are elected and qualified, was
voted upon by the Corporation's shareholders. The nominees, all of whom
were elected, are set forth in the table below. The Inspector of
Election certified the following vote tabulations:
FOR WITHHELD
------------- ------------
Nominees for Director for Three-year Term Expiring in 1999:
John F. Leinfelder 5,448,918.207 8,449.054
David C. Mebane 5,438,326.207 19,041.054
Dale A. Nordeen 5,444,934.207 12,433.054
Thomas W. Schini 5,448,866.207 8,501.054
Nominee for Director for One-Year Term expiring in 1997:
John T. Bennett 5,446,861.082 10,506.179
2. Ratification of the appointment by the Board of Directors of Ernst &
Young as the Corporation's independent auditors for the year ending
December 31, 1996:
FOR AGAINST ABSTENTIONS
------------- ---------- -----------
5,436,109.893 10,248.604 11,008.764
17
<PAGE> 19
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Part II--Other Information (continued)
March 31, 1996
Item 5--Other Information.
Not applicable.
Item 6--Exhibits and Reports on Form 8-K.
The Corporation filed a report on Form 8-K/A on February 2, 1996.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
Date: May 3, 1996 By: /s/Thomas W. Schini
------------------------------------
Thomas W. Schini, Chairman
of the Board, President, and
Chief Executive Officer
(duly authorized officer)
Date: May 3, 1996 By: /s/Jack C. Rusch
------------------------------------
Jack C. Rusch,
Executive Vice President,
Treasurer, and Chief
Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 23,387,994
<INT-BEARING-DEPOSITS> 8,813,570
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,737,247
<INVESTMENTS-CARRYING> 181,616,539
<INVESTMENTS-MARKET> 177,364,067
<LOANS> 984,037,457
<ALLOWANCE> 8,122,333
<TOTAL-ASSETS> 1,382,068,500
<DEPOSITS> 995,273,597
<SHORT-TERM> 168,631,000
<LIABILITIES-OTHER> 14,713,770
<LONG-TERM> 108,778,228
0
0
<COMMON> 36,038,206
<OTHER-SE> 58,633,699
<TOTAL-LIABILITIES-AND-EQUITY> 1,382,068,500
<INTEREST-LOAN> 20,007,859
<INTEREST-INVEST> 5,335,021
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,342,880
<INTEREST-DEPOSIT> 11,455,934
<INTEREST-EXPENSE> 15,788,584
<INTEREST-INCOME-NET> 9,554,296
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (53,729)
<EXPENSE-OTHER> 9,487,438
<INCOME-PRETAX> 4,901,491
<INCOME-PRE-EXTRAORDINARY> 4,901,491
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,069,325
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 7.79
<LOANS-NON> 1,210,108
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,414,341
<ALLOWANCE-OPEN> 8,186,077
<CHARGE-OFFS> 69,599
<RECOVERIES> 5,855
<ALLOWANCE-CLOSE> 8,122,333
<ALLOWANCE-DOMESTIC> 8,122,333
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
