<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...............................September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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 November 14, 1996: 6,130,559
<PAGE> 2
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1996, and December 31, 1995
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 25,982,226 $ 30,384,484
Interest-bearing deposits 5,814,692 4,051,288
Investment securities available for sale, at
fair value 67,900,780 80,325,428
Mortgage-backed and related securities:
Available for sale, at fair value 65,775,271 84,172,997
Held for investment, at cost (fair value
of $149,875,879 and $169,365,825,
respectively) 154,255,381 171,493,244
Loans held for sale 12,660,343 23,976,063
Loans held for investment, net 1,057,538,899 932,083,879
Federal Home Loan Bank stock 17,849,000 16,855,100
Accrued interest receivable, net 11,306,804 10,133,211
Office properties and equipment 26,268,573 27,176,063
Mortgage servicing rights, net 11,630,619 10,292,604
Intangible assets 5,325,122 5,642,719
Other assets 7,113,882 5,891,607
-------------- --------------
Total assets $1,469,421,592 $1,402,478,687
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit liabilities $1,017,798,100 $ 969,422,519
Federal Home Loan Bank advances and
other borrowings 334,968,810 322,295,781
Advance payments by borrowers for taxes and
insurance 10,683,697 3,740,518
Accrued interest payable 2,274,787 2,632,658
Other liabilities 10,521,538 5,448,217
-------------- --------------
Total liabilities 1,376,246,932 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, 6,636,077 and 6,612,305
shares issued and outstanding, including
467,300 and 47,500 shares of treasury
stock, respectively 663,608 661,231
Additional paid-in capital 35,527,633 35,192,795
Unearned restricted stock (504,709) (817,250)
Securities valuation allowance, net (2,783,355) (1,609,161)
Retained earnings 69,751,983 66,370,129
Treasury stock, at cost (9,480,500) (858,750)
-------------- --------------
Total stockholders' equity 93,174,660 98,938,994
-------------- --------------
Commitments and contingencies (Note 3) - -
-------------- --------------
Total liabilities and stockholders' equity $1,469,421,592 $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 September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended
September 30
--------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $ 21,079,686 $ 17,033,467
Interest on mortgage-backed and related
securities 3,539,649 3,875,683
Interest and dividends on investments 1,369,096 1,605,003
-------------- --------------
Total interest income 25,988,431 22,514,153
-------------- --------------
Interest on deposit liabilities 11,668,498 10,345,008
Interest on advances and other borrowings 4,241,572 3,723,608
-------------- --------------
Total interest expense 15,910,070 14,068,616
-------------- --------------
Net interest income 10,078,361 8,445,537
Provision for loan losses - -
-------------- --------------
Net interest income after
provision for loan losses 10,078,361 8,445,537
-------------- --------------
Retail banking fees and service charges 2,605,868 2,260,393
Commissions on annuity and insurance sales 660,468 208,141
Loan servicing fees 705,137 702,301
Gain on sales of loans 776,674 1,266,332
Loss on sales of investments (62,005) (37,662)
Other income 429,655 644,687
-------------- --------------
Total non-interest income 5,115,797 5,044,192
-------------- --------------
Compensation and employee benefits 5,080,847 4,730,299
Occupancy and equipment 1,540,495 1,457,903
Federal deposit insurance premiums 565,305 465,023
Advertising and marketing 593,817 514,300
FDIC special assessment 5,941,000 -
Other expenses 1,850,039 1,564,165
-------------- --------------
Total non-interest expense 15,571,503 8,731,690
-------------- --------------
Income (loss) before income taxes (377,345) 4,758,039
Income tax expense (benefit) (317,434) 1,730,547
-------------- --------------
Net income (loss) $ (59,911) $ 3,027,492
============== ==============
Primary earnings per share $ 0.00 $ 1.18
Fully-diluted earnings per share (0.01) 1.18
Dividends paid per share 0.16 0.14
</TABLE>
2
<PAGE> 4
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $ 61,050,483 $ 48,060,840
Interest on mortgage-backed and related
securities 11,122,739 11,945,700
Interest and dividends on investments 4,184,721 4,945,859
------------ ------------
Total interest income 76,357,943 64,952,399
------------ ------------
Interest on deposit liabilities 34,610,004 28,223,279
Interest on advances and other borrowings 12,308,998 11,917,383
------------ ------------
Total interest expense 46,919,002 40,140,662
------------ ------------
Net interest income 29,438,941 24,811,737
Provision for loan losses - -
------------ ------------
Net interest income after
provision for loan losses 29,438,941 24,811,737
------------ ------------
Retail banking fees and service charges 7,440,663 6,093,609
Commissions on annuity and insurance sales 1,665,854 713,124
Loan servicing fees 1,534,099 1,988,845
Gain on sales of loans 3,457,402 2,190,233
Loss on sales of investments (252,142) (27,114)
Other income 1,060,908 1,298,864
------------ ------------
Total non-interest income 14,906,784 12,257,561
------------ ------------
Compensation and employee benefits 14,799,496 13,702,635
Occupancy and equipment 4,851,452 4,296,665
Federal deposit insurance premiums 1,679,755 1,342,032
Advertising and marketing 1,315,351 1,639,899
FDIC special assessment 5,941,000 -
Other expenses 6,008,501 4,804,862
------------ ------------
Total non-interest expense 34,595,555 25,786,093
------------ ------------
Income before income taxes 9,750,170 11,283,205
Income tax expense 3,484,278 4,015,466
------------ ------------
Net income $ 6,265,892 $ 7,267,739
============ ============
Primary earnings per share $ 0.93 $ 1.18
Fully-diluted earnings per share 0.92 1.18
Dividends paid per share 0.46 0.41
</TABLE>
3
<PAGE> 5
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (59,911) $ 3,027,492
Adjustments to reconcile net income to net
cash provided (used) by operations:
Depreciation and amortization 1,318,619 1,214,662
Net gains on sales of loans and other
investments (714,669) (1,228,670)
Increase in accrued interest receivable (730,282) (1,561,995)
Increase in accrued interest payable 118,955 190,402
Decrease in current and deferred
income taxes (1,844,841) (75,711)
Accrual of FDIC special assessment 5,941,000 -
Other, net (29,686) 224,826
------------- ------------
Net cash provided by operations before loan
originations and sales 3,999,185 1,791,006
------------- ------------
Loans originated for sale (41,294,302) (64,280,059)
Sales of loans originated for sale 41,947,269 60,977,338
------------- ------------
Net cash provided (used) by operations 4,652,152 (1,511,715)
------------- ------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits 9,834,999 (898,813)
Purchases of investment securities (10,555,501) (2,974,313)
Sales of investment securities 3,008,231 1,062,056
Maturities of investment securities 6,211,920 4,808,358
Mortgage-backed and related securities
principal repayments 12,623,718 7,540,741
Loans originated for investment (153,857,515) (83,431,845)
Loans purchased for investment (8,777,119) -
Loan principal repayments 71,928,401 55,181,169
Sales of loans originated for investment 941,833 2,994,843
Additions to office properties and equipment (272,835) (1,566,637)
Other, net (4,336,497) (20,764)
------------- ------------
Net cash used by investing activities (73,250,365) (17,305,205)
------------- ------------
</TABLE>
(Continued)
4
<PAGE> 6
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $ 18,830,151 $ 6,526,703
Long-term advances from Federal Home
Loan Bank 32,000,000 -
Repayment of long-term Federal Home Loan
Bank advances (28,000,000) (19,405,000)
Net increase in short-term Federal Home
Loan Bank borrowings 51,440,000 26,260,000
Increase in other short-term borrowings - -
Increase in advance payments by borrowers
for taxes and insurance 2,559,433 1,679,805
Purchase of treasury stock (1,428,437) -
Dividends paid (993,883) (814,290)
Other, net (356,517) 467,024
-------------- ------------
Net cash provided by financing activities 74,050,747 14,714,242
------------ ------------
Net increase (decrease) in cash 5,452,534 (4,102,678)
Cash at beginning of period 20,529,692 27,221,141
------------ ------------
Cash at end of period $ 25,982,226 $ 23,118,463
============ ============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $ 25,258,149 $ 20,952,158
Interest paid on deposits and borrowings 15,791,115 13,878,214
Income taxes paid 1,576,088 1,842,459
Income taxes refunded 120,005 32,083
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,265,892 $ 7,267,739
Adjustments to reconcile net income to net
cash provided (used) by operations:
Depreciation and amortization 4,628,050 3,361,878
Net gains on sales of loans and other
investments (3,205,260) (2,163,119)
Increase in accrued interest receivable (1,173,593) (2,682,619)
Decrease (increase) in accrued
interest payable (357,871) 206,322
Decrease in current and deferred
income taxes (727,832) (42,912)
Accrual of FDIC special assessment 5,941,000 -
Other, net (698,952) (859,234)
------------- -------------
Net cash provided by operations before
loan originations and sales 10,671,434 5,088,055
------------- -------------
Loans originated for sale (191,853,699) (120,667,130)
Sales of loans originated for sale 199,797,419 104,556,247
------------- -------------
Net cash provided (used) by operations 18,615,154 (11,022,828)
------------- -------------
Cash flows from investing activities:
Net increase in interest-bearing deposits (1,763,404) (3,967,144)
Purchases of investment securities (21,816,385) (7,459,642)
Sales of investment securities 8,022,010 6,072,599
Maturities of investment securities 25,467,985 10,090,766
Mortgage-backed and related securities
principal repayments 33,664,243 19,906,914
Loans originated for investment (343,059,639) (218,751,476)
Loans purchased for investment (8,779,119) (1,968,075)
Loan principal repayments 220,920,757 134,684,862
Sales of loans originated for investment 8,937,495 3,792,287
Additions to office properties and equipment (1,313,360) (5,101,507)
Other, net 727,555 (2,246,419)
------------- -------------
Net cash used by investing activities (78,991,862) (64,946,835)
------------- -------------
</TABLE>
(Continued)
6
<PAGE> 8
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $ 48,375,581 $ 99,334,611
Deposit purchased - 5,336,084
Long-term advances from Federal Home
Loan Bank 132,000,000 25,000,000
Repayment of long-term Federal Home Loan
Bank advances (154,050,000) (48,630,000)
Net increase (decrease) in short-term
Federal Home Loan Bank borrowings 28,727,000 (13,530,000)
Increase in other short-term borrowings 5,000,000 -
Increase in advance payments by borrowers
for taxes and insurance 6,943,179 5,574,994
Purchase of treasury stock (8,621,750) -
Dividends paid (2,898,466) (2,377,846)
Other, net 498,906 2,020,831
------------- ------------
Net cash provided by financing activities 55,974,450 72,728,674
------------- ------------
Net decrease in cash (4,402,258) (3,240,989)
Cash at beginning of period 30,384,484 26,359,452
------------- ------------
Cash at end of period $ 25,982,226 $ 23,118,463
============= ============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $ 75,184,350 $ 62,269,780
Interest paid on deposits and borrowings 47,276,873 39,934,340
Income taxes paid 4,540,490 4,100,367
Income taxes refunded 392,080 32,083
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 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 and nine
month periods ended September 30, 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
First Enterprises, Inc. ("FEI"), a wholly-owned subsidiary of the Bank
formerly involved in the acquisition and development of hotels, recently
received a favorable judgement in a United States District Court awarding it
$1.1 million in compensatory damages, plus post-judgement interest on the
damages, as well as filing fees and other court costs. The defendant in the
action is a well-capitalized money-center bank that provided certain trust
services relating to one of FEI's hotel joint ventures in the 1980's.
In addition to this judgement, FEI also has a pending claim against the
defendant for punitive damages which could substantially increase the final
award, if any. A hearing on this claim is scheduled for January 1997. The
defendant is expected to appeal the judgement as well as vigorously oppose
any award of punitive damages. As a result, management of the Corporation
is unable to determine the likelihood of a favorable outcome or reliably
estimate the amount of the final award, if any. Accordingly, the
Corporation has not recognized any portion of the current judgement or
possible future punitive damanges in its results of operations.
The Corporation and its subsidiaries are also 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.
8
<PAGE> 10
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis
September 30, 1996
Results of Operations
Overview The Corporation's earnings for the three month period ended
September 30, 1996, were $3.5 million or $0.54 per share, excluding the
after-tax effect of a special assessment from the Federal Deposit Insurance
Corporation or "FDIC" (refer to "Results of Operations-- Non-Interest
Expense" for additional discussion). These results compare to earnings of
$3.0 million or $0.49 per share for the same period in the previous year. The
increase in earnings between these periods was primarily attributable to a
$1.6 million increase in net interest income. This development was partially
offset by a $0.9 million increase in total non-interest expense and a $0.3
million increase in income tax expense, after excluding the effect of the
special assessment from both of these items. Earnings for these two periods
represented a return on average assets of 0.99% and 0.98%, respectively, and
a return on average equity of 14.44% and 14.64%, respectively, after
adjusting for the effect of the special assessment in 1996.
The Corporation's earnings for the nine month period ended September 30,
1996, were $9.8 million or $1.47 per share (again, excluding the special
assessment) compared to $7.3 million or $1.18 per share for the same period
in the previous year. The increase in earnings between these two periods
was primarily attributable to a $4.6 million increase in net interest income
and a $2.6 million increase in total non-interest income. These
developments were partially offset by a $2.9 million increase in total
non-interest expense and a $1.8 million increase in income tax expense,
after excluding the effects of the special assessment from both of these
items. Earnings for these two periods represented a return on average
assets of 0.95% and 0.81%, respectively, and a return on average equity of
13.60% and 12.03%, respectively, after adjusting for the effect of the
special assessment in 1996.
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 and nine month periods ended September 30, 1996
and 1995.
Net Interest Income Net interest income increased by $1.6 million or 19.3%
and $4.6 million or 18.6% during the three and nine month periods ended
September 30, 1996, respectively, as compared to the same periods in the
previous year. Net interest income was favorably impacted by a $175.0
million or 15.0% increase and a $171.1 million or 15.0% increase in the
Corporation's average interest-earning assets during the three and nine
month periods ended September 30, 1996, respectively, as compared to the
previous year. These increases were primarily due to the purchase of Rock
Financial Corp ("RFC") in December 1995. Also contributing to these
9
<PAGE> 11
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
increases, however, were increases in originations of mortgage, consumer,
and commercial real estate loans that were funded primarily by increases in
deposit liabilities and decreases in investment securities (refer to
"Financial Condition" for additional discussion).
Also contributing to the increase in net interest income during the three
and nine month periods ended September 30, 1996, as compared to the same
period in the previous year, were a ten and five basis point increase,
respectively, in the Corporation's average interest rate spread during the
most recent periods as compared to the previous year. Management attributes
these increases to a combination of the lag effects of a generally lower
interest rate environment throughout 1995, a generally steeper yield curve
in 1996, and the Corporation's negative funding gap position (refer to
"Asset/Liability Management" for additional discussion).
The tables on the next two pages set 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 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 and nine month periods ended September 30, 1996
and 1995, respectively.
10
<PAGE> 12
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Dollars in thousands September 30, 1996 September 30, 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 $1,018,047 $21,080 8.28% $806,853 $17,034 8.44%
Mortgage-backed and related securities 229,893 3,540 6.16 255,389 3,876 6.07
Investment securities 69,535 1,059 6.09 83,445 1,294 6.20
Interest-bearing deposits 4,695 52 4.43 2,453 43 7.01
Other earning assets 15,246 256 6.72 15,739 267 6.79
---------- ------- ------ ---------- ------- -------
Total interest-earning assets 1,337,415 25,987 7.77% 1,163,879 22,514 7.74%
------- ====== ------- =======
Non-interest-earning assets:
Office properties and equipment, net 26,460 25,615
Real estate, net 236 39
Other non-interest-earning assets 50,329 40,623
---------- ----------
Total assets $1,414,441 $1,230,156
========== ==========
Interest-bearing liabilities:
Deposit liabilities $ 917,487 $11,668 5.09% $ 802,808 $10,346 5.15%
FHLB advances 290,664 4,063 5.59 258,910 3,705 5.72
Other borrowed funds 18,945 179 3.78 7,878 19 0.96
---------- ------- ------- ---------- ------- -------
Total interest-bearing liabilities 1,227,096 15,910 5.19% 1,069,596 14,070 5.26%
------- ======= ------- =======
Non-interest-bearing liabilities:
Non-interest-bearing deposits 82,461 69,613
Other liabilities 7,491 8,204
---------- ----------
Total liabilities 1,317,049 1,147,413
Stockholders' equity 97,392 82,743
---------- ----------
Total liabilities and stockholders' equity $1,414,441 $1,230,156
========== ==========
Net interest income $10,077 $ 8,444
======= =======
Interest rate spread 2.59% 2.48%
======= =======
Net yield on interest-earning assets 3.01% 2.90%
======= =======
Average earning assets to average
interest-bearing liabilities 108.99% 108.81%
======= =======
</TABLE>
11
<PAGE> 13
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
Dollars in thousands September 30, 1996 September 30, 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 $ 976,287 $61,050 8.34% $ 773,128 $48,061 8.29%
Mortgage-backed and related securities 240,453 11,123 6.17 260,748 11,946 6.11
Investment securities 72,142 3,228 5.96 86,237 4,051 6.26
Interest-bearing deposits 4,647 180 5.16 2,658 133 6.67
Other earning assets 15,547 777 6.66 15,657 761 6.48
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,309,076 76,358 7.78% 1,138,428 64,952 7.61%
------- ====== ------- ======
Non-interest-earning assets:
Office properties and equipment, net 26,811 24,421
Real estate, net 170 68
Other non-interest-earning assets 50,795 39,739
---------- ----------
Total assets $1,386,852 $1,202,656
========== ==========
Interest-bearing liabilities:
Deposit liabilities $ 908,199 $34,610 5.08% $ 772,796 $28,223 4.87%
FHLB advances 284,520 11,933 5.59 277,312 11,879 5.71
Other borrowed funds 13,123 376 3.82 6,021 39 0.86
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 1,205,842 46,919 5.19% 1,056,129 40,141 5.07%
------- ====== ------- ======
Non-interest-bearing liabilities:
Non-interest-bearing deposits 76,006 58,846
Other liabilities 8,528 7,161
---------- ----------
Total liabilities 1,290,376 1,122,136
Stockholders' equity 96,476 80,520
---------- ----------
Total liabilities and stockholders' equity $1,386,852 $1,202,656
========== ==========
Net interest income $29,439 $24,812
======= =======
Interest rate spread 2.59% 2.54%
====== ======
Net yield on interest-earning assets 3.00% 2.91%
====== ======
Average earning assets to average
interest-bearing liabilities 108.56% 107.79%
====== ======
</TABLE>
12
<PAGE> 14
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 six months of 1996
and 1995 as a result of its low levels of non-performing and other
classified assets as well as its low levels of loan and real estate
charge-offs (refer to "Financial Condition" for additional discussion).
As of September 30, 1996, and December 31, 1995, the Corporation's allowance
for loan losses were $8.0 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 $72,000 or 1.4% during
the three months ended September 30, 1996, compared to the same period in
the previous year. This increase was principally due to a $452,000 or
approximately 220% increase in commissions on annuity and insurance sales
during the three months ended September 30, 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 sales of credit life
insurance policies on consumer loan products.
Retail banking fees increased by $345,000 or 15.3% which was due primarily
to a general increase in deposit-related service charges and a 29.6%
increase since December 31, 1994, in the number of checking accounts
serviced by the Corporation. Approximately 40% of this growth came from
banking offices opened or acquired in 1995 and 1996.
Gain on sales of mortgage loans decreased by $490,000 or 38.7% during the
three months ended September 30, 1996, compared to the same period in the
previous year. This decrease was due primarily to a $21.1 million or 33.0%
decrease in the Corporation's mortgage loan sales during the most recent
quarter as compared to the same quarter in the previous year. The decline
in mortgage loan sales was primarily attributable to a rising interest rates
in recent periods which shifted borrower preferences to adjustable-rate
loans which the Corporation retains in its portfolio.
Loss on sale of investment securities amounted to $62,000 and $38,000 during
the three months ended September 30, 1996, compared to the same period in
the previous year. The loss during both periods was principally due to the
sale of a portion of the Bank's investment in certain mutual funds.
Other income decreased by $215,000 or 33.4% during the three months ended
September 30, 1996, compared to the same period in the previous year. This
decrease was due primarily to a decrease in income recognized on loans that
the Bank originates as agent for the State Veteran's
13
<PAGE> 15
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Administration ("State VA") and the Wisconsin Housing and Economic
Development Authority ("WHEDA") loans. This decrease was due primarily to
the adoption in the third quarter of last year of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights"
("SFAS 122"). This standard was retroactively adopted in that period for
all State VA and WHEDA loan originations made after January 1, 1995.
Also contributing to the decrease in other income were timing differences
between the receipt of fee income from mortgage loan borrowers for loan
closing services such as appraisal fees and abstract fees and the payment
for these services to third-party vendors.
During the nine months ended September 30, 1996, non-interest income
increased by $2.6 million or 21.6%. This increase was due primarily to a
$1.3 million or 22.1% increase in retail banking fees, a $1.3 million or
57.9% increase in gain on sales of loans, and a $1.0 million or
approximately 135% increase in commissions on annuity and insurance sales.
These developments were partially offset by a $0.2 million increase in
losses on sales of investments. Except for the gain on sales of loans,
reasons for the changes are similar to those discussed in previous
paragraphs.
The increase in gain on sales of loans during the nine months ended
September 30, 1996, compared to the same period in the previous year was due
to a $100.4 million or 92.7% increase in the Corporation's mortgage loan
sales during the most recent nine month period due primarily to a lower
interest rate environment in late 1995 and early 1996 which increased
consumer demand for fixed-rate loans. The Corporation sells substantially
all of its fixed-rate loan production in the secondary market. However,
recent increases in market interest rates have reduced consumers'
preferences for fixed-rate mortgage loans, in favor of adjustable-rate
mortgage loans which could reduce the Corporation's gains on sales of
mortgage loans in future periods.
The increase in non-interest income described in the previous paragraph was
partially offset by a $455,000 or 22.9% decrease in loan servicing fees
during the nine months ended September 30, 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 lower interest rate
environment in 1995 and early 1996 resulted in an increase in mortgage
refinance activity during the first half of 1996 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
$547,000. Recent increases in market
14
<PAGE> 16
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
interest rates, however, have reduced 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 $92,000 or 4.6%. This increase was primarily attributable
to a $214.8 million or 33.5% increase in average mortgage loans serviced for
third parties during the nine month period ended September 30, 1996,
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.
Non-Interest Expense Non-interest expense increased by $899,000 or 10.3% and
$2.9 million or 11.1% during the three and nine month periods ended
September 30, 1996, compared to the previous year (excluding the effect of
the FDIC special assessment). Expenses as a percent of average assets
during the 1996 periods were 2.72% and 2.76%, respectively (again, excluding
the special assessment). This compares to 2.84% and 2.88% during the same
periods in the previous year. The following paragraphs discuss the primary
reasons for these changes.
Compensation and employee benefits increased by $351,000 or 7.4% during the
three months ended September 30, 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 December 1995 purchase of RFC, which
added 42 employees and four banking locations to the Corporation's
operations. Also contributing to the increase, however, was a general
increase in compensation paid to employees in the Corporation's Residential
Lending Division caused primarily by increases in originations of mortgage
loans, as previously described. In addition, since June 30, 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 and existing market areas of Wisconsin. As of September
30, 1996, the Corporation employed 641 full-time equivalent employees. This
compares to 623 and 620 at December 31, 1995, and September 30, 1995,
respectively.
Occupancy and equipment expense increased by $83,000 or 5.7% during the
three months ended September 30, 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
15
<PAGE> 17
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
the Corporation completed the construction of a separate facility located in
La Crosse, Wisconsin, which houses a large portion of its retail support
operations.
Advertising and marketing expense increased by $80,000 or 15.5% during the
three months ended September 30, 1996, compared to the same period in the
previous year. This increase was due primarily to an increase in
expenditures to outside agencies for advertising and promotion work.
Federal insurance premiums increased by $100,000 or 21.6% during the three
months ended September 30, 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).
The FDIC special assessment was $5.9 million during the three months ended
September 30, 1996. This amount represented a one-time charge toward the
recapitalization of the Savings Association Insurance Fund ("SAIF"). This
charge was determined at 65.7 basis points of the Bank's deposit liabilities
at March 31, 1995. All SAIF-insured financial institutions participated in
the recapitalization of the deposit insurance fund. Although the payment of
the special assessment impacted total results for the quarter, the Bank will
receive long-term benefits because of the recapitalization of the fund.
Specifically, the Bank's deposit insurance premiums will be reduced by
approximately 70% beginning January 1, 1997, when SAIF-insured institutions
begin to pay $0.067 per $100 of assessable deposits. Based on current
deposit levels, management expects this to contribute approximately $1.0
million, or $0.16 per share, in annual after-tax earnings to the
Corporation.
Other non-interest expenses increased by $286,000 or 18.3% during the three
months ended September 30, 1996, compared to the same period in the previous
year. This increase was due primarily to goodwill amortization associated
with the RFC acquisition. Also contributing to the increase, however, was
an increase in automated teller machine ("ATM") charges resulting from
increased usage by the Corporation's customers of ATMs owned by other
financial institutions, an increase in expenses associated with customer
collections and check returns, and an increase in student loan origination
fees.
During the nine months ended September 30, 1996, non-interest expense
increased by $2.9 million or 11.1% (excluding the effect of the FDIC special
assessment). This increase was due primarily to a $1.1 million or 8.0%
increase in compensation and employee benefits, a $555,000 or 12.9% increase
in occupancy and equipment expense, a $338,000 or 25.2% increase in federal
insurance premiums, and a $1.2 or 25.1% increase in other expenses. Reasons
for these changes were similar to those discussed in previous paragraphs.
16
<PAGE> 18
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
These increases were only partially offset by a $325,000 or 19.8% decrease
in advertising and marketing expenses which was primarily attributable to a
decrease in expenditures related to savings and certificate of deposit
promotions, image advertising, grand openings, and other customer mailings.
Income Tax Expense Income tax expense for the three months ended September
30, 1996 and 1995, was $2.0 million (excluding the tax effect of the FDIC
special assessment) and $1.7 million, respectively, on pretax income of $5.6
million (excluding the special assessment) and $4.8 million, respectively.
These results equated to effective tax rates for the two periods of 36.8%
and 36.4%, respectively.
Income tax expense for the nine months ended September 30, 1996 and 1995,
was $5.9 million (excluding the tax effect of the FDIC special assessment)
and $4.0 million, respectively, on pretax income of $15.7 million (excluding
the special assessment) and $11.3 million, respectively. These results
equated to effective tax rates for the nine months ended September 30, 1996
and 1995, of 37.3% and 35.6%, 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.
Financial Condition
The Corporation's total assets increased by $66.9 million or 4.8% during the
nine months ended September 30, 1996. This increase was primarily the
result of a $125.5 million or 13.5% increase in loans held for investment.
This growth was funded in part by a $48.4 million or 5.0% increase in
deposit liabilities. The majority of this growth occurred in time deposit
and non-interest-bearing accounts. Also funding the increase in loans held
for investment was a $48.1 million or 14.3% aggregate decrease in 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.
Contributing to a lesser degree to the funding of loans held for investment
was a $12.7 million or 3.9% increase in the aggregate of the Corporation's
Federal Home Loan Bank ("FHLB") advances and other borrowings. These
increases were due primarily to an increase in overnight borrowings at the
FHLB and the utilization of an overnight line of credit from another
financial institution.
17
<PAGE> 19
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
As previously noted, the Corporation's loans held for investment increased
by $125.5 million or 13.5% during the nine month period ended September 30,
1996. This growth was only partially offset by an $11.3 million or 47.2%
decrease in loans held for sale during the same period. These changes were
primarily the result of a higher interest rate environment in recent months
which has encouraged borrowers to shift their preferences to adjustable-rate
mortgage loans, rather than fixed-rate mortgage loans. Since the
Corporation generally retains all of its adjustable-rate loan production in
portfolio, the Corporation has experienced an increase in loans held for
investment and a decline in loans held for sale. Also contributing to the
increase in loans held for investment, however, were increased originations
of second mortgage loans, education loans, and commercial real estate loans.
The first due to competitive interest rate offerings, the second due to
enrollment increases at educational institutions in the Corporation's market
areas, and the last due to increased emphasis on commercial real estate
lending due to the continued strong economy in the Corporation's market
areas.
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 $1.7 million or 0.12% of total assets at September
30, 1996, compared to $1.4 million or 0.10% at December 31, 1995. The
Corporation's other classified assets were $10.5 million or 0.72% of total
assets at September 30, 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.
18
<PAGE> 20
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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.
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 5.3% during the nine months ended September 30, 1996, and was 5.1%
on September 30, 1996.
The Corporation's stockholder's equity ratio as of September 30, 1996, was
6.34% 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. This ratio is currently less than 6.7% as a result
of the FDIC special assessment, as previously described. Management expects
the Corporation's capital ratio to return to 6.7% to 7.2% in late 1997 or
early 1998.
The Corporation paid cash dividends of $1.0 million and $0.8 million during
the three months ended September 30, 1996 and 1995, respectively, and $2.9
million and $2.4 million during the nine months ended September 30, 1996 and
1995, respectively. These amounts equated to dividend payout ratios of
27.5% and 26.9%, respectively, and 29.3% and 32.7%, respectively, of the net
income in such periods (excluding the effect of the FDIC special
assessment). 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
19
<PAGE> 21
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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 October 22, 1996, the Board of Directors of the Corporation declared a
$0.16 dividend payable on December 5, 1996, to shareholders of record on
November 14, 1996.
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 September 30, 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 June 30, 1996,
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.
20
<PAGE> 22
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Part II--Other Information
September 30, 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.
Not applicable.
Item 5--Other Information.
Not applicable.
Item 6--Exhibits and Reports on Form 8-K.
Not applicable.
21
<PAGE> 23
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: November 14, 1996 By: /s/ Thomas W. Schini,
-----------------------------
Thomas W. Schini, Chairman of the
Board, President, and Chief
Executive Officer (duly
authorized officer)
Date: November 14, 1996 By: /s/ Jack C. Rusch
-----------------------------
Jack C. Rusch, Executive Vice
President, Treasurer, and Chief
Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (a) FORM
10-Q FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (b) FORM 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,982,226
<INT-BEARING-DEPOSITS> 5,814,692
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,676,051
<INVESTMENTS-CARRYING> 172,104,381
<INVESTMENTS-MARKET> 167,724,879
<LOANS> 1,107,577,800
<ALLOWANCE> 7,967,961
<TOTAL-ASSETS> 1,469,421,592
<DEPOSITS> 1,017,798,100
<SHORT-TERM> 292,753,000
<LIABILITIES-OTHER> 23,480,022
<LONG-TERM> 32,151,000
0
0
<COMMON> 36,191,241
<OTHER-SE> 56,983,419
<TOTAL-LIABILITIES-AND-EQUITY> 1,469,421,592
<INTEREST-LOAN> 61,050,483
<INTEREST-INVEST> 15,307,460
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 76,357,943
<INTEREST-DEPOSIT> 34,610,004
<INTEREST-EXPENSE> 46,919,002
<INTEREST-INCOME-NET> 29,438,941
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (252,142)
<EXPENSE-OTHER> 34,595,555
<INCOME-PRETAX> 9,750,170
<INCOME-PRE-EXTRAORDINARY> 9,750,170
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,265,892
<EPS-PRIMARY> $0.93
<EPS-DILUTED> $0.92
<YIELD-ACTUAL> 7.78
<LOANS-NON> 1,305,911
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,954,379
<ALLOWANCE-OPEN> 8,186,077
<CHARGE-OFFS> 243,304
<RECOVERIES> 25,188
<ALLOWANCE-CLOSE> 7,967,961
<ALLOWANCE-DOMESTIC> 7,967,901
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
