<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................................June 30, 1997
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 39-165128
----------------------------------------- ----------------------
(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 August 8, 1997: 9,158,365
---------------------------- ---------
<PAGE> 2
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1997, and December 31, 1996
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $29,520,427 $24,644,254
Interest-bearing deposits 11,568,288 2,456,901
Investment securities available for sale,
at fair value 57,401,801 74,029,474
Mortgage-backed and related securities:
Available for sale, at fair value 55,853,883 61,875,130
Held for investment, at cost (fair
value of $136,105,395 and $145,217,199,
respectively) 138,100,775 147,834,733
Loans held for sale 41,329,353 20,338,790
Loans held for investment, net 1,159,274,968 1,106,039,995
Federal Home Loan Bank stock 18,811,300 18,823,200
Accrued interest receivable, net 12,420,549 11,487,427
Office properties and equipment 25,263,981 26,210,947
Mortgage servicing rights, net 13,304,255 11,887,202
Intangible assets 5,987,422 5,221,245
Other assets 3,144,108 4,564,171
-------------- --------------
Total assets $1,571,981,110 $1,515,413,469
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit liabilities $1,079,922,641 $1,024,092,887
Federal Home Loan Bank advances and
other borrowings 373,501,999 383,592,983
Advance payments by borrowers for taxes
and insurance 9,030,896 3,912,206
Accrued interest payable 2,455,186 2,432,796
Other liabilities 5,827,724 5,968,239
-------------- --------------
Total liabilities 1,470,738,446 1,419,999,111
-------------- --------------
Preferred stock, $.10 par value, 5,000,000
shares authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000
shares authorized, 9,970,815 and 9,958,989
shares issued and outstanding, including
829,950 and 768,450 shares of treasury
stock, respectively 997,082 663,933
Additional paid-in capital 35,610,485 35,580,114
Unearned restricted stock (284,368) (414,392)
Securities valuation allowance, net (1,687,607) (2,450,764)
Retained earnings 78,290,135 72,569,092
Treasury stock, at cost (11,683,063) (10,533,625)
-------------- --------------
Total stockholders' equity 101,242,664 95,414,358
-------------- --------------
Total liabilities and stockholders' equity $1,571,981,110 $1,515,413,469
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
June 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $24,153,490 $19,962,938
Interest on mortgage-backed and related
securities 3,128,424 3,710,438
Interest and dividends on investments 1,335,240 1,353,256
-------------- --------------
Total interest income 28,617,154 25,026,632
-------------- --------------
Interest on deposit liabilities 12,376,766 11,485,572
Interest on advances and other borrowings 5,090,163 3,734,776
-------------- --------------
Total interest expense 17,466,929 15,220,348
-------------- --------------
Net interest income 11,150,225 9,806,284
Provision for loan losses 131,581 -
-------------- --------------
Net interest income after provision
for loan losses 11,018,644 9,806,284
-------------- --------------
Retail banking fees and service charges 3,111,367 2,531,240
Loan servicing fees 597,718 624,387
Commissions on annuity and insurance sales 503,659 516,173
Gain on sales of loans 991,798 1,134,187
Loss on sales of investments (42,860) (136,408)
Other income 463,758 286,775
-------------- --------------
Total non-interest income 5,625,440 4,956,354
-------------- --------------
Compensation and employee benefits 5,309,649 4,912,324
Occupancy and equipment 1,450,635 1,633,883
Advertising and marketing 699,909 455,026
Federal deposit insurance premiums 164,058 552,446
Other expenses 2,122,475 1,982,935
-------------- --------------
Total non-interest expense 9,746,726 9,536,614
-------------- --------------
Income before income taxes 6,897,358 5,226,024
Income tax expense 2,688,442 1,969,546
-------------- --------------
Net income $4,208,916 $3,256,478
============== ==============
Primary earnings per share $0.43 $0.32
Fully-diluted earnings per share 0.42 0.32
Dividends paid per share 0.12 0.107
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $47,454,992 $39,970,797
Interest on mortgage-backed and related
securities 6,343,364 7,583,090
Interest and dividends on investments 2,775,118 2,815,625
-------------- --------------
Total interest income 56,573,474 50,369,512
-------------- --------------
Interest on deposit liabilities 24,355,127 22,941,506
Interest on advances and other borrowings 10,262,288 8,067,426
-------------- --------------
Total interest expense 34,617,415 31,008,932
-------------- --------------
Net interest income 21,956,059 19,360,580
Provision for loan losses 252,421 -
-------------- --------------
Net interest income after provision
for loan losses 21,703,638 19,360,580
-------------- --------------
Retail banking fees and service charges 5,917,579 4,834,795
Loan servicing fees 1,176,482 828,962
Commissions on annuity and insurance sales 1,119,529 1,005,386
Gain on sales of loans 1,780,828 2,680,728
Loss on sales of investments (97,415) (190,137)
Other income 881,150 631,253
-------------- --------------
Total non-interest income 10,778,153 9,790,987
-------------- --------------
Compensation and employee benefits 10,460,037 9,718,649
Occupancy and equipment 3,268,325 3,310,957
Advertising and marketing 1,185,523 721,534
Federal deposit insurance premiums 326,152 1,114,450
Other expenses 4,219,185 4,158,462
-------------- --------------
Total non-interest expense 19,459,222 19,024,052
-------------- --------------
Income before income taxes 13,022,569 10,127,515
Income tax expense 5,055,888 3,801,712
-------------- --------------
Net income $7,966,681 $6,325,803
============== ==============
Primary earnings per share $0.81 $0.62
Fully-diluted earnings per share 0.80 0.62
Dividends paid per share 0.227 0.20
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
June 30
-------------------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $4,208,915 $3,256,477
Adjustments to reconcile net income to net
cash provided (used) by operations:
Provision for loan and real estate losses 108,431 (3,903)
Net loan fees (costs) deferred (180,726) 24,566
Depreciation and amortization 1,516,771 1,442,264
Net gains on sales of loans and other
investments (948,938) (997,779)
Increase in accrued interest receivable (230,907) (149,674)
Decrease in accrued interest payable (67,747) (490,981)
Decrease in current and deferred
income taxes (1,509,171) (672,205)
Other, net (45,361) (195,015)
-------------- --------------
Net cash provided by operations before
loan originations and sales 2,851,267 2,213,750
-------------- --------------
Loans originated for sale (43,564,700) (59,759,046)
Sales of loans originated for sale 43,123,536 77,889,089
-------------- --------------
Net cash provided by operations 2,410,103 20,343,793
-------------- --------------
Cash flows from investing activities:
Increase in interest-bearing deposits (4,607,319) (6,836,121)
Purchases of investment securities - (6,201,585)
Sales of investment securities 1,772,050 2,004,640
Maturities of investment securities 8,221,497 10,093,316
Mortgage-backed and related securities
principal repayments 8,535,856 11,799,635
Loans originated for investment (153,264,345) (112,587,728)
Loan principal repayments 95,764,817 70,571,963
Sales of loans originated for investment 5,609,453 1,449,084
Additions to office properties and
equipment (451,792) (852,304)
Other, net 1,339,867 2,247,251
-------------- --------------
Net cash used by investing activities (37,079,916) (28,311,849)
-------------- --------------
(Continued)
</TABLE>
4
<PAGE> 6
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Three Months Ended
June 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $26,199,399 $3,694,352
Repayment of long-term Federal Home Loan
Bank advances (50,000,000) (33,300,000)
Net increase in short-term Federal Home
Loan Bank borrowings 59,355,000 30,422,000
Increase (decrease) in other borrowings (1,001,298) 4,998,805
Increase in advance payments by borrowers
for taxes and insurance 3,929,146 3,248,657
Purchase of treasury stock (134,999) (1,571,250)
Dividends paid (1,101,555) (987,471)
Other, net 681,721 (1,405,339)
-------------- --------------
Net cash provided by financing
activities 37,927,414 5,099,754
-------------- --------------
Net increase (decrease) in cash 3,257,601 (2,868,302)
Cash at beginning of period 26,262,826 23,397,994
-------------- --------------
Cash at end of period $29,520,427 $20,529,692
============== ==============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $28,386,247 $24,876,958
Interest paid on deposits and borrowings 17,534,676 15,711,329
Income taxes paid 4,331,000 2,659,500
Income taxes refunded 97,575 -
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $7,966,681 $6,325,803
Adjustments to reconcile net income to net
cash provided (used) by operations:
Provision for loan and real estate losses 227,825 (9,940)
Net loan fees (costs) deferred (384,609) 61,791
Depreciation and amortization 3,099,084 3,309,431
Net gains on sales of loans and other
investments (1,683,413) (2,490,591)
Increase in accrued interest receivable (933,122) (443,311)
Increase (decrease) in accrued interest
payable 22,390 (476,826)
Increase in current and deferred
income taxes 462,775 1,117,009
Other, net (478,381) (721,117)
-------------- --------------
Net cash provided by operations before
loan originations and sales 8,299,230 6,672,249
-------------- --------------
Loans originated for sale (84,197,169) (147,867,026)
Sales of loans originated for sale 86,444,507 155,155,313
-------------- --------------
Net cash provided by operations 10,546,568 13,960,536
-------------- --------------
Cash flows from investing activities:
Increase in interest-bearing deposits (9,111,387) (11,598,403)
Purchases of investment securities - (11,260,884)
Sales of investment securities 4,773,621 5,013,779
Maturities of investment securities 11,710,379 19,256,065
Mortgage-backed and related securities
principal repayments 16,689,405 21,040,525
Loans originated for investment (246,651,629) (191,896,495)
Loan principal repayments 160,866,667 148,992,356
Sales of loans originated for investment 8,879,751 10,690,499
Additions to office properties and
equipment (1,364,569) (1,040,525)
Other, net 1,034,614 5,064,052
-------------- --------------
Net cash used by investing activities (53,173,148) (5,739,031)
-------------- --------------
(Continued)
</TABLE>
6
<PAGE> 8
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $55,829,754 $29,545,430
Long-term advances from Federal Home
Loan Bank 25,000,000 100,000,000
Repayment of long-term Federal Home Loan
Bank advances (177,776,000) (76,050,000)
Net increase (decrease) in short-term
Federal Home Loan Bank borrowings 143,688,000 (72,713,000)
Increase (decrease) in other borrowings (1,002,984) 5,997,252
Increase in advance payments by borrowers
for taxes and insurance 5,118,690 4,383,746
Purchase of treasury stock (1,341,437) (7,193,313)
Dividends paid (2,081,082) (1,904,583)
Other, net 67,812 (141,829)
--------------- -------------
Net cash provided (used) by financing
activities 47,502,753 (18,076,297)
--------------- -------------
Net increase (decrease) in cash 4,876,173 (9,854,792)
Cash at beginning of period 24,644,254 30,384,484
--------------- -------------
Cash at end of period $29,520,427 $20,529,692
=============== =============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $55,640,352 $49,926,201
Interest paid on deposits and borrowings 34,595,025 31,485,758
Income taxes paid 4,729,000 2,964,402
Income taxes refunded 97,545 272,075
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997
(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 six month periods ended June 30,
1997, may not necessarily be indicative of the results which may be expected for
the entire year ending December 31, 1997.
Certain 1996 balances have been reclassified to conform with the 1997
presentation.
(4) Pending Accounting Change
In the first quarter of 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). This standard replaces "primary earnings per share" with "basic
earnings per share". In general, basic earnings per share is computed using the
actual shares outstanding during the period, unadjusted for common stock
equivalents. "Fully-diluted earnings per share" is retained under the new
standard, but is referred to as "diluted earnings per share". The new standard
is effective for periods ending after December 15, 1997. All prior-period
earnings per share data must be restated. Earlier adoption is not permitted.
If the Corporation had reported its earnings per share in accordance with SFAS
128 for the three months ended June 30, 1997 and 1996, it would have reported
basic earnings per share of $0.46 and $0.35, respectively. It would have
reported $0.87 and $0.66 for the six months ended June 30, 1997 and 1996,
respectively.
(3) Contingencies
First Enterprises, Inc. ("FEI"), a wholly-owned subsidiary of the Bank that was
formerly involved in the acquisition and development of hotels, received a
favorable judgement in a United States District Court in 1996 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 1980s.
8
<PAGE> 10
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 was conducted in in the second quarter
of 1997; the Corporation does not know at this time when it will be informed of
the court's decision with respect to this hearing. The defendant is expected to
appeal the initial 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 damages 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.
(4) Stock Splits
Earnings per share and dividends paid per share, as presented in the
Corporation's Consolidated Statements of Operations and accompanying notes,
have been adjusted to recognize a three-for-two stock split on June 5, 1997.
Common shares issued and outstanding, as presented in the Corporation's
Consolidated Statements of Financial Condition, have also been adjusted for such
stock split.
9
<PAGE> 11
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis
June 30, 1997
Results of Operations
Overview The Corporation's net income for the three months ended June 30, 1997
and 1996, was $4.2 million or $0.43 per share and $3.3 million or $0.32 per
share, respectively. The increase in earnings between these two periods
was primarily attributable to a $1.3 million increase in net interest income, a
$580,000 increase in retail banking fees, and a $388,000 decrease in federal
deposit insurance premiums. These developments were partially offset by a
$599,000 increase in total non-interest expense (excluding the decline in
deposit insurance) and a $719,000 increase in income tax expense. Net income
for these periods represented a return on average assets of 1.10% and 0.96%,
respectively, and a return on average equity of 16.88% and 13.83%,
respectively.
The Corporation's net income for the six months ended June 30, 1997 and 1996,
was $8.0 million or $0.81 per share and $6.3 million or $0.62 per share,
respectively. The increase in earnings between these two periods was
attributable to a variety of factors including a $2.6 million increase in net
interest income, a $1.1 million increase in retail banking fees, a $788,000
decrease in federal deposit insurance premiums, and a $348,000 increase in loan
servicing fees. These developments were partially offset by a $1.2 million
increase in total non-interest expense (excluding the decline in deposit
insurance), a $900,000 decrease in gain on sales of loans, and a $1.3 million
increase in income tax expense. Net income for these periods represented a
return on average assets of 1.05% and 0.92%, respectively, and a return on
average equity of 16.31% and 13.18%, respectively.
The following paragraphs discuss the aforementioned changes in more detail
as well as other changes in the Corporation's results of operations during the
three and six month periods ended June 30, 1997, as compared to the same periods
in the previous year.
Net Interest Income Net interest income increased by $1.3 million or 13.7% and
$2.6 million or 13.4% during the three and six month periods ended June 30,
1997, respectively, as compared to the same periods in the previous year. Net
interest income was favorably impacted in both periods by increases in average
interest-earning assets of $163.0 million or 12.7% and $148.1 million or 11.4%
as compared to the same periods in the previous year, respectively. This growth
was principally due to increases in mortgage and consumer loans outstanding, the
origination of which were funded by increases in Federal Home Loan Bank ("FHLB")
advances and deposit liabilities.
Also contributing to the increase in net interest income in both periods was a
modest improvement in the Corporation's average interest rate spread.
Management attributes these improvements to a higher mix of interest-earning
assets invested in mortgage and consumer loans, which generally earn higher
yields than the Corporation's other interest-earning assets.
The following tables set forth information regarding (i) the total dollar
amount of interest income from interest-earning assets and the resulting average
yields, (ii) the total dollar amount of interest expense from
10
<PAGE> 12
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
interest-bearing liabilities and the resulting 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 daily average balances during the three and six
month periods ended June 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Dollars in thousands June 30, 1997 June 30, 1996
------------------------------------------- -------------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
<S> <C> <C> <C> <C> <S> <C>
Interest-earning assets:
Loans held for investment and loans held
for sale $1,166,686 $24,153 8.28% $957,973 $19,963 8.34%
Mortgage-backed and related securities 198,402 3,128 6.31 240,452 3,710 6.17
Investment securities 63,361 967 6.10 69,824 1,031 5.91
Interest-bearing deposits 4,731 64 5.38 5,307 73 5.50
Other earning assets 18,118 305 6.73 14,763 250 6.77
------------ --------- ---------- ----------- --------- ---------
Total interest-earning assets 1,451,298 28,617 7.89 1,288,319 25,027 7.77
--------- ---------- --------- ---------
Non-interest-earning assets:
Office properties and equipment 25,525 26,916
Other non-interest-earning assets 56,111 48,717
------------ -----------
Total assets $1,532,934 $1,363,952
============ ===========
Interest-bearing liabilities:
Deposit liabilities $973,585 12,377 5.09 $911,665 11,486 5.04
FHLB advances 346,313 4,935 5.70 261,620 3,624 5.54
Other borrowed funds 15,909 155 3.89 12,430 110 3.54
------------ --------- ---------- ----------- --------- ---------
Total interest-bearing liabilities 1,335,807 17,467 5.23 1,185,715 15,220 5.13
--------- ---------- --------- ---------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 87,359 75,750
Other liabilities 10,031 8,293
------------ -----------
Total liabilities 1,433,197 1,269,758
Stockholders' equity 99,737 94,194
------------ -----------
Total liabilities and stockholders'
equity $1,532,934 $1,363,952
============ ===========
Net interest income $11,150 $9,807
========= =========
Interest rate spread 2.66% 2.64%
========== =========
Net yield on interest-earning assets 3.07% 3.04%
========== =========
Average earning assets to average
interest-bearing liabilities 108.65% 108.65%
========== =========
</TABLE>
11
<PAGE> 13
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
Dollars in thousands June 30, 1997 June 30, 1996
------------------------------------------- -------------------------------------------
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 $1,149,708 $47,455 8.26% $955,407 $39,970 8.37%
Mortgage-backed and related securities 202,563 6,343 6.26 245,733 7,583 6.17
Investment securities 66,558 2,005 6.02 73,446 2,169 5.91
Interest-bearing deposits 5,433 145 5.34 4,623 128 5.54
Other earning assets 18,698 625 6.68 15,698 520 6.63
------------ --------- -------- ----------- --------- ---------
Total interest-earning assets 1,442,960 56,573 7.84 1,294,907 50,370 7.78
--------- -------- --------- ---------
Non-interest-earning assets:
Office properties and equipment 25,932 26,986
Other non-interest-earning assets 54,951 51,317
------------ -----------
Total assets $1,523,843 $1,373,210
============ ===========
Interest-bearing liabilities:
Deposit liabilities $963,809 24,355 5.05 $903,692 22,942 5.08
FHLB advances 355,390 9,947 5.60 281,448 7,871 5.59
Other borrowed funds 14,720 315 4.29 10,248 196 3.83
------------ --------- -------- ----------- --------- ---------
Total interest-bearing liabilities 1,333,919 34,617 5.19 1,195,388 31,009 5.19
--------- -------- --------- ---------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 82,450 72,783
Other liabilities 9,807 9,037
------------ -----------
Total liabilities 1,426,176 1,277,208
Stockholders' equity 97,667 96,002
------------ -----------
Total liabilities and stockholders'
equity $1,523,843 $1,373,210
============ ===========
Net interest income $21,956 $19,361
========= =========
Interest rate spread 2.65% 2.59%
======== =========
Net yield on interest-earning assets 3.04% 2.99%
======== =========
Average earning assets to average
interest-bearing liabilities 108.17% 108.33%
======== =========
</TABLE>
Provision for Loan Losses Due to growth in the Corporation's loan portfolio in
recent periods, management of the Corporation elected to record provisions for
loan losses during the three and six month periods ended June 30, 1997.
In general, the provision recorded during such periods was equal to the
Corporation's actual charge-off activity.
12
<PAGE> 14
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
As of June 30, 1997, and December 31, 1996, the Corporation's allowance for loan
losses was $7.9 million or 0.68% and 0.71% of loans held for investment,
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 was $5.6 million and $5.0 million
during the three months ended June 30, 1997 and 1996, respectively. The
following paragraphs discuss the principal reasons for this increase.
Retail banking fees increased by $580,000 or 22.9% during the three months
ended June 30, 1997, compared to the same period in the previous year. This
increase was primarily due to a general increase in per-transaction service
charges and a 9.3% increase in the number of checking accounts serviced by the
Corporation since June 30, 1996. Also contributing was $231,000 in fees earned
on customers' use of debit cards, which were first introduced by the Corporation
in the fourth quarter of 1996.
Loan servicing fees decreased by $27,000 or 4.3% during the three months ended
June 30, 1997, compared to the same period in the previous year. This decrease
was primarily caused by losses recorded on the Corporation's mortgage servicing
rights. Declining interest rates generally result in increased mortgage
refinance activity which leads to increased loan prepayment activity. As a
result of such activity, the value of the Corporation's mortgage servicing
rights generally decline; such declines are recorded as losses against servicing
fee revenue. During the second quarter of 1997 $150,000 in such losses were
recorded; this compares to only $100,000 during the second quarter of 1996.
Gain on sales of mortgage loans decreased by $142,000 or 12.6% during the three
months ended June 30, 1997, compared to the same period in the previous year.
This decrease was primarily attributable to a $30.6 million or approximately 40%
decline in the Corporation's mortgage loan sales between the two periods. This
decline was principally due to a more favorable interest rate environment in
early 1996, which resulted in the origination and sale of more fixed-rate
mortgage loans during such period as compared to the more recent period.
However, recent declines in market interest rates may result in increased
customer demand for fixed-rate mortgage loans in the immediate future. This
development could result in increased gain on sales of such loans, although
there can be no assurances.
Other income increased by $177,000 or approximately 60% during the three months
ended June 30, 1997, compared to the same period in the previous year. This
improvement was primarily due to a change in the manner in which the Corporation
accounts for certain fees and costs to originate consumer loans. Prior to 1997,
such fees and costs were netted and were recorded in other income.
However, due to the increased materiality of these fees and costs, the
Corporation elected to conform its accounting for such with that which is done
for mortgage loans. That is, loan origination fees and certain direct loan
origination costs are deferred and amortized over the life of the related loans
as an adjustment of yield.
13
<PAGE> 15
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Non-interest income was $10.8 million and $9.8 million during the six months
ended June 30, 1997 and 1996, respectively. This increase was primarily due to
a $1.1 million or 22.4% increase in retail banking fees and a $250,000 or
approximately 40% increase in other income. These developments were partially
offset by a $900,000 or approximately 35% decrease in gain on sales of
loans. Reasons for these changes are similar to those discussed in previous
paragraphs.
Also contributing to the improvement in non-interest income during the six
months ended June 30, 1997, was a $348,000 or approximately 40% increase in loan
servicing fees. This increase was primarily the result of losses recorded on
the Corporation's mortgage servicing rights. A declining interest rate
environment in late 1995 resulted in a high level of prepayment activity in
early 1996. Losses recorded as a result of such activity were $624,000 during
the first six months of 1996. This compares to only $300,000 for the same
period in 1997.
Non-Interest Expense Non-interest expense was $9.7 million and $9.5 million or
2.55% and 2.80% of average assets during the three months ended June 30,
1997 and 1996, respectively. The following paragraphs discuss the principal
reasons for this increase.
Compensation and employee benefits increased by $397,000 or 8.1% during the
three months ended June 30, 1997, 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 net addition of four banking locations in 1996. The
Corporation also opened one supermarket banking location during the first six
months of 1997, but also closed a traditional location during the same period.
The Corporation intends to open two or three additional supermarket banking
offices during the remainder of 1997, although there can be no assurances. As
of June 30, 1997, the Corporation employed 673 full-time equivalent employees.
This compares to 641 and 642 at December 31, 1996, and June 30, 1996,
respectively.
Occupancy and equipment expense decreased by $183,000 or 11.2% during the three
months ended June 30, 1997, compared to the same period in the previous year.
This decrease was principally due to the Corporation's efforts in recent
periods to reduce its real estate and personal property tax obligations through
discussions with taxing authorities. As a result of these efforts, the
Corporation's obligations have been reduced and taxes accrued in previous
periods were reversed during the current period.
Advertising and marketing expense increased by $245,000 or approximately 55%
during the three months ended June 30, 1997, compared to the same period
in the previous year. The Corporation's expenditures in this area have
increased in recent periods due to a larger branch network and increased media
advertising in new market areas. Also contributing were increased expenditures
related to checking and consumer loan promotions. Management expects advertising
and marketing expenditures during the remaining half of 1997 to be comparable to
the same period in the previous year, although there can be no assurances.
Federal insurance premiums decreased by $388,000 or approximately 70% during
the three months ended June 30, 1997, compared to the same period in the
previous year. This decrease was attributable to a decline in the
14
<PAGE> 16
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Bank's federal insurance premiums as a result of the recapitalization of
the Saving Association Insurance Fund ("SAIF") in the third quarter of 1996.
Non-interest expense was $19.5 million and $19.0 million or 2.56% and 2.77% of
average assets during the six months ended June 30, 1997 and 1996,
respectively. This increase was due primarily to a $741,000 or 7.6% increase in
compensation and employee benefits and a $464,000 or approximately 65% increase
in advertising and marketing. These developments were partially offset by a
$788,000 or approximately 70% decline in federal insurance premiums. Reasons
for these changes are similar to those discussed in previous paragraphs.
Income Tax Expense Income tax expense for the three months ended June 30, 1997
and 1996, was $2.7 million and $2.0 million, respectively, on pretax income of
$6.9 million and $5.2 million, respectively. The effective tax rates for these
periods were 39.0% and 37.7%, respectively.
Income tax expense for the six months ended June 30, 1997 and 1996, was $5.1
million and $3.8 million, respectively, on pretax income of $13.0 million
and $10.1 million, respectively. The effective tax rates for these periods were
38.8% and 37.5%, 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 $56.7 million or 3.7% during the six
months ended June 30, 1997. This increase was primarily the result of a
$53.2 million or 4.8% increase in loans held for investment due principally to
continued strong demand for the Corporation's single-family adjustable-rate
mortgage loans. The Corporation has experienced consistent growth in this loan
category since the first quarter of 1996. Management attributes this growth to
an interest rate environment that favored the origination of adjustable-rate
mortgage loans, which the Corporation generally retains in its portfolio.
Management is uncertain whether this trend will continue in the immediate future
as a result of recent declines in market interest rates. Also contributing to
the increase in loans held for investment during the period, were increases in
the Corporation's education, consumer, and commercial real estate loans.
The growth in loans held for investment was principally funded by a $55.8
million or 5.5% increase in deposit liabilities. This growth was evenly
distributed between certificates of deposit, money market savings accounts, and
non-interest-bearing checking accounts. Management attributes this growth to a
combination of its expansion efforts in recent years, competitive product and
interest rate offerings, convenient banking locations, and strong local
economies in its market areas. Management expects deposit liabilities to
continue to grow modestly in the immediate future, although there can be no
assurances.
15
<PAGE> 17
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Growth in the Corporation's deposit liabilities was also used to reduce the
Corporation's borrowings from the FHLB. As a result, FHLB advances
outstanding declined by $9.1 million or 2.4% during the six months ended June
30, 1997.
The Corporation's aggregate investment in its investment securities and
mortgage-backed and related securities portfolios declined by $32.0 million
or 11.3% during the six months ended June 30, 1997. This decline was
principally due to the normal periodic amortization of the mortgage loans that
underlie mortgage-backed securities and/or the periodic sale or maturity of
investment securities. The proceeds from such amortization, maturities, and/or
sales were reinvested in loans held for investment or were used to reduce
borrowings from the FHLB, as previously described.
The Corporation's loans held for sale increased by $$21.0 million or
approximately 100% during the six months ended June 30, 1997. This increase was
principally due to the transfer of $19.7 million in single-family
adjustable-rate mortgage loans from the Corporation's held for investment
portfolio. Management expects to sell these loans in the third quarter,
although there can be no assurances. Management also expects that the
proceeds from the sale will be used to reduce FHLB borrowings. In the future,
the Corporation may elect to sell modest amounts of its single-family adjustable
rate mortgage loans in an effort to manage its borrowing capacity at the FHLB.
The recognition of gains or losses on the sales of such loans is dependent on
market conditions. Accordingly, there can be no assurance that that there will
not be significant inter-period variations in gains or losses from such sales.
Although management expects the aforementioned loans to be sold at a gain, it is
also anticipated that a loss of approximately the same amount may be recorded on
the sale of $27.7 million in mutual fund securities. These securities are
currently classified as available for sale and management is considering their
possible sale in the third quarter. However, there can be no assurances that
such will occur. The proceeds from any sale are expected to be used to reduce
borrowings at the FHLB.
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 $1.9 million or 0.12% of total assets at June 30, 1997, compared
to $2.4 million or 0.16% at December 31, 1996. The Corporation's other
classified assets were $10.9 million or 0.69% of total assets at June 30, 1997,
compared to $10.0 million or 0.66% at December 31, 1996.
Asset/Liability Management
The Corporation manages the exposure of its operations to changes in interest
rates ("interest rate risk") by monitoring its ratio of interest-earning assets
to interest-bearing liabilities within one- and three-year maturities and/or
repricing dates. Management has sought to control these ratios, thereby
limiting the affects of changes in interest rates on the Corporation's earnings,
by selling substantially all of its originations of long-term, fixed-rate,
single-family mortgage loans in the secondary market, investing in
adjustable-rate single-family residential loans, investing in short- to
medium-term CMOs, and investing in consumer
16
<PAGE> 18
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
loans and education loans, which generally have shorter terms to maturity
and higher interest rates.
The Corporation also originates multi-family residential and commercial real
estate loans for its own portfolio, which generally have adjustable or floating
interest rates and/or shorter terms to maturity than conventional
single-family residential loans.
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
reduce the potential effects of changes in interest rates on the Corporation's
operations, material and prolonged increases in interest rates may 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 qualifying types of U.S. government, federal agency, and other
investment securities 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 was in full compliance with these
regulations during the three and six month periods ended June 30, 1997.
The Corporation's stockholders' equity ratio as of June 30, 1997, was 6.44% of
total assets. The Corporation's long-term objective is to maintain this ratio
in a range of approximately 6.5% to 7.0%, which is consistent with return on
asset and return on equity goals of 1% and 15%, respectively. The Corporation's
equity ratio is below its target range as of June 30, 1997. Management expects
the ratio to return to its target range within the next six to twelve months,
although there can be no assurances.
The Bank is also required to maintain specified amounts of capital pursuant to
regulations promulgated by the Office of Thrift Supervision ("OTS") and the
Federal Deposit Insurance Corporation ("FDIC"). 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 June 30, 1997, 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 Corporation paid cash dividends of $1.1 million and $987,000 during the
three months ended June 30, 1997 and 1996, respectively. These amounts equated
to dividend payout ratios of 26.2% and 30.3% of net income in such periods,
respectively. The Corporation paid cash dividends of $2.1 million and $1.9
million during the six months ended June 30, 1997 and 1996,
17
<PAGE> 19
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
respectively. These amounts equated to dividend payout ratios of 26.1% and
30.1% of 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, as
previously described, and certain regulatory restrictions on the payment of
dividends. 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 July 22, 1997, the Board of Directors of the Corporation declared a $0.12 per
share dividend payable on September 4, 1997, to shareholders of record on August
14, 1997.
During the six months ended June 30, 1997, the Corporation repurchased 72,000
shares of common stock at a cost of $1.3 million under its 1996 stock repurchase
plan. The Corporation also reissued 10,500 shares out of treasury stock during
this period at an average cost of $18.29 per share. The Corporation uses the
"last-in/first-out" method when accounting for reissuance of shares out of
treasury stock.
Forward-Looking Statements
The discussion in this report includes certain forward-looking statements based
on current management expectations. Examples of factors which could cause
future results to differ from management's expectations include, but are not
limited to the following: general economic and competitive conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; general market rates of interest; interest rates on
competing investments; interest rates on funding sources; consumer demand for
deposit and loan products and services; consumer demand for other financial
services; changes in accounting policies or guidelines; and changes in the
quality or composition of the Corporation's loan and investment portfolios.
18
<PAGE> 20
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Part II--Other Information
June 30, 1997
Item 1--Legal Proceedings.
Refer to Note 4 of the Corporation's Consolidated Financial Statements.
Item 2--Changes in Securities.
None.
Item 3--Defaults Upon Senior Securities.
Not applicable.
Item 4--Submission of Matters to Vote of Security Holders.
None.
Item 5--Other Information.
None.
Item 6--Exhibits and Reports on Form 8-K.
None.
19
<PAGE> 21
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: August 8, 1997 By: /s/ Thomas W. Schini
Thomas W. Schini, Chairman
of the Board, President, and
Chief Executive Officer
(duly authorized officer)
Date: August 8, 1997 By: /s/ Jack C. Rusch
Jack C. Rusch,
Executive Vice President,
Treasurer, and Chief
Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE 6-MONTH PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 29,250,427
<INT-BEARING-DEPOSITS> 11,568,288
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,255,684
<INVESTMENTS-CARRYING> 138,100,755
<INVESTMENTS-MARKET> 136,105,395
<LOANS> 1,159,274,968
<ALLOWANCE> 7,902,323
<TOTAL-ASSETS> 1,571,981,110
<DEPOSITS> 1,079,922,641
<SHORT-TERM> 338,661,999
<LIABILITIES-OTHER> 17,313,806
<LONG-TERM> 34,840,000
0
0
<COMMON> 36,607,567
<OTHER-SE> 64,635,097
<TOTAL-LIABILITIES-AND-EQUITY> 1,571,981,110
<INTEREST-LOAN> 47,454,992
<INTEREST-INVEST> 9,118,482
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 56,573,474
<INTEREST-DEPOSIT> 24,355,127
<INTEREST-EXPENSE> 34,617,415
<INTEREST-INCOME-NET> 21,950,059
<LOAN-LOSSES> 252,421
<SECURITIES-GAINS> (97,415)
<EXPENSE-OTHER> 19,459,222
<INCOME-PRETAX> 13,022,569
<INCOME-PRE-EXTRAORDINARY> 13,022,569
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,966,681
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 3.04
<LOANS-NON> 1,387,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,918,000
<ALLOWANCE-OPEN> 7,888,323
<CHARGE-OFFS> 238,421
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<ALLOWANCE-CLOSE> 7,902,323
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<ALLOWANCE-UNALLOCATED> 7,665,815
</TABLE>
