<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, 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 39-1651288
- ----------------------------------------- ---------------------
(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 7, 1997: 9,160,902
<PAGE> 2
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1997, and December 31, 1996
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 20,658,570 $ 24,644,254
Interest-bearing deposits 19,818,594 2,456,901
Investment securities available for sale,
at fair value 25,805,272 74,029,474
Mortgage-backed and related securities:
Available for sale, at fair value 51,613,216 61,875,130
Held for investment, at cost (fair
value of $129,742,469 and $145,217,199,
respectively) 130,833,134 147,834,733
Loans held for sale 34,680,325 20,338,790
Loans held for investment, net 1,194,972,266 1,106,039,995
Federal Home Loan Bank stock 18,811,300 18,823,200
Accrued interest receivable, net 12,751,932 11,487,427
Office properties and equipment 24,136,888 26,210,947
Mortgage servicing rights, net 15,019,887 11,887,202
Intangible assets 6,045,225 5,221,245
Other assets 4,525,000 4,564,171
-------------- --------------
Total assets $1,559,671,609 $1,515,413,469
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit liabilities $1,141,668,745 $1,024,092,887
Federal Home Loan Bank advances and
other borrowings 293,210,672 383,592,983
Advance payments by borrowers for taxes
and insurance 11,204,493 3,912,206
Accrued interest payable 2,250,569 2,432,796
Other liabilities 6,307,881 5,968,239
-------------- --------------
Total liabilities 1,454,642,360 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
805,913 and 768,450 shares of treasury
stock, respectively 997,082 663,933
Additional paid-in capital 36,322,056 35,580,114
Unearned restricted stock (247,687) (414,392)
Securities valuation allowance, net (1,053,445) (2,450,764)
Retained earnings 80,509,925 72,569,092
Treasury stock, at cost (11,498,682) (10,533,625)
-------------- --------------
Total stockholders' equity 105,029,249 95,414,358
-------------- --------------
Total liabilities and stockholders' equity $1,559,671,609 $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 September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $25,137,703 $21,079,686
Interest on mortgage-backed and related
securities 2,965,013 3,539,649
Interest and dividends on investments 1,244,682 1,369,096
-------------- --------------
Total interest income 29,347,398 25,988,431
-------------- --------------
Interest on deposit liabilities 13,076,182 11,668,498
Interest on advances and other borrowings 4,928,748 4,241,572
-------------- --------------
Total interest expense 18,004,930 15,910,070
-------------- --------------
Net interest income 11,342,468 10,078,361
Provision for loan losses 122,613 -
-------------- --------------
Net interest income after provision
for loan losses 11,219,855 10,078,361
-------------- --------------
Retail banking fees and service charges 3,239,287 2,605,868
Loan servicing fees 566,782 705,137
Commissions on annuity and insurance sales 355,434 660,468
Gain on sales of loans 2,437,897 776,674
Loss on sales of investments (627,727) (62,005)
Other income 529,482 429,655
-------------- --------------
Total non-interest income 6,501,155 5,115,797
-------------- --------------
Compensation and employee benefits 5,571,509 5,080,847
Occupancy and equipment 1,628,768 1,540,495
Advertising and marketing 524,048 593,817
Federal deposit insurance premiums 143,443 565,305
FDIC special assessment - 5,941,000
Other expenses 2,266,731 1,850,039
-------------- --------------
Total non-interest expense 10,134,499 15,571,503
-------------- --------------
Income (loss) before income taxes 7,586,511 (377,345)
Income tax expense (benefit) 2,895,513 (317,434)
-------------- --------------
Net income (loss) $4,690,998 ($59,911)
============== ==============
Primary (loss) earnings per share $0.48 $(0.01)
Fully-diluted earnings (loss) per share 0.48 (0.01)
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
Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $72,592,695 $61,050,483
Interest on mortgage-backed and related
securities 9,308,377 11,122,739
Interest and dividends on investments 4,019,800 4,184,721
-------------- --------------
Total interest income 85,920,872 76,357,943
-------------- --------------
Interest on deposit liabilities 37,431,309 34,610,004
Interest on advances and other borrowings 15,191,036 12,308,998
-------------- --------------
Total interest expense 52,622,345 46,919,002
-------------- --------------
Net interest income 33,298,527 29,438,941
Provision for loan losses 375,034 -
-------------- --------------
Net interest income after provision
for loan losses 32,923,493 29,438,941
-------------- --------------
Retail banking fees and service charges 9,156,866 7,440,663
Loan servicing fees 1,743,264 1,534,099
Commissions on annuity and insurance sales 1,474,963 1,665,854
Gain on sales of loans 4,218,725 3,457,402
Loss on sales of investments (725,142) (252,142)
Other income 1,410,632 1,060,908
-------------- --------------
Total non-interest income 17,279,308 14,906,784
-------------- --------------
Compensation and employee benefits 16,031,546 14,799,496
Occupancy and equipment 4,897,093 4,851,452
Advertising and marketing 1,709,571 1,315,351
Federal deposit insurance premiums 469,595 1,679,755
FDIC special assessment - 5,941,000
Other expenses 6,485,915 6,008,501
-------------- --------------
Total non-interest expense 29,593,720 34,595,555
-------------- --------------
Income before income taxes 20,609,081 9,750,170
Income tax expense 7,951,402 3,484,278
-------------- --------------
Net income $12,657,679 $6,265,892
============== ==============
Primary earnings per share $1.29 $0.62
Fully-diluted earnings per share 1.28 0.61
Dividends paid per share 0.347 0.307
</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 September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $4,690,998 ($59,911)
Adjustments to reconcile net income to net
cash provided (used) by operations:
Provision for loan and real estate losses 93,659 (200)
Net loan costs deferred (251,691) (46,011)
Depreciation and amortization 1,614,626 1,318,619
Net gains on sales of loans and other
investments (1,810,170) (714,669)
Increase in accrued interest receivable (331,383) (730,282)
Increase (decrease) in accrued interest
payable (204,617) 118,955
Decrease in current and deferred
income taxes (851,987) (1,844,841)
Accrual of FDIC special assessment - 5,941,000
Other, net (2,541) 16,525
-------------- --------------
Net cash provided by operations before
loan originations and sales 2,946,894 3,999,185
-------------- --------------
Loans originated for sale (90,566,776) (40,858,134)
Sales of loans originated for sale 82,248,792 41,506,158
-------------- --------------
Net cash provided (used) by operations (5,371,090) 4,647,209
-------------- --------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing
deposits (8,250,306) 9,834,999
Purchases of investment securities - (10,555,501)
Sales of investment securities 26,937,148 3,008,231
Maturities of investment securities 4,674,192 6,211,920
Mortgage-backed and related securities
principal repayments 11,830,288 12,623,718
Loans originated for investment (128,724,508) (154,293,683)
Loans purchased for investment (4,351,005) (8,777,119)
Loan principal repayments 73,029,928 71,928,401
Sales of loans originated for investment 39,982,643 1,382,944
Additions to office properties and
equipment (319,702) (272,835)
Other, net (329,168) (4,336,497)
-------------- --------------
Net cash provided (used) by investing
activities 14,479,510 (73,245,422)
-------------- --------------
(Continued)
</TABLE>
4
<PAGE> 6
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $61,746,104 $18,830,151
Long-term advances from Federal Home
Loan Bank - 32,000,000
Repayment of long-term Federal Home Loan
Bank advances (32,000,000) (3,000,000)
Net increase (decrease) in short-term
Federal Home Loan Bank borrowings (43,290,000) 26,440,000
Decrease in other borrowings (5,001,327) (1,223)
Increase in advance payments by borrowers
for taxes and insurance 2,173,597 2,559,433
Purchase of treasury stock (1,393,751) (1,428,437)
Dividends paid (1,100,036) (993,883)
Other, net 895,136 (355,294)
-------------- --------------
Net cash provided (used) by financing
activities (17,970,277) 74,050,747
-------------- --------------
Net increase (decrease) in cash (8,861,857) 5,452,534
Cash at beginning of period 29,520,427 20,529,692
-------------- --------------
Cash at end of period $20,658,570 $25,982,226
============== ==============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $29,016,015 $25,258,149
Interest paid on deposits and borrowings 18,209,547 15,791,115
Income taxes paid 3,735,000 1,576,088
Income taxes refunded - 120,005
</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, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $12,657,679 $6,265,892
Adjustments to reconcile net income to net
cash provided by operations:
Provision for loan and real estate losses 321,484 (10,140)
Net loan fees (costs) deferred (636,300) 15,780
Depreciation and amortization 4,713,710 4,628,050
Net gains on sales of loans and other
investments (3,493,583) (3,205,260)
Increase in accrued interest receivable (1,264,505) (1,173,593)
Decrease in accrued interest payable (182,227) (357,871)
Decrease in current and deferred
income taxes (389,212) (727,832)
Accrual of FDIC special assessment - 5,941,000
Other, net (480,922) (704,592)
-------------- --------------
Net cash provided by operations before
loan originations and sales 11,246,124 10,671,434
-------------- --------------
Loans originated for sale (174,763,945) (188,725,160)
Sales of loans originated for sale 168,693,299 196,661,471
-------------- --------------
Net cash provided by operations 5,175,478 18,607,745
-------------- --------------
Cash flows from investing activities:
Increase in interest-bearing deposits (17,361,693) (1,763,404)
Purchases of investment securities - (21,816,385)
Sales of investment securities 31,710,769 8,022,010
Maturities of investment securities 16,384,571 25,467,985
Mortgage-backed and related securities
principal repayments 28,519,693 33,664,243
Loans originated for investment (373,354,146) (346,188,178)
Loans purchased for investment (6,372,996) (8,779,119)
Loan principal repayments 233,896,595 220,920,757
Sales of loans originated for investment 48,862,394 12,073,443
Additions to office properties and
equipment (1,684,271) (1,313,360)
Other, net 705,446 727,555
-------------- --------------
Net cash used by investing activities (38,693,638) (78,984,453)
-------------- --------------
(Continued)
</TABLE>
6
<PAGE> 8
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $117,575,858 $48,375,581
Long-term advances from Federal Home
Loan Bank 25,000,000 132,000,000
Repayment of long-term Federal Home Loan
Bank advances (209,776,000) (79,050,000)
Net increase (decrease) in short-term
Federal Home Loan Bank borrowings 100,398,000 (46,273,000)
Increase (decrease) in other borrowings (6,004,311) 5,996,029
Increase in advance payments by borrowers
for taxes and insurance 7,292,287 6,943,179
Purchase of treasury stock (2,735,188) (8,621,750)
Dividends paid (3,181,118) (2,898,466)
Other, net 962,948 (497,123)
-------------- --------------
Net cash provided by financing
activities 29,532,476 55,974,450
-------------- --------------
Net increase (decrease) in cash (3,985,684) (4,402,258)
Cash at beginning of period 24,644,254 30,384,484
-------------- --------------
Cash at end of period $20,658,570 $25,982,226
============== ==============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $84,656,367 $75,184,350
Interest paid on deposits and borrowings 52,804,572 47,276,873
Income taxes paid 8,464,000 4,540,490
Income taxes refunded 97,545 392,080
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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.
(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, 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 September 30, 1997 and 1996, it would
have reported basic earnings per share of $0.51 and $(0.01), respectively.
It would have reported $1.38 and $0.66 for the nine months ended September
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 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 may
appeal the initial judgement and 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
September 30, 1997
Results of Operations
Overview The Corporation's net income for the three months ended September
30, 1997 and 1996, was $4.7 million or $0.48 per share and $3.5 million or
$0.35 per share, respectively (the results for 1996 exclude the after-tax
effect of a $5.9 million special assessment from the Federal Deposit
Insurance Corporation or "FDIC"). The increase in earnings between these
two periods was primarily attributable to a $1.7 million increase in gain on
sales of loans, a $1.3 million increase in net interest income, a $633,000
increase in retail banking fees, and a $422,000 decrease in federal deposit
insurance premiums. These developments were partially offset by a $566,000
increase in loss on sales of investment securities and a $926,000 increase
in total non-interest expense (excluding the decline in deposit insurance
and the FDIC special assessment in 1996). Earnings for these periods
represented a return on average assets of 1.20% and 0.99%, respectively, and
a return on average equity of 18.27% and 14.44%, respectively (excluding the
effects of the FDIC special assessment in 1996).
The Corporation's net income for the nine months ended September 30, 1997
and 1996, was $12.7 million or $1.28 per share and $9.8 million or $0.97 per
share, respectively (again, the results for 1996 exclude the after-tax
effect of the FDIC special assessment). The increase in earnings between
these two periods was primarily attributable to a $3.9 million increase in
net interest income, a $1.7 million increase in retail banking fees, a $1.2
million decrease in federal deposit insurance premiums, and a $761,000
increase in gain on sales of loans. These developments were partially
offset by a $473,000 increase in loss on sales of investment securities and
a $2.1 million increase in total non-interest expense (excluding the decline
in deposit insurance and the FDIC special assessment in 1996). Earnings for
these periods represented a return on average assets of 1.10% and 0.95%,
respectively, and a return on average equity of 17.00% and 13.60%,
respectively (excluding the effects of the FDIC special assessment in 1996).
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 nine month periods ended September 30, 1997, as compared to
the same periods in the previous year.
Net Interest Income Net interest income increased by $1.3 million or 12.5%
and $3.9 million or 13.1% during the three and nine month periods ended
September 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 $142.5 million or 10.7%
and $146.2 million or 11.2% 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 deposit liabilities and, to a lesser extent, Federal
Home Loan Bank ("FHLB") advances.
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-
10
<PAGE> 12
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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 the average balances of
the Corporation's assets, liabilities, and equity, as well as the interest
earned or paid and the average yield or cost on each. The information is
based on daily average balances during the three and nine month periods
ended September 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Dollars in thousands September 30, 1997 September 30, 1996
------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans held for investment and loans held
for sale $1,212,722 $25,138 8.29% $1,018,047 $21,080 8.28%
Mortgage-backed and related securities 189,263 2,965 6.27 229,893 3,540 6.16
Investment securities 42,887 703 6.56 69,535 1,059 6.09
Interest-bearing deposits 16,250 221 5.45 4,695 52 4.43
Other earning assets 18,811 320 6.81 15,246 256 6.72
-------------- ---------- ------- -------------- -------------- -------
Total interest-earning assets 1,479,933 29,347 7.93 1,337,416 25,987 7.77
---------- ------- -------------- -------
Non-interest-earning assets:
Office properties and equipment 24,670 26,460
Other non-interest-earning assets 57,624 50,565
-------------- --------------
Total assets $1,562,227 $1,414,441
============== ==============
Interest-bearing liabilities:
Deposit liabilities $1,005,633 13,076 5.20 $917,487 11,668 5.09
FHLB advances 327,497 4,794 5.86 290,664 4,063 5.59
Other borrowed funds 16,611 135 3.25 18,945 179 3.78
-------------- ---------- ------- -------------- -------------- -------
Total interest-bearing liabilities 1,349,741 18,005 5.34 1,227,096 15,910 5.19
---------- ------- -------------- -------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 98,606 82,461
Other liabilities 11,174 7,492
-------------- --------------
Total liabilities 1,459,521 1,317,049
Stockholders' equity 102,706 97,392
-------------- --------------
Total liabilities and stockholders'
equity $1,562,227 $1,414,441
============== ==============
Net interest income $11,342 $10,077
========== ==============
Interest rate spread 2.60% 2.59%
======== =======
Net yield on interest-earning assets 3.07% 3.01%
======== =======
Average earning assets to average
interest-bearing liabilities 109.65% 108.99%
======== =======
</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, 1997 September 30, 1996
------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans held for investment and loans held
for sale $1,170,713 $72,594 8.27% $976,287 $61,050 8.34%
Mortgage-backed and related securities 198,130 9,308 6.26 240,453 11,123 6.17
Investment securities 58,668 2,708 6.16 72,142 3,228 5.97
Interest-bearing deposits 9,039 366 5.40 4,647 180 5.16
Other earning assets 18,736 945 6.73 15,547 777 6.66
-------------- -------------- ------- -------------- -------------- -------
Total interest-earning assets 1,455,286 85,921 7.87 1,309,076 76,358 7.78
-------------- ------- -------------- -------
Non-interest-earning assets:
Office properties and equipment 25,512 26,811
Other non-interest-earning assets 55,839 50,965
-------------- --------------
Total assets $1,536,637 $1,386,852
============== ==============
Interest-bearing liabilities:
Deposit liabilities $977,805 37,431 5.10 $908,199 34,610 5.08
FHLB advances 346,092 14,740 5.68 284,520 11,933 5.59
Other borrowed funds 15,370 451 3.91 13,123 376 3.82
-------------- -------------- ------- -------------- -------------- -------
Total interest-bearing liabilities 1,339,267 52,622 5.24 1,205,842 46,919 5.19
-------------- ------- -------------- -------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 87,814 76,006
Other liabilities 10,265 8,528
-------------- --------------
Total liabilities 1,437,346 1,290,376
Stockholders' equity 99,291 96,476
-------------- --------------
Total liabilities and stockholders'
equity $1,536,637 $1,386,852
============== ==============
Net interest income $33,299 $29,439
============== ===========
Interest rate spread 2.63% 2.59%
======== =======
Net yield on interest-earning assets 3.05% 3.00%
======== =======
Average earning assets to average
interest-bearing liabilities 108.66% 108.56%
======== =======
</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 nine month periods ended
September 30, 1997. The provision recorded during such periods approximated
the Corporation's actual charge-off activity.
As of September 30, 1997, and December 31, 1996, the Corporation's allowance
for loan losses was $7.9 million or 0.66% and 0.71% of loans
12
<PAGE> 14
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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 $6.5 million and $5.1 million
during the three months ended September 30, 1997 and 1996, respectively.
The following paragraphs discuss the principal reasons for this increase.
Retail banking fees increased by $633,000 or 24.3% during the three months
ended September 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 an 8.3% increase in the number of checking accounts
serviced by the Corporation since September 30, 1996. Also contributing was
$278,000 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 $138,000 or 19.6% during the three months
ended September 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 third quarter
of 1997 $200,000 in such losses were recorded; this compares to zero during
the third quarter of 1996.
Commissions on annuity and insurance sales decreased by $305,000 or
approximately 45% during the three months ended September 30, 1997, as
compared to the same period in the previous year. This decrease was
principally due to a decline in sales of tax-deferred annuity products.
This decline was caused in part by increased competition from the
Corporation's own deposit liabilities, which increased by $61.7 million or
5.7% during the most recent quarter (refer to "Financial Condition" for
additional discussion).
Gain on sales of mortgage loans increased by $1.7 million or over 200%
during the three months ended September 30, 1997, compared to the same
period in the previous year. This increase was primarily attributable to a
$122.2 million or approximately 185% increase in the Corporation's mortgage
loan sales. This increase was due in part to a generally lower interest
rate environment which resulted in increased originations and sales of
fixed-rate mortgage loans as well as increased conversions of adjustable-
rate loans to fixed-rate loans, which were subsequently sold in the
secondary market. Also contributing to the increase in gain on sale,
however, was the Corporation's decision during the most recent quarter to
sell $17.4 million in single-family adjustable-rate mortgage loans; these
loans were sold out of the Corporation's "held for investment" portfolio and
resulted in a $583,000 gain. 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 sale of such loans is dependent on market conditions.
Accordingly, there can be no assurance that there will
13
<PAGE> 15
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
not be significant inter-period variations in gains or losses from such
sales.
Loss on sales of investment securities increased from $62,000 in the third
quarter of 1996 to $628,000 during the most recent quarter. The losses in
both periods were caused by the Corporation's sale of mutual funds that
invested primarily in adjustable-rate mortgage and short-term government
securities. During the most recent period the Corporation sold its
remaining investment in such funds; $26.9 million in proceeds from the sale
were principally used to reduce outstanding FHLB advances. Refer to
"Financial Condition" for additional discussion.
Other income increased by $100,000 or 23.3% during the three months ended
September 30, 1997, compared to the same period in the previous year. This
improvement was due in part 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. Also contributing to the
increase in other income was increased fee income from customers that
converted their adjustable-rate mortgage loans to fixed-rate loans, as
previously described.
Non-interest income was $17.3 million and $14.9 million during the nine
months ended September 30, 1997 and 1996, respectively. This increase was
primarily due to a $1.7 million or 23.1% increase in retail banking fees and
a $761,000 or 22.0% increase in gain on sales of mortgage loans. These
developments were partially offset by $473,000 increase in loss on sales of
investments. The reason for these changes, as well as other changes in
non-interest income between the two nine month periods, are similar to those
discussed in previous paragraphs.
Non-Interest Expense Non-interest expense was $10.1 million and $9.6 million
or 2.60% and 2.72% of average assets during the three months ended September
30, 1997 and 1996, respectively (excluding the effects of the $5.9 million
special assessment from the FDIC in 1996). The following paragraphs discuss
the principal reasons for this increase.
Compensation and employee benefits increased by $491,000 or 9.7% during the
three months ended September 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 five banking
locations since mid-1996. The Corporation opened five supermarket banking
locations and one loan production office during this period. The
Corporation also closed a traditional retail banking location during the
period. The Corporation intends to open up to four additional supermarket
banking offices during the next six months, although there can be no
assurances. As of September 30, 1997, the Corporation employed 670
full-time equivalent employees. This compares to 641 at the end of both
September and December 1996.
14
<PAGE> 16
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Occupancy and equipment expense increased by $88,000 or 5.7% during the
three months ended September 30, 1997, compared to the same period in the
previous year. This increase was primarily attributable to the opening of
the aforementioned banking facilities.
Federal insurance premiums decreased by $422,000 or approximately 75% during
the three months ended September 30, 1997, compared to the same period in
the previous year. This decrease was attributable to a decline in the
Bank's deposit insurance premiums as a result of the recapitalization of the
Savings Association Insurance Fund ("SAIF") during the third quarter of last
year. The Bank's share of this recapitalization was $5.9 million and was
paid to the FDIC in the form of a special assessment.
Other non-interest expenses increased by $417,000 or 22.5% during the three
months ended September 30, 1997, compared to the same period in the previous
year. This increase was caused by a variety of factors, the most
significant of which were increased ATM and debit card transaction costs,
increased office supply costs, increased communication and postage costs,
increased losses on deposit customer accounts, and increased servicing costs
on education loans.
Non-interest expense was $29.6 million and $28.7 million or 2.57% and 2.76%
of average assets during the nine months ended September 30, 1997 and 1996,
respectively (excluding the effects of the $5.9 million special assessment
from the FDIC in 1996). This increase was due primarily to a $1.2 million
or 8.3% increase in compensation and employee benefits, a $394,000 or 30.0%
increase in advertising and marketing, and a $477,000 or 7.9% increase in
other non-interest expense. These developments were partially offset by a
$1.2 million or approximately 70% decline in federal deposit insurance
premiums. Reasons for most of these changes are similar to those discussed
in previous paragraphs.
The Corporation's advertising and marketing expenditures increased in 1997
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 remainder of 1997 to be comparable to the same
period in the previous year, although there can be no assurances.
Income Tax Expense Income tax expense for the three months ended September
30, 1997 and 1996, was $2.9 million and $2.0 million, respectively, on
pretax income of $7.6 million and $5.6 million, respectively (excluding the
effects of the FDIC special assessment in 1996). The effective tax rates
for these periods were 38.2% and 36.8%, respectively.
Income tax expense for the nine months ended September 30, 1997 and 1996,
was $8.0 million and $5.9 million, respectively, on pretax income of $20.6
million and $15.7 million, respectively (again, excluding the effects of the
special assessment in 1996). The effective tax rates for these periods were
38.6% and 37.3%, 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
15
<PAGE> 17
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
State of Nevada, where the Corporation has established a wholly-owned
investment subsidiary and which has no state income tax.
Financial Condition
The Corporation's total assets increased by $44.3 million or 2.9% during the
nine months ended September 30, 1997. This increase was primarily the
result of an $88.9 million or 8.0% increase in loans held for investment due
to continued growth in the Corporation's consumer installment, education,
and commercial real estate and single-family residential loan portfolios.
Growth in these portfolios was principally funded by a $117.6 million or
11.5% increase in deposit liabilities. Most of this growth occurred in
certificates of deposit due in part to a popular CD program that was offered
to customers in the third quarter. Management also attributes the growth in
deposit liabilities to the combined effects of the Corporation's expansion
efforts in recent years, its convenient banking locations, and strong local
economies in its market areas. Management expects deposit liabilities to
continue to grow modestly in the future, although there can be no
assurances.
Growth in the Corporation's deposit liabilities, as well as the sale and/or
maturity of investment securities described below, were also used to reduce
FHLB advances and other borrowings. As a result, FHLB advances and other
borrowings declined by $90.4 million or 23.6% during the nine months ended
September 30, 1997.
The Corporation's aggregate investment in its investment and mortgage-
backed and related securities portfolios declined by $75.5 million or 26.6%
during the nine months ended September 30, 1997. This decline was
principally due to the aforementioned sale of mutual funds, as well as the
normal periodic amortization of the mortgage loans that underlie the
Corporation's mortgage-backed and related securities. The proceeds from
such sales and/or amortization were reinvested in loans held for investment
or were used to reduce FHLB advances and other borrowings, as previously
described.
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 $2.0 million or 0.13% of total assets at September
30, 1997, compared to $2.4 million or 0.16% at December 31, 1996. The
Corporation's other classified assets were $9.3 million or 0.60% of total
assets at September 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 nine month periods
ended September 30, 1997.
The Corporation's stockholders' equity ratio as of September 30, 1997, was
6.73% 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 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 September 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 $1.0 million during
the three months ended September 30, 1997 and 1996, respectively. These
amounts equated to dividend payout ratios of 23.5% and 27.5% of earnings in
such periods, respectively (excluding the effect of the FDIC special
assessment in 1996). The Corporation paid cash dividends of $3.2 million
and $2.9 million during the nine months ended September 30, 1997 and 1996,
respectively. These amounts equated to dividend payout ratios of 25.1% and
17
<PAGE> 19
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
29.3% of earnings in such periods, respectively (again, excluding the effect
of the special assessment in 1996). 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 October 28, 1997, the Board of Directors of the Corporation declared a
$0.12 per share dividend payable on December 11, 1997, to shareholders of
record on November 20, 1997.
During the nine months ended September 30, 1997, the Corporation repurchased
127,000 shares of common stock at a cost of $2.7 million under its 1996
stock repurchase plan. The Corporation also reissued 89,537 shares out of
treasury stock during this period with a book value of $1.8 million. 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
September 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: November 7, 1997 By: /s/ Thomas W. Schini
Thomas W. Schini, Chairman
of the Board, President, and
Chief Executive Officer
(duly authorized officer)
Date: November 7, 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 (A) FORM
10-Q FOR THE 9 MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,658,570
<INT-BEARING-DEPOSITS> 19,318,594
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,418,488
<INVESTMENTS-CARRYING> 130,833,134
<INVESTMENTS-MARKET> 129,742,469
<LOANS> 1,194,972,266
<ALLOWANCE> 7,902,323
<TOTAL-ASSETS> 1,559,671,609
<DEPOSITS> 1,141,668,745
<SHORT-TERM> 254,311,000
<LIABILITIES-OTHER> 19,762,943
<LONG-TERM> 38,899,672
37,319,138
0
<COMMON> 0
<OTHER-SE> 67,710,111
<TOTAL-LIABILITIES-AND-EQUITY> 1,571,981,110
<INTEREST-LOAN> 72,592,695
<INTEREST-INVEST> 13,328,177
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 85,920,872
<INTEREST-DEPOSIT> 37,431,309
<INTEREST-EXPENSE> 52,622,345
<INTEREST-INCOME-NET> 33,298,527
<LOAN-LOSSES> 375,034
<SECURITIES-GAINS> (725,142)
<EXPENSE-OTHER> 29,593,720
<INCOME-PRETAX> 20,609,081
<INCOME-PRE-EXTRAORDINARY> 20,609,081
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,657,679
<EPS-PRIMARY> $1.29
<EPS-DILUTED> $1.28
<YIELD-ACTUAL> 3.05
<LOANS-NON> 1,999,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,300,000
<ALLOWANCE-OPEN> 7,888,323
<CHARGE-OFFS> 361,034
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,902,323
<ALLOWANCE-DOMESTIC> 7,902,323
<ALLOWANCE-FOREIGN> 7,665,815
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
