<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended..................................March 31, 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 May 1, 1997: 6,084,044
---------
<PAGE> 2
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 1997, and December 31, 1996
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $26,262,826 $24,644,254
Interest-bearing deposits 6,960,969 2,456,901
Investment securities available for sale,
at fair value 67,372,983 74,029,474
Mortgage-backed and related securities:
Available for sale, at fair value 58,132,090 61,875,130
Held for investment, at cost (fair
value of $139,106,321 and $145,217,199,
respectively) 143,293,817 147,834,733
Loans held for sale 19,843,780 20,338,790
Loans held for investment, net 1,128,530,452 1,106,039,995
Federal Home Loan Bank stock 19,653,500 18,823,200
Accrued interest receivable, net 12,189,642 11,487,427
Office properties and equipment 25,444,561 26,210,947
Mortgage servicing rights, net 12,287,969 11,887,202
Intangible assets 6,106,711 5,221,245
Other assets 4,157,526 4,564,171
-------------- --------------
Total assets $1,530,236,826 $1,515,413,469
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit liabilities $1,053,723,242 $1,024,092,887
Federal Home Loan Bank advances and
other borrowings 365,148,297 383,592,983
Advance payments by borrowers for taxes
and insurance 5,101,750 3,912,206
Accrued interest payable 2,522,933 2,432,796
Other liabilities 6,482,153 5,968,239
-------------- --------------
Total liabilities 1,432,978,375 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, 6,644,344 and 6,639,326
shares issued and outstanding, including
555,300 and 512,300 shares of treasury
stock, respectively 664,434 663,933
Additional paid-in capital 35,795,202 35,580,114
Unearned restricted stock (321,049) (414,392)
Securities valuation allowance, net (2,487,404) (2,450,764)
Retained earnings 75,347,331 72,569,092
Treasury stock, at cost (11,740,063) (10,533,625)
-------------- --------------
Total stockholders' equity 97,258,451 95,414,358
-------------- --------------
Total liabilities and stockholders' equity $1,530,236,826 $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 March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Interest on loans $23,301,502 $20,007,859
Interest on mortgage-backed and related
securities 3,214,940 3,872,652
Interest and dividends on investments 1,439,878 1,462,369
----------- -----------
Total interest income 27,956,320 25,342,880
----------- -----------
Interest on deposit liabilities 11,978,361 11,455,934
Interest on advances and other borrowings 5,172,125 4,332,650
----------- -----------
Total interest expense 17,150,486 15,788,584
----------- -----------
Net interest income 10,805,834 9,554,296
Provision for loan losses 120,840 -
----------- -----------
Net interest income after provision
for loan losses 10,684,994 9,554,296
----------- -----------
Retail banking fees and service charges 2,806,212 2,303,555
Commissions on annuity and insurance sales 615,870 489,213
Loan servicing fees 578,764 204,575
Gain on sales of loans 789,030 1,546,541
Loss on sales of investments (54,555) (53,729)
Other income 417,392 344,478
----------- -----------
Total non-interest income 5,152,713 4,834,633
----------- -----------
Compensation and employee benefits 5,150,388 4,806,325
Occupancy and equipment 1,817,690 1,677,074
Advertising and marketing 485,614 266,508
Federal deposit insurance premiums 162,094 562,004
Other expenses 2,096,709 2,175,527
----------- -----------
Total non-interest expense 9,712,495 9,487,438
----------- -----------
Income before income taxes 6,125,212 4,901,491
Income tax expense 2,367,446 1,832,166
----------- -----------
Net income $3,757,766 $3,069,325
=========== ===========
Primary earnings per share $0.57 $0.45
Fully-diluted earnings per share 0.57 0.45
Dividends paid per share 0.16 0.14
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $3,757,766 $3,069,326
Adjustments to reconcile net income to net
cash provided (used) by operations:
Provision for loan and real estate losses 119,394 (6,037)
Net loan fees (costs) deferred (203,883) 37,225
Depreciation and amortization 1,582,313 1,867,167
Net gains on sales of loans and other
investments (734,475) (1,492,812)
Increase in accrued interest receivable (702,215) (293,637)
Increase in accrued interest payable 90,137 14,155
Increase in current and deferred
income taxes 1,971,946 1,789,214
Other, net (433,020) (526,102)
----------- -----------
Net cash provided by operations before
loan originations and sales 5,447,963 4,458,499
----------- -----------
Loans originated for sale (43,757,834) (89,882,113)
Sales of loans originated for sale 46,438,529 79,141,375
----------- -----------
Net cash provided (used) by operations 8,128,658 (6,282,239)
----------- -----------
Cash flows from investing activities:
Increase in interest-bearing deposits (4,504,068) (4,762,282)
Purchases of investment securities - (5,059,299)
Sales of investment securities 3,001,571 3,009,139
Maturities of investment securities 3,488,882 9,162,749
Mortgage-backed and related securities
principal repayments 8,153,549 9,240,890
Loans originated for investment (90,261,919) (77,532,634)
Loan principal repayments 65,101,850 78,420,393
Sales of loans originated for investment 152,740 7,366,264
Additions to office properties and
equipment (912,777) (188,221)
Other, net (305,253) 2,814,801
----------- -----------
Net cash provided (used) by investing
activities (16,085,425) 22,471,800
----------- -----------
(Continued)
</TABLE>
3
<PAGE> 5
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposit liabilities $29,630,355 $25,851,078
Long-term advances from Federal Home
Loan Bank 25,000,000 100,000,000
Repayment of long-term Federal Home Loan
Bank advances (127,776,000) (42,750,000)
Net increase (decrease) in short-term
Federal Home Loan Bank borrowings 84,333,000 (103,135,000)
Increase (decrease) in other borrowings (1,686) 998,447
Increase in advance payments by borrowers
for taxes and insurance 1,189,544 1,135,089
Purchase of treasury stock (1,206,438) (5,622,063)
Dividends paid (979,527) (917,113)
Other, net (613,909) 1,263,511
----------- -----------
Net cash provided (used) by financing
activities 9,575,339 (23,176,051)
----------- -----------
Net increase (decrease) in cash 1,618,572 (6,986,490)
Cash at beginning of period 24,644,254 30,384,484
----------- -----------
Cash at end of period $26,262,826 $23,397,994
=========== ===========
Supplemental disclosures of cash flow information:
Interest and dividends received on loans
and investments $27,254,105 $25,049,243
Interest paid on deposits and borrowings 17,060,349 15,774,429
Income taxes paid 398,000 304,902
Income taxes refunded - 272,075
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE> 6
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 month
period ended March 31, 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 March 31, 1997 and 1996, it would have
reported basic earnings per share of $0.61 and $0.48, 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.
5
<PAGE> 7
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 April 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.
6
<PAGE> 8
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis
March 31, 1997
Results of Operations
Overview The Corporation's net income for the three months ended
March 31, 1997 and 1996, was $3.8 million or $0.57 per share and $3.1
million or $0.45 per share, respectively. The increase in earnings between
these two periods was attributable to a variety of factors including a $1.3
million increase in net interest income, a $503,000 increase in retail
banking fees, a $400,000 decrease in federal deposit insurance premiums,
and a $374,000 increase in loan servicing fees. These developments were
partially offset by a $758,000 decrease in gain on sales of mortgage loans,
a $625,000 increase in total non-interest expense (excluding the effect of
the decline in deposit insurance), and a $535,000 increase in income tax
expense. Net income for these two periods represented a return on average
assets of 0.99% and 0.89%, respectively, and a return on average equity of
15.73% and 12.58%, 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 months ended March 31, 1997, as compared to the same period in
the previous year.
Net Interest Income Net interest income increased by $1.3 million
or 13.1% during the three months ended March 31, 1997, as compared to the
same period in the previous year. Net interest income was favorably
impacted by a $133.1 million or 10.2% increase in the Corporation's average
interest-earning assets. This development was principally due to increases
in mortgage and consumer loans outstanding, the origination of which were
primarily funded by increases in Federal Home Loan Bank ("FHLB") advances
and deposit liabilities.
Also contributing to the increase in net interest income was a ten basis
point improvement in the Corporation's average interest rate spread.
Management attributes this improvement to a higher percentage mix of
interest-earning assets invested in mortgage and consumer loans, which
generally earn higher yields than the Corporation's other interest-earning
assets. Contributing to a lesser degree was a lower interest cost on the
Corporation's interest-bearing liabilities, due primarily to the lag
effects of a generally lower interest rate environment in 1996 as compared
to 1995 and earlier periods. It should be noted, however, that management
of the Corporation does not expect the average cost of the Corporation's
interest-bearing liabilities to decline in the immediate future. Recent
increases and expected future increases in market interest rates, combined
with the Corporation's negative funding gap, are expected to result in a
higher cost of liabilities and a narrower interest rate spread for the
Corporation in the immediate future. Refer to "Asset/Liability
Management" for additional discussion.
The following table sets 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
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 months ended March 31, 1997, and 1996,
respectively.
7
<PAGE> 9
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Dollars in thousands March 31, 1997 March 31, 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 $1,132,731 $23,302 8.23% $952,842 $20,008 8.40%
Mortgage-backed and related securities 206,724 3,215 6.22 251,015 3,873 6.17
Investment securities 69,755 1,038 5.95 77,069 1,138 5.91
Interest-bearing deposits 6,135 82 5.32 3,939 55 5.59
Other earning assets 19,278 320 6.64 16,630 269 6.47
---------- -------- ------- ---------- ------- ----
Total interest-earning assets 1,434,623 27,956 7.79 1,301,495 25,343 7.79
-------- ------- ---------- ------- ----
Non-interest-earning assets:
Office properties and equipment 26,339 27,055
Other non-interest-earning assets 53,789 53,946
----------- ---------
Total assets $1,514,751 $1,382,496
=========== =========
Interest-bearing liabilities:
Deposit liabilities $954,360 11,978 5.02 $895,776 11,456 5.12
FHLB advances 364,466 5,011 5.50 301,276 4,247 5.64
Other borrowed funds 13,638 161 4.72 8,244 85 4.12
----------- -------- ------- ---------- ------ ----
Total interest-bearing liabilities 1,332,464 17,150 5.15 1,205,296 15,788 5.24
-------- ------- ---------- ------- ----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 77,143 69,798
Other liabilities 9,587 9,818
----------- ---------
Total liabilities 1,419,195 1,284,912
Stockholders' equity 95,556 97,584
----------- ---------
Total liabilities and stockholders'
equity $1,514,751 $1,382,496
=========== ==========
Net interest income $10,806 $9,5554
======== ========
Interest rate spread 2.65% 2.55%
===== =====
Net yield on interest-earning assets 3.01% 2.94%
===== =====
Average earning assets to average
interest-bearing liabilities 107.67% 107.98%
====== ======
</TABLE>
Provision for Loan Losses Due to growth in the Corporation's loan
portfolio in recent periods, management of the Corporation elected to
record a provision for loan losses during the current period. The
provision recorded was equal to the Corporation's actual charge-off
activity during the period.
As of March 31, 1997, and December 31, 1996, the Corporation's allowance
for loan losses was $7.9 million or 0.70% and 0.71% of loans held for FIRST
8
<PAGE> 10
FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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 $5.2 million and $4.8
million during the three months ended March 31, 1997 and 1996,
respectively. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their change from 1996 to
1997.
Retail banking fees increased by $503,000 or 21.8% during the three months
ended March 31, 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 11.0% increase in the number of checking accounts
serviced by the Corporation since December 31, 1995. Also contributing was
$183,000 in fees earned on customers' use of debit cards, which were first
introduced by the Corporation in the fourth quarter of 1996.
Commissions on annuity and insurance sales increased by $127,000 or 25.9%
during the three months ended March 31, 1997, compared to the same period
in the previous year. This increase was primarily attributable to the
receipt in the most recent period of an annual bonus on credit life
insurance policies sold by the Corporation.
Loan servicing fees increased by $374,000 or approximately 180% during the
three months ended March 31, 1997, compared to the same period in the
previous year. This increase was primarily caused by losses recorded on
the Corporation's mortgage servicing rights in the first quarter of 1996.
A declining interest rate environment in late 1995 resulted in an increase
in mortgage refinance activity during the first quarter of 1996 which
resulted in increased loan prepayment activity. As a result of such
activity, the value of the Corporation's mortgage servicing rights was
estimated to have declined by $523,000. This compares to an estimated
decline in value of only $150,000 during the first quarter of 1996.
Gain on sales of mortgage loans decreased by $758,000 or approximately 50%
during the three months ended March 31, 1997, compared to the same period
in the previous year. This decrease was primarily attributable to a $39.9
million or approximately 55% 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 as compared to the same
period in 1997, which resulted in the origination and sale of more
fixed-rate mortgage loans during the former period. Recent and expected
future increases in market interest rates may further reduce customer
demand for fixed-rate mortgage loans in the immediate future, which could
further reduce the Corporation's gain on sales of mortgage loans.
Non-Interest Expense Non-interest expense was $9.7 million and $9.5
million or 2.57% and 2.75% of average assets during the three months ended
March 31, 1997 and 1996, respectively. The following paragraphs discuss
the principal components of non-interest expense and the primary reasons
for their change from 1996 to 1997.
9
<PAGE> 11
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
Compensation and employee benefits increased by $344,000 or 7.2% during the
three months ended March 31, 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 a supermarket banking
location in the first quarter of 1997, but also closed a traditional
banking facility during the same period. The Corporation intends to open
four additional supermarket banking offices during the remainder of 1997,
although there can be no assurances. As of March 31, 1997, the Corporation
employed 651 full-time equivalent employees. This compares to 641 and 626
at December 31, 1996, and March 31, 1996, respectively.
Occupancy and equipment expense increased by $141,000 or 8.4% during the
three months ended March 31, 1997, compared to the same period in the
previous year. This increase was primarily attributable to the opening of
the aforementioned banking facilities in 1996 and 1997.
Advertising and marketing expense increased by $219,000 or approximately
80% during the three months ended March 31, 1997, compared to the same
period in the previous year. This increase was principally due to
increased expenditures related to savings and certificate of deposit
promotions, mortgage and consumer lending promotions, check promotions, and
other marketing and research efforts. Although advertising and marketing
expense has increased significantly from the first quarter of 1996,
management of the Corporation does not expect this trend to continue
throughout 1997, although there can be no assurances.
Federal insurance premiums decreased by $400,000 or approximately 70%
during the three months ended March 31, 1997, compared to the same period
in the previous year. This decrease was attributable to a decline in the
Bank's federal insurance premiums as a result of the recapitalization of
the Saving Association Insurance Fund ("SAIF") in the third quarter of
1996.
Other non-interest expenses decreased by $79,000 or 3.6% during the three
months ended March 31, 1997, compared to the same period in the previous
year. This decrease was principally due to the payment of merger-related
expenses in the previous year that were related to the Corporation's
acquisition of Rock Financial Corp. in December 1995.
Income Tax Expense Income tax expense for the three months ended
March 31, 1997 and 1996, was $2.4 million and $1.8 million, respectively,
on pretax income of $6.1 million and $4.9 million, respectively. The
effective tax rates for these periods were 38.7% and 37.4%, 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 $14.8 million or 1.0% during
the three months ended March 31, 1997. This increase was primarily the
result of a $22.5 million or 2.0% 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
10
<PAGE> 12
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
growth in this loan category since March 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 expects this trend to continue in the immediate
future as a result of recent and expected future increases in market
interest rates, although there can be no assurances. 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 $29.6
million or 2.9% 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.
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 $18.4 million or 4.9% during the three months ended
March 31, 1997.
The Corporation's aggregate investment in its investment securities and
mortgage-backed and related securities portfolios declined by $14.9 million
or 5.3% during the three months ended March 31, 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 non-performing assets (consisting of non-accrual loans,
real estate acquired through foreclosure or deed-in-lieu thereof, and real
estate in judgement) were $2.6 million or 0.17% of total assets at March
31, 1997, compared to $2.4 million or 0.16% at December 31, 1996. The
Corporation's other classified assets were $9.7 million or 0.63% of total
assets at March 31, 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
loans and education loans, which generally have shorter terms to maturity
and higher interest rates.
11
<PAGE> 13
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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 months ended March 31,
1997.
The Corporation's stockholders' equity ratio as of March 31, 1997, was
6.36% 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 March 31, 1997. Management expects the ratio to return to its target
range during the next 18 to 24 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 March 31, 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 $980,000 and $917,000 during the
three months ended March 31, 1997 and 1996, respectively. These amounts
equated to dividend payout ratios of 26.1% and 29.9% 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'
12
<PAGE> 14
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Item 2--Management's Discussion and Analysis (Continued)
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 April 22, 1997, the Board of Directors of the Corporation declared a
$0.18 per share dividend payable on June 5, 1997, to shareholders of record
on May 15, 1997. On the same date the Board of Directors also approved a
three-for-two stock split in the form of a stock dividend, payable on June
12, 1997, to shareholders of record on May 15th.
During the three months ended March 31, 1997, the Corporation repurchased
43,000 shares of common stock at a cost of $1.2 million under its 1996
stock repurchase plan.
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.
13
<PAGE> 15
FIRST FEDERAL CAPITAL CORP AND SUBSIDIARIES
Part II--Other Information
March 31, 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.
The Corporation held its Annual Meeting of Shareholders on April 23, 1997.
The following matters were voted upon at the Annual Meeting of
Shareholders:
1. The election of three nominees for the Board of Directors, who will
serve for a three-year term, was voted upon by the Corporation's
shareholders. The nominees, all of whom were elected, are set forth in
the table below. The Inspector of Election certified the following vote
tabulations:
FOR WITHHELD
Marjorie A. Davenport 4,692,863 36,193
Richard T. Lommen 4,707,838 21,217
Phillip J. Quillen 4,708,808 20,247
2. Approval of the 1997 Stock Option and Incentive Plan in which officers
and employees of the Corporation and its affiliates are eligible to
participate.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
3,366,766 417,783 82,339 862,168
3. Ratification of the appointment by the Board of Directors of Ernst and
Young LLP as the Corporation's independent auditors for the year ending
December 31, 1997:
FOR AGAINST ABSTAIN
4,688,839 21,789 18,431
Item 5--Other Information.
None.
Item 6--Exhibits and Reports on Form 8-K.
None.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
Date: May 1, 1997 By: /s/ Thomas W. Schini
Thomas W. Schini, Chairman
of the Board, President, and
Chief Executive Officer
(duly authorized officer)
Date: May 1, 1997 By: /s/ Jack C. Rusch
Jack C. Rusch,
Executive Vice President,
Treasurer, and Chief
Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (a) FORM
10-Q FOR THE 3-MONTH PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (b) 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,262,826
<INT-BEARING-DEPOSITS> 6,960,969
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,505,073
<INVESTMENTS-CARRYING> 143,293,817
<INVESTMENTS-MARKET> 0
<LOANS> 1,128,530,452
<ALLOWANCE> 7,888,323
<TOTAL-ASSETS> 1,530,236,826
<DEPOSITS> 1,053,723,242
<SHORT-TERM> 302,935,000
<LIABILITIES-OTHER> 14,106,836
<LONG-TERM> 62,213,297
0
0
<COMMON> 36,459,636
<OTHER-SE> 60,798,815
<TOTAL-LIABILITIES-AND-EQUITY> 1,530,236,826
<INTEREST-LOAN> 23,301,502
<INTEREST-INVEST> 4,654,818
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 27,956,320
<INTEREST-DEPOSIT> 11,978,361
<INTEREST-EXPENSE> 17,150,486
<INTEREST-INCOME-NET> 10,805,834
<LOAN-LOSSES> 120,840
<SECURITIES-GAINS> (54,555)
<EXPENSE-OTHER> 9,712,495
<INCOME-PRETAX> 6,125,212
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,757,766
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 3.01
<LOANS-NON> 1,723,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,495,000
<ALLOWANCE-OPEN> 7,888,323
<CHARGE-OFFS> (120,840)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,888,323
<ALLOWANCE-DOMESTIC> 7,888,323
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,652,814
</TABLE>
