<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended................................SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period 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)
605 STATE STREET
LA CROSSE, WISCONSIN 54601
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (608) 784-8000
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 such shorter period as the Registrant has
been subject to such requirements), 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 as of November 4, 1998:
18,480,849 (EXCLUDES 1,460,781 SHARES HELD AS TREASURY STOCK)
<PAGE> 2
FORM 10-Q TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION Page
Item 1--Financial Statements ..................................................................2
Item 2--Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................11
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.....................................................................23
Item 2--Changes in Securities.................................................................23
Item 3--Defaults Upon Senior Securities.......................................................23
Item 4--Submission of Matters to Vote of Security Holders.....................................23
Item 5--Other Information.....................................................................23
Item 6--Exhibits and Reports on Form 8-K......................................................23
SIGNATURES..........................................................................................24
</TABLE>
1
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998, and December 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
ASSETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $25,948,956 $29,939,484
Interest-bearing deposits with banks 8,190,469 7,113,756
Investment securities available for sale, at fair value 2,353,484 21,376,678
Mortgage-backed and related securities:
Available for sale, at fair value 247,796,204 47,895,297
Held for investment, at cost (fair value of $116,701,857 and $123,613,629, 116,205,651 124,335,969
respectively)
Loans held for sale 77,437,586 45,576,945
Loans held for investment, net 1,176,006,462 1,193,893,087
Federal Home Loan Bank stock 13,998,700 13,811,300
Accrued interest receivable, net 15,044,622 11,547,757
Office properties and equipment 24,847,046 24,243,132
Mortgage servicing rights, net 21,080,908 16,290,903
Intangible assets 5,559,218 5,921,443
Other assets 2,123,968 2,348,647
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,736,593,274 $1,544,294,398
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Deposit liabilities $1,311,758,730 $1,146,533,896
Federal Home Loan Bank advances and other borrowings 277,063,977 275,778,770
Advance payments by borrowers for taxes and insurance 6,911,733 3,872,764
Accrued interest payable 1,788,149 2,030,153
Other liabilities 16,576,004 6,717,469
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 1,614,098,593 1,434,933,052
- ------------------------------------------------------------------------------------------------------------------
Preferred stock, $.10 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares authorized, 19,941,630 shares
issued and outstanding, including 1,469,381 and 1,560,570 shares of treasury stock,
respectively 1,994,163 997,082
Additional paid-in capital 34,540,065 35,537,146
Retained earnings 94,810,610 84,548,291
Treasury stock, at cost (10,874,930) (10,845,168)
Unearned restricted stock (1,428,303) (211,006)
Non-owner adjustments to equity, net 3,453,076 (664,999)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 122,494,681 109,361,346
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,736,593,274 $1,544,294,398
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest on loans $21,836,937 $25,137,703
Interest on mortgage-backed and related securities 6,333,748 2,965,013
Interest and dividends on investments 783,940 1,244,682
- ------------------------------------------------------------------------------------------------------------------
Total interest income 28,954,625 29,347,398
- ------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 15,215,226 13,076,182
Interest on FHLB advances and other borrowings 2,224,145 4,928,748
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 17,439,371 18,004,930
- ------------------------------------------------------------------------------------------------------------------
Net interest income 11,515,254 11,342,468
Provision for loan losses 63,218 122,613
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,452,036 11,219,855
- ------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 3,827,025 3,239,287
Commissions on annuity and insurance sales 447,204 355,434
Loan servicing fees (690,631) 566,782
Gain on sales of loans 3,499,146 2,437,897
Loss on sales of investment securities - (627,727)
Other income 826,675 529,482
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income 7,909,419 6,501,155
- ------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 6,962,811 5,571,509
Occupancy and equipment 1,722,632 1,628,768
Advertising and marketing 510,681 524,048
Federal deposit insurance premiums 180,051 143,443
Other expenses 2,585,063 2,266,730
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense 11,961,238 10,134,498
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,400,217 7,586,512
Income tax expense 2,627,940 2,895,514
- ------------------------------------------------------------------------------------------------------------------
Net income $4,772,277 $4,690,998
- ------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.24 $0.24
Basic earnings per share 0.26 0.26
Dividends paid per share 0.07 0.06
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest on loans $70,871,741 $72,592,695
Interest on mortgage-backed and related securities 12,796,825 9,308,377
Interest and dividends on investments 3,602,427 4,019,800
- ------------------------------------------------------------------------------------------------------------------
Total interest income 87,270,993 85,920,872
- ------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 43,456,559 37,431,309
Interest on FHLB advances and other borrowings 8,907,863 15,191,036
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 52,364,422 52,622,345
- ------------------------------------------------------------------------------------------------------------------
Net interest income 34,906,571 33,298,527
Provision for loan losses 205,141 375,034
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 34,701,430 32,923,493
- ------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 10,715,104 9,156,866
Commissions on annuity and insurance sales 1,235,561 1,474,963
Loan servicing fees (3,361,074) 1,743,264
Gain on sales of loans 11,079,891 4,218,725
Loss on sales of investment securities - (725,142)
Other income 2,547,543 1,410,632
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income 22,217,025 17,279,308
- ------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 19,090,248 16,031,546
Occupancy and equipment 5,161,313 4,897,093
Advertising and marketing 1,556,586 1,709,571
Federal deposit insurance premiums 531,439 469,595
Other expenses 7,871,317 6,485,915
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense 34,210,903 29,593,720
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 22,707,552 20,609,081
Income tax expense 8,438,531 7,951,402
- ------------------------------------------------------------------------------------------------------------------
Net income $14,269,021 $12,657,679
- ------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.72 $0.64
Basic earnings per share 0.77 0.69
Dividends paid per share 0.200 0.173
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
COMMON
STOCK AND
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $36,607,567 $78,290,135 ($11,683,063) ($284,368) ($1,687,607) $97,258,451
-------------
Net income 4,690,998 4,690,998
Securities valuation
adjustment,
net of income taxes 260,916 260,916
Reclassification adjustment
for loss
on securities included in
income,
net of income taxes 373,246 373,246
-------------
Net income and non-owner
adjustments to equity 5,325,160
-------------
Dividends paid (1,100,036) (1,100,036)
Exercise of stock options 711,571 (1,371,172) 1,578,132 918,531
Purchase of treasury stock (1,393,751) (1,393,751)
Amortization of restricted
stock 36,681 36,681
- ------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $37,319,138 $80,509,925 ($11,498,682) ($247,687) ($1,053,445) $105,029,249
- ------------------------------------------------------------------------------------------------------------------
UNAUDITED
- ------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $36,534,228 $91,886,232 ($10,155,071) ($1,600,340) $2,154,793 $113,316,721
------------
Net income 4,772,277 4,772,277
Securities valuation
adjustment,
net of taxes 1,298,283 1,298,283
------------
Net income and non-owner
adjustments to equity 6,070,560
-----------
Dividends paid (1,297,861) (1,297,861)
Exercise of stock options (550,038) 891,891 341,853
Restricted stock award -
Purchase of treasury stock (1,611,750) (1,611,750)
Amortization of restricted
stock 172,037 172,037
- ---------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $36,534,228 $94,810,610 ($10,874,930) ($1,428,303) $3,453,076 122,494,681
- ------------------------------------------------------------------------- -------------- ----------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial
Statements.
5
<PAGE> 7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
COMMON
STOCK AND
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $36,244,047 $72,569,092 ($10,533,625) ($414,392) ($2,450,764) $95,414,358
--------------
Net income 12,657,679 12,657,679
Securities valuation
adjustment,
net of income taxes 966,150 966,150
Reclassification adjustment
for loss
on securities included in
income,
net of income taxes 431,169 431,169
--------------
Net income and non-owner
adjustments to equity 14,054,998
--------------
Dividends paid (3,181,118) (3,181,118)
Exercise of stock options 1,075,091 (1,535,728) 1,770,131 1,309,494
Purchase of treasury stock (2,735,188) (2,735,188)
Amortization of restricted
stock 166,705 166,705
- --------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $37,319,138 $80,509,925 ($11,498,682) ($247,687) ($1,053,445) $105,029,249
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $36,534,228 $84,548,291 ($10,845,168) ($211,006) ($664,999) $109,361,346
--------------
Net income 14,269,021 14,269,021
Securities valuation
adjustment,
net of taxes 4,118,075 4,118,075
--------------
Net income and non-owner
adjustments to equity 18,387,096
--------------
Dividends paid (3,702,537) (3,702,537)
Exercise of stock options (1,068,261) 2,348,925 1,280,664
Restricted stock award 764,096 969,312 (1,733,408) -
Purchase of treasury stock (3,347,999) (3,347,999)
Amortization of restricted
stock 516,111 516,111
- --------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $36,534,228 $94,810,610 ($10,874,930) ($1,428,303) $3,453,076 122,494,681
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $4,772,277 $4,690,998
Adjustments to reconcile net income to net cash provided (used) by
operations:
Provision for loan and real estate losses, net 67,042 93,659
Net loan costs deferred (257,422) (251,691)
Depreciation and amortization 3,464,559 1,614,626
Gains on sales of loans and other investments (3,499,147) (1,810,170)
Increase in accrued interest receivable (1,533,848) (331,383)
Increase (decrease) in accrued interest payable 322,321 (204,617)
Decrease in current and deferred income taxes (594,460) (851,987)
Other accruals and prepaids, net 307,063 (2,541)
- ----------------------------------------------------------------------------------------------------- -------------
Net cash provided by operations before loan originations and sales 3,048,385 2,946,894
Loans originated for sale (168,021,007) (90,566,776)
Sales of loans originated for sale 146,357,438 82,248,792
- ----------------------------------------------------------------------------------------------------- -------------
Net cash used by operations (18,615,184) (5,371,090)
- ----------------------------------------------------------------------------------------------------- -------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with banks 74,762,123 (8,250,306)
Sales of investment securities - 26,937,148
Maturities of investment securities 3,520,662 4,674,192
Purchases of mortgage-backed and related securities held for investment (20,355,825) -
Principal payments on mortgage-backed and related securities held for 11,873,824 7,256,449
investment
Principal payments on mortgage-backed and related securities available 20,338,249 4,573,839
for sale
Loans originated for investment (153,189,921) (128,724,508)
Loans purchased for investment (160,609,987) (4,351,005)
Loan principal repayments 75,176,708 73,097,430
Sales of loans originated for investment 16,353,667 39,982,643
Sales of real estate 1,317,932 387,391
Additions to office properties and equipment (1,021,485) (319,702)
Purchases of mortgage servicing rights - (517,065)
Other, net (2,335,699) (266,996)
- ----------------------------------------------------------------------------------------------------- -------------
Net cash provided (used) by investing activities (134,169,752) 14,479,510
- ----------------------------------------------------------------------------------------------------- -------------
Cash flows from financing activities:
Net increase in deposit liabilities 32,170,405 61,746,104
Long-term advances from Federal Home Loan Bank 75,660,000 -
Repayment of long-term Federal Home Loan Bank advances - (32,000,000)
Net increase (decrease) in short-term Federal Home Loan Bank borrowings 36,510,000 (43,290,000)
Decrease in other borrowings (1,501,463) (5,001,327)
Increase in advance payments by borrowers for taxes and insurance 1,438,089 2,173,597
Proceeds from sale of common stock 145,623 206,960
Purchase of treasury stock (1,611,750) (1,393,751)
Dividends paid (1,297,861) (1,100,036)
Other, net 3,567,547 688,176
- ----------------------------------------------------------------------------------------------------- -------------
Net cash provided (used) by financing activities 145,080,590 (17,970,277)
- ----------------------------------------------------------------------------------------------------- -------------
Net decrease in cash and due from banks (7,704,346) (8,861,857)
Cash and due from banks at beginning of period 33,653,302 29,520,427
- ----------------------------------------------------------------------------------------------------- -------------
Cash and due from banks at end of period $25,948,956 $20,658,570
- ----------------------------------------------------------------------------------------------------- -------------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $27,420,777 $29,016,015
Interest paid on deposits and borrowings 17,117,050 18,209,547
Income taxes paid 3,219,000 3,735,000
- ----------------------------------------------------------------------------------------------------- -------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $14,269,021 $12,657,679
Adjustments to reconcile net income to net cash provided (used) by
operations:
Provision for loan and real estate losses, net 423,382 321,484
Net loan costs deferred (787,928) (636,300)
Depreciation and amortization 10,922,295 4,713,710
Gains on sales of loans and other investments (11,079,891) (3,493,583)
Increase in accrued interest receivable (3,496,865) (1,264,505)
Decrease in accrued interest payable (242,004) (182,227)
Increase (decrease) in current and deferred income taxes 1,526,409 (389,212)
Other accruals and prepaids, net 99,170 (480,922)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan originations and sales 11,633,589 11,246,124
Loans originated for sale (535,140,129) (174,763,945)
Sales of loans originated for sale 512,209,977 168,693,299
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations (11,296,563) 5,175,478
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in interest-bearing deposits with banks (1,076,713) (17,361,693)
Sales of investment securities - 31,710,769
Maturities of investment securities 18,963,585 16,384,571
Purchases of mortgage-backed and related securities held for investment (20,355,825) -
Principal payments on mortgage-backed and related securities held for 28,475,209 16,879,132
investment
Principal payments on mortgage-backed and related securities available 26,860,349 11,640,561
for sale
Loans originated for investment (414,181,063) (373,354,146)
Loans purchased for investment (160,609,987) (6,372,996)
Loan principal repayments 284,696,892 233,964,097
Sales of loans originated for investment 72,906,820 48,862,394
Sales of real estate 5,082,486 1,007,214
Additions to office properties and equipment (2,711,070) (1,684,271)
Purchases of mortgage servicing rights (454,774) (1,374,069)
Other, net (16,449) 1,004,799
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (162,420,540) (38,693,638)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposit liabilities 165,224,834 117,575,858
Long-term advances from Federal Home Loan Bank 150,660,000 25,000,000
Repayment of long-term Federal Home Loan Bank advances (16,580,000) (209,776,000)
Net increase (decrease) in short-term Federal Home Loan Bank borrowings (119,790,000) 100,398,000
Decrease in other borrowings (13,004,793) (6,004,311)
Increase in advance payments by borrowers for taxes and insurance 3,038,969 7,292,287
Proceeds from sale of common stock 341,014 355,303
Purchase of treasury stock (3,347,999) (2,735,188)
Dividends paid (3,702,537) (3,181,118)
Other, net 6,887,087 607,645
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 169,726,575 29,532,476
- ------------------------------------------------------------------------------------------------------------------
Net decrease in cash and due from banks (3,990,528) (3,985,684)
Cash and due from banks at beginning of period 29,939,484 24,644,254
- ------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $25,948,956 $20,658,570
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $83,774,127 $84,656,367
Interest paid on deposits and borrowings 52,606,426 52,804,572
Income taxes paid 6,878,000 8,464,000
Income taxes refunded 389,875 97,545
Mortgage-backed security swaps 222,259,809 -
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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.
NOTE 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, 1998, may not necessarily be indicative of the results which may
be expected for the entire year ending December 31, 1998.
Certain 1997 balances have been reclassified to conform to the 1998
presentation.
NOTE 3--CONTINGENCIES
In 1996, First Enterprises, Inc. ("FEI"), a wholly-owned subsidiary of
the Bank, received a favorable judgement in a matter that was brought before the
United States District Court for the Northern District of Indiana (the "Court").
The Court awarded FEI $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.
In July 1998, the Court entertained oral arguments from the parties on
the issue of punitive damages. In September 1998, the Court entered its final
judgement in the case, which included the $1.1 million of previously awarded
compensatory damages, plus interest and punitive damages. The final award was
$5.8 million, plus costs and post-judgement interest.
The defendant has appealed the Court's final judgement to the United
States Court of Appeals for the Seventh Circuit. Management of the Corporation
is unable to predict the outcome of the appeal. Accordingly, the Corporation has
not recognized any portion of the final judgement 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.
NOTE 4--PENDING ACCOUNTING CHANGE
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS 133"). This standard establishes
new rules for the recognition and measurement of derivatives and hedging
activities. It requires all derivatives to be recorded on the balance sheet at
fair value, although the timing of recognition in earnings will depend on the
classification of the hedge according to criteria established by SFAS 133.
Changes in the fair value of derivatives that do not meet these criteria are
required to be included in earnings in the period of the change. The new
standard is effective for years beginning after June 15, 1999, although earlier
adoption is permitted. The Corporation does not intend to adopt SFAS 133 until
January 1, 2000.
9
<PAGE> 11
The Corporation does not use derivative financial instruments such as
futures, swaps, caps, floors, options, interest- or principle-only strips, or
similar financial instruments to manage its operations. However, the Corporation
does use forward sales of mortgage-backed securities to manage exposure to
market risk in its "pipeline" of single-family residential loans intended for
sale. Forward sales are derivative securities and are subject to the rules
established by SFAS 133. The Corporation has not completed the complex analysis
necessary to determine the impact SFAS 133 will have on its statements of
financial condition or operations. However, such impact is not expected to be
material, although there can be no assurances.
NOTE 5--STOCK SPLIT
Earnings per share and dividends paid per share, as presented in the
Corporation's Consolidated Statements of Operations, have been adjusted to
recognize a two-for-one stock split on June 11, 1998. Common shares issued and
outstanding, as presented in the Corporation's Consolidated Statements of
Financial Condition, have also been adjusted for such stock split.
10
<PAGE> 12
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The discussion in this report includes certain forward-looking
statements based on current management's 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.
Readers are cautioned that forward-looking statements are not guarantees of
future performance and that actual results may differ materially from
management's current expectations.
RESULTS OF OPERATIONS
QUARTER OVERVIEW The Corporation's net income for the three months
ended September 30, 1998 and 1997, was $4.77 million or $0.24 per diluted share
and $4.69 million or $0.24 per diluted share, respectively. These amounts
represented a return on average assets of 1.20% for both periods and a return on
average equity of 15.85% and 18.27%, respectively.
The improvement in net income from 1997 to 1998 was primarily
attributable to a $1.1 million increase in gain on sales of loans. Also
contributing was a $588,000 increase in retail banking fees, a $297,000 increase
in other non-interest income, a $173,000 increase in net interest income, and a
$268,000 decrease in income tax expense. The third quarter of the previous year
also included a $628,000 loss on the sale of investment securities. These
developments were partially offset by a $1.3 million decline in loan servicing
fees and a $1.8 million increase in non-interest expense--the latter due
primarily to a $1.4 million increase in compensation and employee benefits
expense.
NINE MONTH OVERVIEW The Corporation's net income for the nine months
ended September 30, 1998 and 1997, was $14.3 million or $0.72 per diluted share
and $12.7 million or $0.64 per diluted share, respectively. These amounts
represented a return on average assets of 1.20% and 1.10%, respectively, and a
return on average equity of 16.47% and 17.00%, respectively.
The improvement in net income from 1997 to 1998 was primarily
attributable to a $6.9 million increase in gain on sales of loans. Also
contributing was a $1.6 million increase in net interest income, a $1.6 million
increase in retail banking fees, and a $1.1 million increase in other income.
The latter was due to increased fee income on certain loan originations and
conversions, as well as certain non-recurring recoveries and refunds from the
federal and state governments. Earnings in the previous year also included a
$725,000 loss on the sale of investment securities. These developments were
partially offset by a $5.1 million decline in loan servicing fees, a $3.1
million increase in compensation and employee benefits expense, and a $1.4
million increase in other non-interest expense. The latter was due to a variety
of factors, the most significant of which were increased communication and
office supply costs, increased transaction charges related to ATMs and debit
cards, increased expenses related to the operation and disposition of foreclosed
real estate, and increased costs related to loans serviced for third-party
investors.
The following paragraphs discuss these changes in more detail along
with other changes in the components of net income during the three and nine
month periods ended September 30, 1998 and 1997.
NET INTEREST INCOME Net interest income increased by $173,000 or 1.5%
and $1.6 million or 4.8% during the three and nine month periods ended September
30, 1998, as compared to the same periods in the previous year. Net interest
income was favorably impacted in these periods by a $14.9 million or 1.0%
increase and a $39.0 million or 2.7% increase in the Corporation's average
interest-earning assets, respectively. The primary source of this
11
<PAGE> 13
growth occurred in consumer and commercial real estate loans, although
mortgage-backed and related securities and overnight investments also increased.
However, these last two increases were caused by the securitization of
single-family mortgage loans into mortgage-backed securities (MBSs) and the
temporary investment of proceeds from loan sales. Both of these developments
explain the substantial decrease in single-family mortgage loans between the
three and nine-month periods ended September 30, 1998 and 1997.
The growth in the Corporation's average earning assets between the
three and nine month periods ended September 30, 1998 and 1997, was primarily
funded by increases in average non-interest-bearing liabilities and
stockholders' equity. The average balance of deposit liabilities also grew
substantially between these periods, but a decline in average FHLB advances and
other borrowings offset this growth. The increase in average
non-interest-bearing liabilities was primarily caused by increases in custodial
deposit accounts. The Corporation maintains borrowers' principal and interest
payments in these accounts on a temporary basis pending their remittance to the
third-party owners of the loans. Balances in these accounts have increased in
recent periods because of increased loan prepayment activity, which was brought
about by a declining interest rate environment. The increase in stockholders'
equity was principally due to the capitalization of earnings.
The favorable impact of the aforementioned developments on net interest
income was offset in part by a modest decline in the Corporation's interest rate
spread during the three and nine month periods ended September 30, 1998, as
compared to the same periods in the previous year. Management attributes this to
a declining interest rate environment, which has resulted in a relatively flat
yield curve during most of 1998. This type of interest rate environment has an
unfavorable impact on the Corporation's interest rate spread because of the
tendency of the Corporation's assets to price off a longer end of the yield
curve than its liabilities. If this interest rate environment persists in the
future, management expects further declines in the Corporation's interest rate
spread.
The tables on the following pages 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 of each. The
information is based on daily average balances during the three and nine months
ended September 30, 1998 and 1997.
12
<PAGE> 14
<TABLE>
<CAPTION>
Dollars in thousands THREE MONTHS ENDED SEPTEMBER 30, 1998 THREE MONTHS ENDED SEPTEMBER 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Single-family mortgage loans $380,683 $7,436 7.81% $617,322 $12,259 7.94%
Commercial real estate loans 304,427 6,319 8.30 255,477 5,605 8.78
Consumer loans 380,578 8,082 8.49 339,923 7,274 8.56
- -----------------------------------------------------------------------------------------------------------------------
Total loans 1,065,688 21,837 8.20 1,212,722 25,138 8.29
Mortgage-backed and related securities 372,859 6,334 6.80 189,263 2,965 6.27
Investment securities 4,846 79 6.52 42,887 703 6.56
Interest-bearing deposits with banks 39,105 500 5.11 16,250 221 5.44
Other earning assets 12,309 205 6.66 18,811 320 6.80
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,494,807 28,955 7.75 1,479,933 29,347 7.93
Non-interest-earning assets:
Office properties and equipment 24,858 24,670
Other assets 76,167 57,624
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,595,832 $1,562,227
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Regular savings accounts $95,834 $479 2.00% $89,906 $460 2.04%
Checking accounts 58,006 127 0.87 52,415 131 1.00
Money market accounts 151,071 1,655 4.38 142,981 1,609 4.50
Certificates of deposit 854,217 12,955 6.07 720,331 10,877 6.04
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 1,159,128 15,215 5.25 1,005,633 13,076 5.20
FHLB advances 164,155 2,183 5.32 327,497 4,794 5.86
Other borrowings 6,951 41 2.36 16,611 135 3.25
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing 1,330,234 17,439 5.24 1,349,741 18,005 5.34
liabilities
Non-interest-bearing liabilities:
Non-interest-bearing deposits 127,553 98,606
Other liabilities 17,596 11,174
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,475,383 1,459,521
Stockholders' equity 120,449 102,706
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,595,832 $1,562,227
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $11,515 $11,342
- -----------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.51% 2.60%
- ------------------------------------------------------------------------------------------------------------------------
Net interest income as a percent of
average
earning assets 3.08% 3.07%
- ------------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 112.37% 109.65%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTI0N>
Dollars in thousands NINE MONTHS ENDED SEPTEMBER 30, 1998 NINE MONTHS ENDED SEPTEMBER 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Single-family mortgage loans $488,351 $28,648 7.82% $601,511 $35,854 7.95%
Commercial real estate loans 287,076 18,538 8.61 245,986 16,038 8.69
Consumer loans 373,168 23,686 8.46 323,216 20,701 8.54
- ----------------------------------------------------------------------------------------------------------------------
Total loans 1,148,595 70,872 8.23 1,170,713 72,593 8.27
Mortgage-backed and related securities 260,053 12,797 6.56 198,130 9,308 6.26
Investment securities 8,499 389 6.10 58,668 2,708 6.16
Interest-bearing deposits with banks 63,319 2,530 5.33 9,039 366 5.40
Other earning assets 13,831 683 6.58 18,736 945 6.73
- ----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,494,297 87,271 7.79 1,455,285 85,921 7.87
Non-interest-earning assets:
Office properties and equipment 24,640 25,512
Other assets 67,502 55,840
- ----------------------------------------------------------------------------------------------------------------------
Total assets $1,586,439 $1,536,637
- ----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Regular savings accounts $93,275 $1,343 1.92% $88,798 $1,345 2.02%
Checking accounts 56,367 399 0.94 52,074 389 1.00
Money market accounts 147,250 4,718 4.27 142,048 4,720 4.43
Certificates of deposit 818,695 36,997 6.03 694,885 30,976 5.94
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 1,115,587 43,457 5.19 977,805 37,431 5.10
FHLB advances 216,813 8,751 5.38 346,092 14,740 5.68
Other borrowings 7,429 156 2.81 15,370 451 3.91
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,339,829 52,364 5.21 1,339,266 52,622 5.24
Non-interest-bearing liabilities:
Non-interest-bearing deposits 116,247 87,814
Other liabilities 14,825 10,266
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,470,901 1,437,346
Stockholders' equity 115,538 99,291
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,586,439 $1,536,637
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $34,907 $33,299
- ----------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.58% 2.63%
- ----------------------------------------------------------------------------------------------------------------------
Net interest income as a percent of
average earning assets 3.11% 3.05%
- ----------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 111.53% 108.66%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
A declining interest rate environment in 1998 has had a significant
impact on the ability of the Corporation to internally grow its interest-earning
assets. This situation has developed because a declining interest rate
environment tends to increase customer preference for fixed-rate mortgage loans,
as opposed to adjustable-rate loans. In addition, a low interest rate
environment encourages borrowers to refinance their existing adjustable-rate
loans into fixed-rate loans to "lock-in" a lower long-term rate. Given the
Corporation's policy of selling these types of loans in the secondary market,
its internally originated portfolio of adjustable-rate residential mortgage
loans has declined substantially since December 31, 1997. Although some of this
decline has been offset by internal growth in consumer and commercial real
estate loans, in recent months the Corporation has purchased adjustable-rate
residential mortgage loans from third-party originators to maintain growth in
its interest-earning assets (refer to "Financial Condition" for additional
discussion). In light of continued declines in interest rates, management
believes it will continue to be a challenge for the Corporation to internally
grow its interest-earning assets. Such could have an unfavorable impact on the
future growth of net interest income.
The Corporation will continue to explore alternatives to maintain
growth in its interest-earning assets in the near term. These alternatives
include, but are not limited to, the purchase of additional adjustable-rate
residential mortgage loans from third-party originators, the purchase of
mortgage-backed and related securities, and the retention of certain fixed-rate
loans that are currently sold by the Corporation in the secondary market. It is
anticipated that such assets would be funded by growth in deposit liabilities or
increased borrowings from the
14
<PAGE> 16
Federal Home Loan Bank of Chicago ("FHLB"). However, there are many
considerations involved in such decisions and there can be no assurances that
the Corporation will elect to adopt any of these strategies to increase its
interest-earnings assets.
PROVISION FOR LOAN LOSSES In general, provisions for loan losses
recorded during the three and nine month periods ended September 30, 1998 and
1997, approximate the Corporation's actual charge-off activity during such
periods. Management of the Corporation expects the provision for the remainder
of 1998 to also approximate actual charge-off activity, although there can be no
assurances.
As of September 30, 1998 and December 31, 1997, the Corporation's
allowance for loan losses was $7.6 million or 0.65% and 0.64% 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 will not be necessary, which
could adversely affect the Corporation's results of operations. For additional
discussion, refer to "Financial Condition--Non-Performing Assets".
NON-INTEREST INCOME Non-interest income for the three months ended
September 30, 1998 and 1997, was $7.9 million and $6.5 million, respectively.
The following paragraphs discuss the principal components of non-interest income
and the primary reasons for their changes from 1997 to 1998.
Retail banking fees and service charges increased by $588,000 or 18.1%
during the three months ended September 30, 1998, as compared to the same period
in the previous year. This increase was due in part to growth of 18.2% since
December 31, 1996, in the number of checking accounts serviced by the
Corporation. Approximately 25% of this growth came from retail banking offices
opened in 1997 and 1998. Also contributing to the growth in retail banking fees
in the most recent period was a $141,000 or approximately 25% increase in fees
from customers' use of ATMs and a $91,000 or approximately 35% increase in fee
income from customers' use of debit cards. The Corporation introduced debit
cards to its checking account customers during the last quarter of 1996. The
Corporation increased the number of ATMs it operates in 1997 and 1998 as a
result of changes in the rules governing ATM surcharges, which permitted the
Corporation to increase fee revenue from ATMs. The Corporation intends to
increase the number of ATMs it operates by approximately 10 to 15% in 1998,
although there can be no assurances.
Commissions on annuity and insurance sales increased by $92,000 or
approximately 25% during the three months ended September 30, 1998, as compared
to the same period in the previous year. The Corporation's current sources of
commission revenues are from sales of tax-deferred annuity contracts, credit
life and disability insurance policies, and mortgage loan insurance policies.
The increase in 1998 was primarily attributable to higher commissions on sales
of the first two--most likely because of increases in the size of the
Corporation's retail banking network and customer base, as previously described.
Loan servicing fees declined by $1.3 million from $567,000 during the
three months ended September 30, 1997, to $(691,000) during the same period in
1998. The decrease in 1998 was caused by a decline in the carrying value of the
Corporation's mortgage servicing rights. A declining interest rate environment
during most of 1998 resulted in an increase in mortgage refinance activity,
which translated into increased loan prepayments during the period. As a result
of such prepayments, the Corporation recorded a $1.6 million decline in the
estimated carrying value of its mortgage servicing rights during the third
quarter of 1998. This compared to a decline of only $200,000 in the third
quarter of 1997.
Subsequent to September 30, 1998, interest rates have remained at
historically low levels. If this environment persists, or if interest rates
decline further, the Corporation may be required to record significant
mark-to-market losses against the carrying value of its mortgage servicing
rights due to increases in market prepayment expectations. Although management
believes that most of the Corporation's loans that prepay are replaced by a loan
to the same customer, hence preserving the customer relationship, as well as the
future servicing cash flow, generally accepted accounting principles require a
loss to be recorded up front in the form of a mark-to-market adjustment on the
mortgage servicing rights. However, the expected gain on the sale of the
refinanced loan, if any, cannot be recorded until it is actually realized in the
period in which the customer actually prepays and refinances
15
<PAGE> 17
the loan. Accordingly, future mark-to-market losses on the carrying value of the
Corporation's mortgage servicing rights could be substantially larger than they
have been in recent periods. Management will continue to closely monitor the
carrying value of its mortgage servicing rights and will record mark-to-market
adjustments as appropriate.
Excluding the effects of the aforementioned declines in carrying value
of mortgage servicing rights, loan servicing fees would have increased by
$168,000 or 21.9% during the three months ended September 30, 1998, as compared
to the same period in the previous year. This increase was attributable to a
$429.2 million or approximately 30% increase in mortgage loans serviced for
others since September 30, 1997. A large portion of this increase was caused by
the securitization during the second quarter of $222 million of the
Corporation's adjustable-rate residential mortgage loans into MBSs. The
principal balance related to these securities is included in the amount reported
as loans serviced for others although the Corporation retained the securities
(refer to "Financial Condition" for additional discussion). The remaining
increase in loans serviced for others was the result of increased sales of
mortgage loans in the secondary market, as described in the following paragraph.
Gains on sales of mortgage loans increased by $1.1 million from $2.4
million during the three months ended September 30, 1997, to $3.5 million during
the same period in 1998. This improvement was primarily attributable to a $40.5
million or approximately 35% increase in the Corporation's mortgage loan sales.
This increase was due to a declining interest rate environment that resulted in
increased originations of fixed-rate mortgage loans, as well as increased
conversions of adjustable-rate loans to fixed-rate, both of which are generally
sold in the secondary market. Subsequent to September 30, 1998, interest rates
have remained at historically low levels. If this environment persists, or if
interest rates decline further, the Corporation is likely to continue to
experience high levels of refinance activity, as well as conversions by
borrowers of their adjustable-rate loans into fixed-rate loans. Such activity is
expected to result in high levels of gains on sales of mortgage loans, although
there can be no assurances. Such gains could be substantially offset by declines
in the carrying value of the Corporation's mortgage servicing rights, as
previously described.
Loss on the sales of investment securities was $628,000 during the
third quarter of 1997, whereas there was no loss recorded during the third
quarter of this year. The loss in 1997 was caused by the Corporation's sale of
its remaining investment in certain mutual funds that invested primarily in
adjustable-rate mortgage and short-term government securities.
Other income increased by $297,000 from $529,000 during the three
months ended September 30, 1997, to $827,000 during the current quarter. Most of
this increase was attributable to an increase in fees received on loans
originated as agent for the Wisconsin State Veterans Administration ("State VA")
and the Wisconsin Housing and Economic Development Authority ("WHEDA"), as well
as increased fee income from customers that converted their adjustable-rate
mortgage loans to fixed rate loans, as previously described. Also contributing
was a recovery of a large amount from the federal government that had been
written-off as a loss in 1995.
Non-interest income for the nine months ended September 30, 1998 and
1997, was $22.2 million and $17.3 million, respectively. This increase was
primarily the result of a $6.9 million increase in gain on sales of loans from
$4.2 million in 1997 to $11.1 million in 1998. Also contributing was a $1.6
million or 17.0% increase in retail banking fees and a $1.1 million or
approximately 80% increase in other income. Non-interest income in the previous
year also included a $725,000 loss on the sale of investment securities, whereas
no such loss was recorded in 1998. These developments were partially offset by a
$5.1 million decrease in loan servicing fees from $1.7 million in 1997 to $(3.4)
million in 1998, as well as a $239,000 or 16.2% decrease in commissions on
annuity and insurance sales. Other income for the nine months ended September
30, 1998, included a $390,000 state income tax refund for the Corporation's
1987-89 tax years. This refund was received a result of the thrift industry's
victory in a court case that reinstated certain tax deductions that had been
denied by the State of Wisconsin. The decrease in commissions on annuity and
insurance sales was due primarily to the receipt in 1997 of a large commission
bonus on sales of credit life and disability insurance policies. A similar bonus
was not received in 1998 because of the Bank's intention to form an insurance
subsidiary, as described elsewhere in this report. Reasons for all other changes
are substantially the same as those described for the three month periods ended
September 30, 1998 and 1997.
16
<PAGE> 18
NON-INTEREST EXPENSE Non-interest expense for the three-month periods
ended September 30, 1998 and 1997, was $12.0 million and $10.1 million,
respectively. Non-interest expense as a percent of average assets during these
periods was 3.00% and 2.60%, respectively. The following paragraphs discuss the
principal components of non-interest expense and the primary reasons for their
changes from 1997 to 1998.
Compensation and employee benefits increased by $1.4 million or
approximately 25% during the three months ended September 30, 1998, as compared
to the same period in the previous year. In general, this increase was due to
normal annual merit increases and to general growth in the number of banking
facilities operated by the Corporation. Since December 31, 1996, the Corporation
has opened ten retail banking facilities and one loan production facility. The
Corporation also closed one retail banking facility in 1997. During the
remainder of 1998, the Corporation intends to open or acquire four or five
additional retail banking facilities, although there can be no assurances (refer
to "Other Matters" for additional discussion). As of September 30, 1998, the
Corporation had 756 full-time equivalent employees. This compares to 690 and 670
as of December 31, 1997, and September 30, 1997, respectively.
Occupancy and equipment expense increased by $94,000 or 5.8% during the
three months ended September 30, 1998, as compared to the same period in the
previous year. This increase was caused by general growth in the number of
banking facilities operated by the Corporation, as previously described
Other non-interest expenses increased by $318,000 or 14.0% during the
three months ended September 30, 1998, as 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 communication and office supply costs,
increased transaction charges related to customers' use of ATMs and debit cards,
increased expenses related to operation and disposition of foreclosed real
estate, and increased costs related to "loan-payoff interest" remitted to the
Federal National Mortgage Association ("FNMA"). Under the terms of its servicing
agreement with FNMA, the Corporation is required to pay a full month's interest
to FNMA when certain loans payoff, regardless of the actual date of the payoff.
A low interest rate environment and increased prepayment activity has resulted
in increased payment of loan-payoff interest to FNMA.
Non-interest expense for the nine month periods ended September 30,
1998 and 1997, was $34.2 million and $29.6 million, respectively. Non-interest
expense as a percent of average assets during these periods was 2.86% and 2.57%,
respectively. This increase was primarily the result of a $3.1 million or 19.1%
increase in compensation and employee benefits. Also contributing was a $1.4
million or approximately 20% increase in other non-interest expenses and a
$264,000 or 5.4% increase in occupancy and equipment expenses. These
developments were partially offset by a $153,000 or 8.9% decline in advertising
and marketing expense. This decline was caused by slightly lower direct mailing
expenditures, reduced marketing costs related to residential lending, and timing
differences in the Corporation's annual remittances for charitable
contributions. Reasons for all other changes are substantially the same as those
described for the three month periods ended September 30, 1998 and 1997.
INCOME TAX EXPENSE Income tax expense for the three months ended
September 30, 1998 and 1997, was $2.6 million and $2.9 million, respectively, or
35.5% and 38.2% of pretax income, respectively. Income tax expense for the nine
months ended September 30, 1998 and 1997, was $8.4 million and $8.0 million,
respectively, or 37.2% and 38.6% of pretax income, respectively. The decline in
the Corporation's effective tax rate in 1998 was caused by the securitization
and transfer of MBSs to the Corporation's wholly-owned investment subsidiary in
Nevada, as well as the recent purchase of adjustable-rate mortgage loans by that
subsidiary (refer to "Financial Condition" for additional discussion). The State
of Nevada does not currently impose a corporate income tax.
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $192.3 million or
12.5% during the nine months ended September 30, 1998. This increase was
principally funded by a $165.2 million or 14.4% increase in deposit liabilities.
The increase in the Corporation's total assets was ostensibly caused by a $199.9
million increase in mortgage-backed and related securities classified as
available for sale. However, this increase was caused by the
17
<PAGE> 19
transfer of $222 million in adjustable-rate residential mortgage loans from
loans held for investment to mortgage-backed and related securities, as more
fully described in a subsequent paragraph. The actual increase in total assets
is more appropriately attributed to the Corporation's recent purchase of $159.8
million in adjustable-rate residential mortgage loans from a number of
third-party financial institutions, as more fully described in a subsequent
paragraph.
INVESTMENT SECURITIES The Corporation's investment securities available
for sale decreased by $19.0 million or approximately 90% during the nine months
ended September 30, 1998. This decrease was due to the maturity of a number of
investment securities during the period.
Historically, the primary purpose of the Corporation's investment
securities portfolio was to meet liquidity requirements imposed on the Bank by
the Office of Thrift Supervision ("OTS"). During 1997, however, the OTS modified
its regulatory liquidity requirements for thrift institutions. As a result of
such modifications, the investment securities the Bank is required to hold for
regulatory liquidity purposes were substantially reduced. Accordingly, the Bank
anticipates that it will not need to maintain a portfolio of investment
securities in the future, although there can be no assurances.
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios increased by
$191.8 million or approximately 110% during the nine months ended September 30,
1998. This increase was caused by the securitization of $222 million of the
Corporation's adjustable-rate residential loans into MBSs during the second
quarter. These securities were classified as "available for sale" and were
transferred to the Corporation's wholly-owned investment subsidiary in Nevada.
The securitization of the Corporation's adjustable-rate residential
mortgage loans into MBSs improves the liquidity of the asset and increases the
Corporation's borrowing capacity by making such loans acceptable as collateral
for reverse-repurchase agreements. MBSs also receive better treatment under the
FHLB's current collateralization guidelines. The Corporation has retained the
credit risk associated with the underlying loans, which has the effect of
reducing the guarantee fee that is normally paid to the Federal Home Loan
Mortgage Corporation ("FHLMC"), the issuer of the MBSs. This fact is not
expected to have any impact on the marketability of the securities, although
there can be no assurances. Furthermore, this action does not change the credit
risk profile of the Corporation's assets, as it was exposed to the credit risk
on the loans before their securitization.
LOANS HELD FOR SALE The Corporation's loans held for sale increased by
$31.9 million or approximately 70% during the nine months ended September 30,
1998. Declining interest rates and high levels of refinance activity during most
of 1998, and especially in the weeks before the end of the most recent quarter,
has resulted in a high level of loans held for sale. Management expects this
situation to continue in the immediate future, although there can be no
assurances.
LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
decreased by $17.9 million or 1.5% during the nine months ended September 30,
1998. This decrease was caused by the aforementioned securitization of
adjustable-rate residential mortgage loans into MBSs, although the impact of
this transaction was offset somewhat by the Corporation's recent purchase of
$159.8 million in adjustable-rate mortgage loans originated by third-party
financial institutions. These loans were purchased to maintain growth in the
Corporation's level of earning assets. A low interest rate environment in 1998
has had a significant impact on the ability of the Corporation to maintain its
internally originated portfolio of loans held for investment. This situation has
developed because a low interest rate environment tends to increase customer
preference for fixed-rate mortgage loans, as opposed to adjustable-rate loans.
In addition, a low interest rate environment encourages borrowers to refinance
their existing adjustable-rate residential mortgage loans into fixed-rate loans
to "lock-in" a lower long-term rate. Given the Corporation's policy of selling
these types of loans in the secondary market, its internally originated
portfolio of adjustable-rate residential loans has declined substantially since
December 31, 1997. Although some of this decline has been offset by internal
growth in consumer and commercial real estate loans, the Corporation purchased
adjustable-rate mortgage loans from a number of third-party financial
institutions in an effort to maintain growth in its level of earning assets.
These loans were subjected to substantially the same underwriting process as the
Corporation's own loans. The loans are located throughout the U.S., with no
single state making up a significant
18
<PAGE> 20
portion of the overall principal. The loans have adjustable-rates that reset
annually at an average margin of approximately 250 basis points above the
one-year U.S. Treasury bill. Most of the loans have fixed interest rates for
terms of three to seven years. The loans were purchased by the Corporation's
wholly-owned investment subsidiary in Nevada.
The Corporation will continue to explore alternatives to maintain
growth in its interest-earning assets in the near term. These alternatives
include, but are not limited to, the purchase of additional adjustable-rate
residential mortgage loans from third-party financial institutions, the purchase
of mortgage-backed and related securities, and the retention of certain
fixed-rate loans that are currently sold by the Corporation in the secondary
market. It is anticipated that such assets would be funded by growth in deposit
liabilities or increased borrowings from the FHLB of Chicago. However, there are
many considerations involved in such decisions and there can be no assurances
that the Corporation will elect to adopt any of these strategies to increase its
interest-earnings assets.
DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$165.2 million or 14.4% during the nine months ended September 30, 1998. This
growth was due in part to a number of popular CD programs that were offered to
customers during the period. Management also attributes this growth to the
combined effects of the Corporation's competitive interest rate offerings, its
expansion efforts in recent years, its convenient banking locations, and the
strong local economies in its market areas. Management expects these trends to
continue in the immediate future, resulting in continued modest growth in the
Corporation's deposit liabilities, although there can be no assurances. Refer to
"Other Matters" for additional discussion relating to future growth in the
Corporation's deposit liabilities.
Also contributing to the increase in deposit liabilities was a $37.2
million increase in the amount the Corporation holds as custodian for
third-party investors in loans serviced by the Corporation. These deposits
increased as a result of significant loan prepayment activity, which was brought
about by a low interest rate environment, as previously described. Management
expects these deposits to return to more reasonable levels as prepayment
activity slows in the future. However, there can be no assurances.
NON-PERFORMING ASSETS 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) amounted to $3.3 million or
0.19% of total assets at September 30, 1998, compared to $4.9 million or 0.32%
of total assets at December 31, 1997. The decrease in non-performing assets
during the period was principally due to a change in the status of a loan on an
apartment complex in Indianapolis, Indiana. The loan on this property was
classified as non-performing as of December 31, 1997. However, it was classified
as performing as of September 30, 1998, because of the Corporation's acceptance
of a deed-in-lieu of foreclosure and subsequent sale to a new borrower in the
first quarter.
In addition to non-performing assets, at September 30, 1998, management
was closely monitoring $7.2 million in assets which it had classified as
doubtful, substandard, or special mention, but which were performing in
accordance with their terms. This compares to $7.2 million in such assets at
December 31, 1997.
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 mortgage-related and investment securities of not less than 4% of net
withdrawable accounts and short-term borrowings. The Bank was in full compliance
with these regulations during the nine months ended September 30, 1998.
The Bank is also required to maintain specified amounts of capital
pursuant to regulations promulgated by the OTS and the FDIC. The Bank's
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, 1998, 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.
19
<PAGE> 21
The Corporation's stockholders' equity ratio as of September 30, 1998,
was 7.05% of total assets. The Corporation's objective is to maintain its
stockholders' equity ratio in a range of approximately 6.5% to 7.0%, which is
consistent with return on asset and return on equity goals of at least 1% and
15%, respectively. The Corporation's equity ratio was above its target range as
of September 30, 1998, primarily because of $3.5 million in "non-owner
adjustments to equity", which represent a valuation allowance on the
Corporation's securities classified as "available for sale" (net of the related
income tax effect). This allowance increased during the nine months ended
September 30, 1998, because of the securitization of adjustable-rate residential
mortgage loans into MBSs, as previously described.
The Corporation paid cash dividends of $3.7 million and $3.2 million
during the nine months ended September 30, 1998 and 1997, respectively. These
amounts equated to dividend payout ratios of 25.9% and 25.1% of net income in
such periods, respectively. It is the Corporation's 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 dividend
restrictions in effect for the Bank. Furthermore, unanticipated or non-recurring
fluctuations in earnings may impact the Corporation's ability to pay dividends
and/or maintain a given dividend payout ratio.
On October 27, 1998, the Corporation's Board of Directors approved a
regular quarterly dividend of $0.07 per share payable on December 10, 1998,
1998, to shareholders of record on November 19, 1998.
During the nine months ended September 30, 1998, the Corporation
repurchased 200,500 shares of common stock at a cost of $3.3 million under its
1996 and 1997 stock repurchase plans (the "1996 Plan" and "1997 Plan"). As of
September 30, 1998, no shares remain to be purchased under the 1996 Plan and
765,652 shares remain to be purchased under the 1997 Plan.
During the nine months ended September 30, 1998, the Corporation
reissued 291,689 shares of common stock out of its inventory of treasury stock
with a cost basis of $3.3 million. In general, these shares were issued upon the
exercise of stock options by, or the issuance of restricted stock to, employees
and directors of the Corporation.
ASSET/LIABILITY MANAGEMENT
The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk") by monitoring its ratios of
interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates (i.e., its one- and three-year
"funding gaps"). Management has sought to control the Corporation's funding
gaps, thereby limiting the affects of changes in interest rates on its future
earnings, by selling substantially all of its long-term, fixed-rate,
single-family mortgage loan production, investing in adjustable-rate
single-family mortgage loans, investing in consumer and education loans, which
generally have shorter terms to maturity and/or floating rates of interest, and
investing in multi-family residential and commercial real estate loans, which
also tend to have shorter terms to maturity and/or floating rates of interest.
The Corporation also invests from time-to-time in short- and medium-term
fixed-rate collateralized mortgage obligations (CMOs) and MBSs, as well as
medium-term, fixed-rate, single-family mortgage loans. As a result of this
strategy, the Corporation's exposure to interest rate risk is significantly
impacted by its funding of the aforementioned asset groups with deposit
liabilities and FHLB advances that tend to have average terms to maturity of
less than one year or carry floating rates of interest.
In general, it is management's goal to maintain the Corporation's
one-year funding gap in a range between 0% and -25% and its three-year funding
gap in a range between +5% and -5%. Management believes this strategy takes
advantage of the fact that market yield curves tend to be upward sloping, which
increases the spread between the Corporation's earning assets and
interest-bearing liabilities. Furthermore, management of the Corporation does
not believe that this strategy exposes the Corporation to unacceptable levels of
interest rate risk as evidenced by the fact that the Corporation's three-year
funding gap is generally maintained in a narrow band around zero, which implies
that the Corporation is exposed to little interest rate risk over a three-year
horizon.
20
<PAGE> 22
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.
As of September 30, 1998, the Corporation was in compliance with its
internal polices with respect to exposure to interest rate risk. Furthermore,
there was no material change in its interest rate risk exposure since December
31, 1997. It should be noted, however, that the strategies intended to increase
the Corporation's earning assets, as described elsewhere in this report, are
expected to modestly increase the Corporation's negative funding gap. However,
management expects that the Corporation will remain in compliance with its
internal interest rate risk policy should any of the strategies be implemented.
OTHER MATTERS
PURCHASE OF DEPOSIT LIABILITIES In August the Corporation announced its
intention to purchase three retail banking offices located in the Rockford,
Illinois, area from another financial institution. Under the terms of the
purchase agreement, the Corporation will acquire approximately $83 million in
deposits, as well as substantially all of the property, plant, and equipment at
each of the locations. The Corporation expects to pay approximately $9.1 million
for the deposit liabilities and fixed assets at these locations. The transaction
is expected to close in November and the Corporation expects to use most of the
proceeds from the deposit liabilities to repay maturing FHLB advances.
Intangible assets created by this transaction are expected to be amortized
straight-line over fifteen years.
FORMATION OF AN INSURANCE SUBSIDIARY The Corporation has sold credit
insurance policies (life and disability) to its consumer loan customers for a
number of years. The Corporation has earned commission revenue from the
third-party insurer in connection with such sales, but has not underwritten or
reinsured any of the associated risk. However, in the fourth quarter of 1998
management expects to complete the formation of a wholly-owned subsidiary of the
Bank, the purpose of which will be to reinsure credit insurance policies sold in
connection with its consumer loans. The third-party insurer will carry the first
level of risk and will be responsible for performing most of the administrative
tasks of the subsidiary on a contract basis. Based on the Corporation's past
claims experience, management does not believe this decision will expose the
Corporation to significant risk of loss, although there can be no assurances.
The Corporation will continue to earn commission revenue from the
third-party insurer. However, it will also earn reinsurance premiums, which net
of administrative costs and required insurance reserves, are expected to
increase revenue from this source by 15% to 20% from what would otherwise be
received (although there can be no assurances). During the nine months ended
September 30, 1998 and 1997, the Corporation earned commission revenue from
sales of credit insurance policies of $460,000 and $629,000, respectively. The
decline in 1998 was primarily attributable to the receipt in the prior year of a
larger than normal annual commission bonus.
As a result of forming this subsidiary and assuming reinsurance risk on
all policies sold since October 1, 1995, the Corporation expects to receive a
"warehousing bonus" from the third-party insurer. This bonus is expected to be
approximately $300,000 and will be recorded as income during the period in which
the subsidiary is formed. However, there can be no assurances with respect to
this bonus. Furthermore, there can be no assurance that the Corporation will
complete the formation of the subsidiary or that it will be able to meet the
timeline specified herein.
LEGISLATION AFFECTING EDUCATION LOANS The Student Loan Reform Act of
1993 ("the Act") contained a provision that changed the rate paid by borrowers
on education loans originated after July 1, 1998, from the three-month U.S.
Treasury bill plus 310 basis points to the ten-year U.S. Treasury note plus 100
basis points. This provision of the Act, if it had been enacted, would have
substantially reduce the profitability of education loans,
21
<PAGE> 23
which may have had an adverse impact on the Corporation's willingness to
originate such loans in the future. However, as a result of compromise
legislation (The Higher Education Amendments of 1998 or "the Act, as amended"),
the original terms of the Act were modified so that the rate paid by borrowers
on education loans originated after July 1, 1998, is the three-month U.S.
Treasury bill plus 230 basis points. Management is not certain at this time what
impact the Act, as amended, will have on the profitability of education loans or
its willingness to originate such loans. During the nine months ended September
30, 1998 and 1997, the Corporation originated $27.6 million and $27.2 million of
education loans, respectively.
YEAR 2000 COMPLIANCE Potential software and hardware failures arising
from calculations that use the year 2000 represent a significant risk exposure
to the Corporation. If not corrected, software and hardware failures caused by
the year 2000 could result in a major system failure and/or miscalculations,
which could result in a material loss to the Corporation--the probability or
amount of which cannot be estimated at this time. Accordingly, management has
implemented an on-going program designed to ensure that the Corporation's
information systems will not be adversely impacted by the year 2000.
The Corporation's program to resolve the year 2000 issue involves the
following four phases: assessment, remediation, testing, and implementation. The
Corporation has completed the assessment phase and has found that the year 2000
issue affects all of its significant information systems. With respect to
remediation, the Corporation estimates that it is 75% complete as of September
30, 1998, and expects to be 100% complete by December 31, 1998. For all
practical purposes, the testing and implementation of revised software programs
occurs simultaneously. The Corporation estimates that these phases are 25%
complete as of September 30, 1998, and that it will be 100% complete by March
31, 1999. These estimates include systems purchased from and maintained by
third-party software and hardware vendors.
The Corporation's information systems interface directly with those of
certain third-party transaction processors, to include the Federal Reserve Bank
of Minneapolis. With respect to the year 2000 issue, the Corporation's
information systems are highly dependent on the state of readiness of these
third-party transaction processors, as well as the communication systems over
which the data is exchanged. The Corporation expects to complete the testing and
implementation phases that relate to interface programs with third-party
transaction processors by December 31, 1998. The Corporation is unable, however,
to provide any assurances with respect to year 2000 readiness on the part of
public providers of communication services and other utilities.
The Corporation is in the process of developing contingency plans to
deal with communication and other utility failures that may occur as a result of
the year 2000. It is also developing plans to temporarily accumulate data
related to customer transactions should its own information systems or those of
third parties fail. A portion of such contingency plans may include the manual
processing of certain types of customer transactions. In addition, it may
include plans to temporarily honor certain obligations of reputable third
parties, such as recurring deposits from the federal government, that could be
disrupted by the year 2000 and which could have a significant impact on the
Corporation's customers if not honored. However, there can be no assurances that
the Corporation will honor the obligations of third parties. The Corporation
estimates that its contingency plan will be completed by December 31, 1998.
The Corporation is using in-house personnel to identify and correct
year 2000 issues, as well as cooperation with third-party software and hardware
vendors. As of September 30, 1998, the Corporation estimates that it has spent
approximately $175,000 in direct, incremental costs related to the year 2000
issue. This amount includes additional compensation costs to retain essential
personnel, hire additional personnel, and purchase new software--it does not
include opportunity costs. The Corporation is unable to estimate additional
future costs of the year 2000 issue at this time, but does not believe such will
be material to its financial condition or results of operations.
Although management does not believe that the arrival of the year 2000
will pose significant operational problems to the Corporation, there can be no
assurances that it will be successful in preventing failures caused by this
issue. There can also be no assurances that such failures will not result in a
material loss to the Corporation. Such losses may include loss of customer
goodwill, waivers of customer transaction fees and interest, errors in honoring
obligations of third parties, fraudulent transactions, or other sources of loss
not know at this time. As
22
<PAGE> 24
previously mentioned, the Corporation is unable to estimate the probability or
the amount of future loss at this time, if any.
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
Refer to Note 3 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.
23
<PAGE> 25
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
/s/ Thomas W. Schini November 4, 1998
Thomas W. Schini
President, Chairman of the
Board and Chief Executive Officer
(duly authorized officer)
/s/ Jack C. Rusch November 4, 1998
Jack C. Rusch
Executive Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE 9-MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,948,956
<INT-BEARING-DEPOSITS> 8,190,469
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 250,149,688
<INVESTMENTS-CARRYING> 116,205,651
<INVESTMENTS-MARKET> 116,701,857
<LOANS> 1,176,006,462
<ALLOWANCE> 7,623,526
<TOTAL-ASSETS> 1,736,593,274
<DEPOSITS> 1,311,758,730
<SHORT-TERM> 99,150,000
<LIABILITIES-OTHER> 25,275,886
<LONG-TERM> 177,913,977
0
0
<COMMON> 36,534,228
<OTHER-SE> 85,960,453
<TOTAL-LIABILITIES-AND-EQUITY> 1,736,593,274
<INTEREST-LOAN> 70,871,741
<INTEREST-INVEST> 16,399,252
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 87,270,993
<INTEREST-DEPOSIT> 43,456,559
<INTEREST-EXPENSE> 52,364,422
<INTEREST-INCOME-NET> 34,906,571
<LOAN-LOSSES> 205,141
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 34,210,903
<INCOME-PRETAX> 22,707,552
<INCOME-PRE-EXTRAORDINARY> 22,707,552
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,269,021
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 7.75
<LOANS-NON> 1,550,000
<LOANS-PAST> 0
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<LOANS-PROBLEM> 7,200,000
<ALLOWANCE-OPEN> 7,637,527
<CHARGE-OFFS> 219,140
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