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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
[ ] 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
Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1998, the aggregate value of the 9,260,430 shares of Common
Stock of the Registrant that were outstanding on such date was approximately
$295.2 million. Excluding 1,829,882 shares held by all directors and officers of
the Registrant, the aggregate value of the Common Stock of the Registrant was
approximately $236.8 million. These figures are based on the closing price of
$31.875 per share of the Registrant's Common Stock on February 28, 1998.
Number of shares of Common Stock outstanding as of February 28, 1998: 9,260,430
(excludes 710,385 shares held as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.
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FORM 10-K TABLE OF CONTENTS
PART I Page
Item 1--Business........................................................2
Item 2--Properties.....................................................13
Item 3--Legal Proceedings..............................................13
Item 4--Submission of Matters to Vote of Security Holders..............13
PART II
Item 5--Market for Registrant's Common Equity and Related
Stockholder Matters............................................14
Item 6--Selected Financial Data........................................15
Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations............................16
Item 7A--Quantitative and Qualitative Disclosures about
Market Risk...................................................30
Item 8--Financial Statements and Supplementary Data....................34
Item 9--Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................57
PART III
Item 10--Directors and Executive Officers of the Registrant............58
Item 11--Executive Compensation........................................58
Item 12--Security Ownership of Certain Beneficial
Owners and Management.........................................58
Item 13--Certain Relationships and Related Transactions................58
PART IV
Item 14--Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...........................................58
SIGNATURES...................................................................60
EXHIBITS.....................................................................62
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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.
PART I
ITEM 1--BUSINESS
This section of the report contains general information about First
Federal Capital Corp (the "Corporation"), First Federal Saving Bank of La
Crosse-Madison (the "Bank"), and the Bank's wholly-owned subsidiaries (together
"the reporting group"). Included in this section is information regarding the
reporting group's markets and business environments, significant operating and
accounting policies, practices, and procedures, as well as its competitive and
regulatory environments. This section should be read in conjunction with Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", Part II, Item 7a, "Quantitative and Qualitative
Disclosures about Market Risk", and Part II, Item 8, "Financial Statements and
Supplementary Data", as well as other sections of the report.
FIRST FEDERAL CAPITAL CORP
The Corporation was incorporated under the laws of the State of
Wisconsin in July 1989. In November 1989, the Corporation became the savings and
loan holding company for the Bank upon its conversion from mutual to stock form.
The Corporation currently owns all of the outstanding capital stock of the Bank,
which is the principal asset of the Corporation. The Corporation's principal
office is located at 605 State Street, La Crosse, Wisconsin, 54601, and its
telephone number is (608) 784-8000.
FIRST FEDERAL SAVINGS BANK LA CROSSE-MADISON
The Bank was founded in 1934 and is a federally-chartered,
federally-insured, savings bank headquartered in La Crosse, Wisconsin. The
Bank's primary business is attracting deposits from the general public. Such
deposits are principally used to originate single-family residential loans, as
well as commercial real estate, consumer, and education loans. The Bank is also
an active seller of residential loans in the secondary market.
The Bank's primary market areas for conducting such activities consist
of communities located in western, south-central, and eastern Wisconsin (not
including the Milwaukee metropolitan area) as well as contiguous counties in
Illinois, Iowa, and Minnesota. The Bank maintains a total of 48 retail banking
offices in its market areas. Fifteen of these offices are located in the Madison
metropolitan area, six in the La Crosse metropolitan area, five in the city of
Eau Claire, three in the city of Appleton, and two in the cities of Beloit,
Hudson, and Neenah, Wisconsin. The Bank also maintains one retail banking
facility in the cities of Fond du Lac, Fort Atkinson, Green Bay, Janesville,
Kimberly, Manitowoc, Monroe, Oshkosh, Prairie du Chien, Richland Center, River
Falls, Sheboygan, and Viroqua, Wisconsin. The Bank also has separate residential
loan production offices in Janesville and Wausau, Wisconsin, as well as a
commercial real estate loan production office in the Milwaukee, Wisconsin,
metropolitan area.
In addition to deposits, the Bank also obtains a substantial portion of
its funding through borrowings from the Federal Home Loan Bank of Chicago (the
"FHLB"), of which it is a member.
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In addition to loans, the Bank also invests in securities issued by the
U.S. government and its agencies and in other investment securities such as
corporate bonds and notes, collateralized mortgage obligations ("CMOs"),
mortgage-backed securities ("MBSs"), and mutual funds, as permitted by federal
laws and regulations.
The Bank is subject to comprehensive regulation and examination by the
Office of Thrift Supervision ("OTS"), its chartering authority and primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), which
administers the Savings Association Insurance Fund ("SAIF"), which insures the
Bank's deposits to the maximum extent permitted by law.
The Bank's principal executive offices are located at 605 State Street,
La Crosse, Wisconsin, 54601, and its telephone number is (608) 784-8000.
LENDING ACTIVITIES
GENERAL The principal categories of loans in the Bank's portfolio are
residential real estate loans secured by single-family residences, commercial
real estate loans secured by multi-family residential and commercial real
estate, consumer loans, consisting primarily of loans secured by second
mortgages on single-family residences, and government-guaranteed education
loans. Substantially all of the Bank's mortgage loan portfolio consists of
conventional mortgage loans, which are loans that are neither insured by the
Federal Housing Administration ("FHA") nor partially guaranteed by the Veterans
Administration ("VA").
A federally-chartered savings institution has general authority to
originate and purchase loans secured by real estate located throughout the
United States. In general, however, the Bank's lending activities have
concentrated on real estate loans secured by properties located in its primary
market areas and within a 300-mile radius of the Bank's headquarters in La
Crosse.
The Bank generally may not make loans to one borrower and related
entities in an aggregate amount that exceeds 15% of its unimpaired capital and
surplus (as defined by regulations).
SINGLE-FAMILY RESIDENTIAL AND CONSTRUCTION LOANS Applications for
single-family residential and construction loans are accepted by
commission-based employees at eleven loan production offices (nine of which are
co-located with deposit-taking offices) and at eight deposit-taking offices of
the Bank which are able to handle such applications. It is the Bank's general
policy to restrict lending on single-family residences to its primary market
areas in Wisconsin as well as contiguous counties in Iowa and Minnesota,
although from time-to-time the Bank will purchase single-family loans originated
outside of its primary market area.
In general, the Bank retains in its portfolio only single-family
residential mortgage loans that provide for periodic adjustments to the interest
rate ("adjustable-rate mortgage loans"). These loans generally have terms of up
to 30-years and interest rates which adjust every one to two years in accordance
with an index based on the yield on certain U.S. government securities. A
portion of these loans may guarantee the borrower a fixed rate for the first
three years of the loan's term. Furthermore, most of these loans have annual
interest rate change limits ranging from 1% to 2% and maximum lifetime interest
rates ranging from 11% to 16%. The Bank has not engaged in the practice of using
a cap on loan payments, which would allow a borrower's loan balance to increase
rather than decrease, resulting in negative principal amortization. The Bank
occasionally offers discounts on the interest rates it offers on its
adjustable-rate mortgage loans during the first one to three years of the loan,
which has the effect of reducing a borrower's payment during such years.
However, the Bank generally complies with Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines in
determining a borrower's ability to repay such loans. Some of the Bank's
adjustable-rate mortgage loan agreements permit borrowers to convert their
adjustable-rate loans to fixed-rate loans under certain circumstances in
exchange for a modest fee. Upon conversion, such loans are generally sold in the
secondary market.
Adjustable-rate mortgage loans decrease the Bank's exposure to risks
associated with changes in interest rates, but involve other risks because as
interest rates increase, borrowers' monthly payments increase, thus increasing
the potential for default. This risk has not had any adverse effect on the Bank
to date, although no assurances can be made with respect to future periods.
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Although in general the Bank only retains adjustable-rate mortgage
loans in its portfolio, it continues to originate fixed-rate mortgage loans in
order to provide a full range of products to its customers. In general, such
loans are originated only under terms, conditions, and documentation standards
that make such loans eligible for sale to FHLMC, FNMA, and other institutional
investors. The Bank generally sells these loans at the time they are originated.
In addition, the Bank generally sells any adjustable-rate mortgage loans that
convert to fixed-rate loans in accordance with options granted to such borrowers
in the original loan documents, as previously described. Sales of mortgage loans
provide additional funds for lending and other business purposes and have
generally been under terms that do not provide for any recourse to the Bank by
the purchaser.
The Bank's staff underwriters generally approve single-family
residential loans that have principal balances of up to $227,150. The Bank's
underwriting supervisor approves single-family residential loans that have
principal balances of up to $250,000. Loans between $250,000 and $500,000 are
approved by either the Vice President responsible for mortgage loan processing,
closing, and underwriting, the Executive Vice President of the residential
lending division, or the President of the Bank. Finally, any loans greater than
$500,000 are approved by the Bank's Board of Directors.
The Bank's general policy is to lend up to 80% of the appraised value
of the property securing a loan (referred to as the "loan-to-value ratio"). The
Bank occasionally will lend more than 80% of the appraised value of the
property, but will obtain private mortgage insurance on behalf of the borrower
on the portion of the principal amount of the loan that exceeds 80% of the
security property's value. The Board of Directors of the Bank approves all
conventional loans that have loan-to-value ratios greater than 90% and which do
not have mortgage insurance.
The Bank evaluates the collateral of its residential real estate loans
using documentation that complies with applicable regulations. For most of its
loans the Bank obtains current appraisals performed by state licensed
appraisers. However, exceptions occur in the case of (i) streamlined,
rate-reduction refinance loans for which the Bank relies on appraisals in the
existing loan files (this procedure is consistent with the guidelines
promulgated by FNMA and FHLMC), and (ii) lot loans less than $100,000 for which
the Bank relies on the most recent municipal assessment and its knowledge and
experience in the respective market. The Bank obtains title insurance policies
on most first mortgage real estate loans it originates. If title insurance is
not obtained or is unavailable, the Bank obtains an abstract of title and title
opinion. Borrowers must also obtain hazard insurance prior to closing and, when
required by federal regulations, flood insurance. Borrowers may be required to
advance funds, along with each monthly payment of principal and interest, to an
escrow account from which the Bank makes disbursements for items such as real
estate taxes, hazard insurance premiums, and mortgage insurance premiums.
The Bank utilizes the services of a third party, which reviews loan
documents relating to a portion of the Bank's single-family residential loan
originations to test compliance with the Bank's regulatory documentation
requirements.
The Bank also originates loans to individuals to construct
single-family residences. Construction loans may be made without commitments to
purchase the property being constructed and the borrower may not have take-out
commitments for permanent financing on hand at the time of origination.
Construction loans generally have a maturity of 6 to 12 months and a fixed rate
of interest, with payments being made monthly on an interest-only basis.
Construction loans are otherwise underwritten and approved in the same manner as
other single-family residential loans. Construction loans, however, are
generally considered to involve a higher degree of risk than conventional
residential mortgage loans. A lender's risk of loss on a construction loan is
largely dependent on the accuracy of the initial estimate of the property's
value at completion of construction, the estimated cost of construction, and the
borrower's ability to advance additional construction funds, if necessary.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE, AND COMMERCIAL
CONSTRUCTION LOANS The Bank originates and occasionally purchases mortgage loans
that are secured by existing multi-family residential and commercial real estate
properties. Applications for multi-family residential and commercial real estate
loans are accepted at the Bank's main office in La Crosse, as well as offices in
Madison, Appleton, and Milwaukee. All underwriting and approval of such loans,
however, is performed at the Bank's main office in La Crosse. It is the Bank's
general policy to restrict its multi-family and commercial real estate lending
to loans secured by properties located within a 300-mile radius of La Crosse, to
include all or a portion of the states of Nebraska, Illinois, Iowa,
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and Minnesota; although in the past the Bank originated multi-family and
commercial real estate loans outside of this area.
The Bank's multi-family residential and commercial real estate lending
activities (together "commercial real estate lending") are managed by the Senior
Vice President in charge of the Bank's Commercial Real Estate Lending Division.
Pursuant to the Bank's commercial real estate lending policy, the Bank
emphasizes investment in loans secured by collateral classified as Type A
properties, which are to comprise not less than 80% of the Bank's commercial
real estate loan portfolio. Such properties consist of multi-family residential
properties such as apartment buildings, retail shopping establishments, office
buildings, and multi-tenant industrial buildings. Not more than 20% of the
Bank's commercial real estate portfolio is to include loans secured by
collateral classified as Type B properties, which consist of nursing homes,
single-tenant industrial buildings, hotels and motels, and churches. The Bank's
current policy is to not make any new loans secured by collateral classified as
Type C properties, which include restaurants, recreation facilities, and other
special purpose facilities, although the Bank has made loans secured by such
properties in the past.
Applications for commercial real estate loans are generally obtained
from existing borrowers, direct contacts by loan officers, and referrals. Terms
on commercial real estate loans are generally negotiated at the time of
origination. In general these loans have amortization periods ranging from 20 to
30 years, mature in ten years or less, and have interest rates which are fixed
for one to five years--thereafter adjusting in accordance with a designated
index that is generally subject to a floor and a ceiling. Loan-to-value ratios
on the Bank's commercial real estate loans may be as high as 80% for loans
secured by Type A properties, but are limited to ratios of 75% or lower for
commercial real estate loans which are secured by other properties. In addition,
as part of the criteria for underwriting commercial real estate loans, the Bank
generally imposes on potential borrowers a "debt coverage ratio" (the ratio of
net cash from operations before payment of debt service to debt service). This
ratio ranges from 115% to 120% for loans secured by Type A properties and 130%
to 160% for loans secured by other properties. It is also the Bank's general
policy to obtain personal guarantees of its commercial real estate loans from
the principals of the borrower and, when this cannot be obtained, to impose more
stringent loan-to-value, debt service, and other underwriting requirements. In
general, mortgage loans purchased from other financial institutions are subject
to the same underwriting standards as mortgage loans originated directly by the
Bank.
The Bank's Commercial Real Estate Division Manager generally approves
commercial real estate loans that have principal balances of up to $300,000.
Commercial real estate loans over $300,000 and up to $1.5 million require the
approval of the Bank's Senior Loan Committee. A Loan Committee of the Board of
Directors must approve loans over $1.5 million and up to $3.0 million. And
finally, loans with principal balances over $3.0 million must be approved by the
Board of Directors of the Bank.
From time to time the Bank originates loans to construct commercial
real estate. Construction loans are generally considered to involve a higher
degree of risk than mortgage loans on completed properties. A lender's risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction, the
estimated cost (including interest) of construction, and the borrower's ability
to advance additional construction funds if that should become necessary. If the
estimate of construction costs proves to be inaccurate, and the borrower is
unable to meet the added costs, the lender may need to advance funds beyond the
amount originally committed to permit completion of the project and protect its
security interest. The Bank's construction lending activities generally are
limited to an area within a 150-mile radius of Madison, La Crosse, Appleton, and
Milwaukee, Wisconsin.
Commercial real estate lending is generally considered to involve a
higher level of risk than single-family residential lending. This is due to the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on real estate developers and managers
and on income producing properties, and the increased difficulty of evaluating
and monitoring these types of loans. Moreover, a construction loan can involve
additional risks because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost (including
interest) of the project. In addition, loans secured by properties located
outside of the Bank's immediate market area may involve a higher degree of risk.
This is because the Bank may not be as familiar with market conditions and other
relevant factors as it would be in the case of loans secured by properties
located within its market areas. The Bank does not have a material concentration
of loans outside of its
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immediate market area. For additional discussion, refer to Note 4 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
The Bank has attempted to minimize the foregoing risks by, among other
things, adopting what management believes are conservative underwriting
guidelines that impose more stringent loan-to-value, debt service, and other
requirements on loans which are believed to involve higher elements of risk, by
requiring independent appraisals on all loans, by limiting the geographic area
in which the Bank will make commercial construction loans, and by limiting the
amount of certain types of commercial real estate loans in its portfolio, as
previously described. In addition, in the case of purchased commercial real
estate loans, the Bank emphasizes purchases of existing loans on
newly-constructed properties, as opposed to older properties, which may require
more maintenance and capital improvements. Furthermore, the Bank generally
requires the seller to retain not less than a 10% interest in a loan that the
Bank desires to purchase in order to ensure that the seller will retain an
interest in repayment of the loan in accordance with its terms.
SERVICING MORTGAGE LOANS In addition to servicing most of the mortgage
loans in its own portfolio, the Bank continues to collect principal and interest
payments on most of the single-family residential loans that it sells to
third-party investors, to make certain insurance and tax advances on behalf of
the borrowers, and to otherwise service such loans. The Bank pays the investors
an agreed-upon yield on the loans, which is generally less than the interest
agreed to be paid by the borrower. The difference, generally 25 basis points or
more, is retained by the Bank and recognized as servicing fee income over the
lives of the loans. The Bank also purchases mortgage servicing rights from third
parties for which it receives an agreed-upon fee and for which it performs
substantially the same services as it performs on its own originations. For
additional discussion refer to Note 1 of the Corporation's Audited Consolidated
Financial Statements, included herein under Part II, Item 8, "Financial
Statements and Supplementary Data".
Management believes that servicing mortgage loans for third parties,
whether such servicing results from its own originations or is purchased,
provides a natural hedge against other risks inherent in the Bank's mortgage
banking activities. That is, fluctuations in gains on sales of mortgage loans as
a result of changes in market interest rates will generally be offset in part by
opposite changes in loan servicing fee income (due principally to fluctuations
in the carrying value on mortgage servicing rights). For additional discussion
refer to Part II, Item 7, "Management Discussion and Analysis of Financial
Condition and Results of Operations".
CONSUMER LOANS The Bank offers consumer loans in order to provide a
full range of financial services to its retail customers. Applications for
consumer loans may be taken at all of the Bank's retail banking offices. The
majority of such loans, however, are underwritten and approved at the Bank's
headquarters in La Crosse. Most of the Bank's consumer loan portfolio consists
of second mortgage loans and education loans, but also includes automobile
loans, home equity lines of credit, recreational vehicle and mobile home loans,
deposit account secured loans, and unsecured lines of credit or signature loans.
The Bank services all of its own consumer loans except education loans, which
are serviced by a third-party. Consumer loans generally have shorter terms and
higher rates of interest than conventional mortgage loans, but typically involve
more credit risk than such loans because of the nature of the collateral and, in
some instances, the absence of collateral. In general, consumer loans are more
dependent upon the borrower's continuing financial stability, are more likely to
be affected by adverse personal circumstances, and are often secured by rapidly
depreciating personal property such as automobiles. However, such risks are
mitigated to some extent in the case of second mortgage loans and education
loans. The former are secured by a second mortgage on the borrower's residence
for which the total principal balance outstanding (including the first mortgage)
does not generally exceed 100% of the property's value. With respect to
education loans, the federal government generally guarantees the principal and
interest. Second mortgage loans are generally fixed-rate and have terms of up to
ten years. Education loans, although generally fixed-rate to the borrower, are
generally floating-rate to the Bank with the difference being paid by the
federal government. The interest rate received by the Bank each quarter is based
on a spread above the average yield on the three-month U.S. Treasury bill. Refer
to "Other Matters" in Part II, Item 7, "Management Discussion and Analysis of
Financial Condition and Results of Operations", for a discussion of legislation
affecting education loans.
The Bank believes that the higher yields earned on consumer loans
compensate for the increased risk associated with such loans and that consumer
loans are important to its efforts to increase the interest rate sensitivity
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and shorten the average maturity of its loan portfolio. Furthermore, despite the
risks inherent in consumer lending, the Bank's net charge-offs on consumer loans
as a percentage of gross loans has been minimal.
DELINQUENT LOANS When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made on the fifteenth day after a
payment is due. In most cases, deficiencies are cured promptly. If a delinquency
extends beyond 15 days, the loan and payment histories are reviewed and efforts
are made to collect the loan. While the Bank generally prefers to work with
borrowers to resolve such problems, when the account becomes 90 days delinquent
the Bank institutes foreclosure or other proceedings, as necessary, to minimize
any potential loss.
NON-PERFORMING AND OTHER CLASSIFIED ASSETS Loans are generally placed
on non-accrual status and considered "non-performing" when, in the judgement of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
and/or non-performing status, previously accrued but unpaid interest is deducted
from interest income. In general, the Bank does not record accrued interest on
loans past due 90 days or more. Refer to Notes 1 and 4 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
Real estate acquired by the Bank as a result of foreclosure or
deed-in-lieu of foreclosure is classified as real estate and is considered
"non-performing" until it is sold. When property is acquired, it is recorded at
the lower of carrying or fair value at the date of acquisition. Any write down
resulting therefrom is charged to the allowance for loan losses. All costs
incurred in maintaining the Bank's interest in the property are capitalized
between the date the loan becomes delinquent and the date of acquisition. After
the date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such property
are capitalized. For additional discussion, refer to Note 1 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
Federal regulations require thrift institutions to classify their
assets on a regular basis. In addition, in connection with examinations of
thrift institutions, federal examiners have authority to identify problem assets
and, if appropriate, include them in classified assets. An asset is classified
as "Substandard" if it is determined to involve a distinct possibility that the
thrift institution could sustain some loss if deficiencies associated with the
loan are not corrected. An asset is classified, as "Doubtful" if full collection
is highly questionable or improbable. An asset is classified as "Loss" if it is
considered uncollectible, even if a partial recovery could be expected in the
future. The regulations also provide for a "Special Mention" designation,
described as assets which do not currently expose an institution to a sufficient
degree of risk to warrant adverse classification, but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the institution to
establish a general allowance for loan losses. If an asset or portion thereof is
classified as Loss, the institution must either establish a specific allowance
for loan losses in the amount of the portion of the assets classified as loss,
or charge off such amount. Refer to Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", for additional
discussion--including a more detailed discussion of the Bank's classified
assets.
ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE The Bank's policy is to
establish allowances for estimated losses on specific loans and real estate when
it determines that losses are expected to be incurred. In addition, the Bank
maintains a general loss allowance against its loan and real estate portfolios
which is based on its own loss experience, that of the financial services
industry, and management's ongoing assessment of current economic conditions,
and the credit risk inherent in the portfolios. For additional information,
refer to Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1 and 4 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
Management of the Bank believes that the allowances established by the
Bank are adequate to cover any potential losses in the Bank's loan and real
estate portfolios. However, future adjustments to these allowances may be
necessary and the Bank's results of operations could be adversely affected if
circumstances differ substantially from the assumptions used by management in
making its determinations in this regard.
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MORTGAGE-BACKED AND RELATED SECURITIES
The Bank invests in CMOs which management of the Bank believes
represent attractive investment alternatives, relative to other investment
vehicles, due to the wide variety of maturity and repayment options available
through such investments and due to the limited credit risk associated with such
investments. CMOs purchased by the Bank are generally rated "AAA" by independent
credit-rating agencies. In addition, such investments are secured by credit
enhancements and/or subordinated tranches or are collateralized by U.S.
government agency MBSs. The Bank only invests in sequential-pay, planned
amortization class ("PAC"), and targeted amortization class ("TAC") tranches
that, at the time of their purchase, are not classified as high-risk derivative
securities in accordance with regulations. The Bank does not invest in support-,
companion-, or residual-type tranches. Furthermore, the Bank does not invest in
interest-only, principal-only, inverse-floating-rate CMO tranches, or similar
complex CMO securities.
The Bank also invests in MBSs that are guaranteed by the FHLMC, FNMA,
or the Government National Mortgage Association ("GNMA"). MBSs enhance the
quality of the Bank's assets by virtue of the guarantees that back them. In
addition, MBSs are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Bank.
The Bank classifies its mortgage-backed and related securities as
either available for sale or held for investment. For additional discussion,
refer to Part II, Item 7, "Management Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
INVESTMENT SECURITIES
Federally-chartered savings institutions have authority to invest in
various types of securities, including U.S. government obligations, securities
of various federal agencies, certificates of deposit issued by insured banks and
savings institutions, and federal funds. Subject to various restrictions,
federally-chartered savings institutions also may invest a portion of their
assets in commercial paper, corporate debt securities, and mutual funds whose
assets conform to the investments that a federally-chartered savings institution
is authorized to make directly. In general, investments in these types of
securities are limited to the four highest credit categories as established by
the major independent credit-rating agencies.
The Bank must maintain minimum liquidity levels specified by the OTS
that may vary from time to time. Liquidity may increase or decrease depending
upon the yields available on investment opportunities and upon management's
judgement as to the attractiveness of such yields and its expectation of the
level of yields that will be available in the future.
Excluding U.S. government and federal agency securities and mutual
funds that invest exclusively in such securities, none of the Bank's individual
investments exceeded 10% of the Bank's retained earnings as of the end of each
of the past three years.
The Bank generally classifies its investment securities as available
for sale. For additional discussion, refer to Part II, Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 1 of the Corporation's Audited Consolidated Financial Statements, included
herein under Part II, Item 8, "Financial Statements and Supplementary Data".
SOURCES OF FUNDS
Deposits obtained through its retail banking facilities have
traditionally been the principal source of the Bank's funds for use in lending
and for other general business purposes. The Bank also obtains funds through
borrowings from the FHLB and other sources and, to a lesser extent, obtains
funds from amortization and prepayments of outstanding loans and investments.
DEPOSIT LIABILITIES The Bank's current deposit products include regular
savings accounts, checking accounts, money market deposit accounts, individual
retirement accounts, and certificates of deposit ranging in
8
<PAGE> 10
terms from three months to five years. Substantially all of the Bank's deposits
are obtained from individual and business residents of the state of Wisconsin.
In addition to serving as the Bank's primary source of funds, deposit
liabilities (especially checking accounts) are a substantial source of
non-interest income. This income is generally received in the form of overdraft
fees, periodic service charges, and other transaction charges.
The principal methods used by the Bank to attract deposit accounts
include offering a wide variety of products and services, competitive interest
rates, and convenient office locations and hours. Most of the Bank's
free-standing retail banking offices have drive-up facilities and 18 of the
Bank's retail banking facilities are located in supermarkets. Depositors also
have access to automated teller machines ("ATMs") connected to TYME, Inc., which
supports a network of ATMs located throughout Wisconsin. TYME is affiliated with
other ATM networks, which permit the Bank's customers to access the TYME network
through similar systems located in other states and countries. As of December
31, 1997, the Bank owned 59 ATM machines, all of which were located in
Wisconsin. Depositors may also obtain a VISA "debit card" from the Bank that
allows them to purchase goods and services directly from any merchant that
accepts VISA credit cards. The same debit card also provides access to the ATM
network.
From time to time, the Bank has also utilized certificates of deposit
sold through third-party brokers ("brokered deposits") as an alternative to
borrowings from the FHLB. FDIC regulations govern the acceptance of brokered
deposits by insured depository institutions such as the Bank. The capital
position of an institution determines whether and with what limitations an
institution may accept brokered deposits. The Bank is a "well capitalized"
institution under the regulations and therefore may accept brokered deposits
without restriction. At December 31, 1997, the Bank had no brokered deposits
outstanding.
FEDERAL HOME LOAN BANK ADVANCES The Bank obtains advances from the FHLB
secured by certain of its home mortgage loans and mortgage-related securities,
as well as stock in the FHLB that it is required to own. Such advances may be
made pursuant to several different credit programs, each with its own interest
rate, maximum size of advance, and range of maturity dates. Depending on the
program, limitations on the amount of such borrowings are based either on a
fixed percentage of the Bank's capital or on the FHLB's assessment of the Bank's
creditworthiness.
OTHER BORROWINGS The Bank has two lines of credit with two financial
institutions. These lines, which amount to $15.0 million in the aggregate,
permit the overnight purchase of fed funds.
The Corporation also has a $3.0 million borrowing outstanding with a
third financial institution which matures on May 31, 1998, but which is subject
to renewal under certain circumstances. Interest on this borrowing is payable
quarterly at 185 basis points above the three-month London Inter-Bank Offered
Rate ("LIBOR"), as determined on a quarterly basis.
SUBSIDIARIES
The Bank has formed a number of subsidiaries to engage in certain
activities that are more appropriately conducted in a subsidiary of the Bank.
Following is a brief description of each subsidiary.
FIRST ENTERPRISES, INC. The Bank's wholly-owned subsidiary, First
Enterprises, Inc. ("FEI"), was incorporated in November 1971. During the period
from 1979 to the mid-1980s, FEI was primarily involved in the acquisition and
development of hotels. In general, however, FEI is no longer involved in these
types of activities, other than the maintenance of its remaining investments.
FEI's investment in its remaining hotel joint ventures was $292,000 as of
December 31, 1997.
From 1988 to 1995, the Bank offered tax-deferred annuity contracts
through FEI as an investment alternative to its customers. Beginning in 1996,
however, these activities were transferred to the Bank. FEI had net income of
$49,000, $56,000, and $290,000 during the twelve-month periods ended December
31, 1997, 1996, and 1995, respectively. At December 31, 1997, the Bank's
investment in FEI was $344,000; this amount is eliminated in consolidation in
accordance with generally accepted accounting principles ("GAAP").
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<PAGE> 11
FIRST CAPITAL HOLDINGS, INC. In June 1993 the Bank formed a
wholly-owned subsidiary in the State of Nevada. The subsidiary, First Capital
Holdings, Inc. ("FCHI") was formed to consolidate and improve the efficiency,
management, safekeeping, and operations of a portion of the Bank's investment
securities portfolio. In addition, the formation of FCHI has resulted in a lower
effective income tax rate for the Bank due to the fact that the State of Nevada
does not currently impose a corporate income tax. As of December 31, 1997, FCHI
was managing $168.4 million in mortgage-backed and related securities for the
Bank, consisting principally of CMOs. FCHI's net income was $9.8 million, $9.5
million, and $9.3 million for the twelve-month periods ended December 31, 1997,
1996, and 1995, respectively. The Bank's investment in FCHI as of December 31,
1997, was $235.6 million; this amount is eliminated in consolidation in
accordance with GAAP.
TURTLE CREEK CORPORATION In December 1995 the Bank acquired an
additional subsidiary, Turtle Creek Corporation ("Turtle Creek"), as a result of
its acquisition of the net assets of another financial institution. Turtle Creek
is a joint venture partner in a real estate project to develop single-family
residential building lots and condominium building sites on a 78-acre parcel
located within the city limits of Beloit, Wisconsin. Turtle Creek's aggregate
investment in this project was $31,000 at December 31, 1997. Turtle Creek also
holds a 40% limited partnership interest in a fifty-unit complex providing
housing for low-to-moderate income and elderly persons in Beloit. Turtle Creek's
aggregate investment in this project was $134,000 at December 31, 1997. The
Bank's investment in Turtle Creek as of December 31, 1997, was $361,000; this
amount is eliminated in consolidation in accordance with GAAP.
COMPETITION
The Bank faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks,
credit unions, and other savings institutions located in its market area. In
addition, during periods of high market interest rates, the Bank faces
significant competition from short-term money market mutual funds; during
periods of low interest rates, the Bank faces significant competition from
long-term bond mutual funds and equity mutual funds and issuers of corporate and
government securities. The Bank competes for deposits principally by offering
depositors a variety of deposit products, convenient branch locations, operating
hours, and other services. The Bank does not rely upon any individual group or
entity for a material portion of its deposits.
The Bank's competition for loans comes principally from mortgage
banking companies, other savings institutions, commercial banks, finance
companies, and credit unions. The Bank competes for loan originations primarily
through the interest rates and loan fees it charges, the efficiency and quality
of services it provides borrowers, referrals from real estate brokers and
builders, and the variety of its products. Factors that affect competition
include the general and local economic conditions, current interest rate levels,
and volatility in the secondary market for residential mortgage loans.
REGULATION OF THE CORPORATION
The Corporation is a savings and loan holding company within the
meaning of Section 10 of the Home Owners' Loan Act ("HOLA"). As such, the
Corporation is registered with and subject to OTS examination and supervision as
well as certain reporting requirements. Furthermore, the Corporation is limited
with respect to the transactions it can execute with its affiliates (including
the Bank), and its ability to acquire control of another insured financial
institution, as specified more fully in the applicable regulations. There
generally are no restrictions as to activities of a unitary savings and loan
holding company such as the Corporation as long as its sole insured subsidiary,
the Bank, complies with certain regulatory requirements, which management
believes it did as of December 31, 1997.
REGULATION OF THE BANK
The Bank, as a federally-chartered savings bank, is subject to federal
regulation and oversight by the OTS extending to all aspects of its operations.
The Bank also is subject to regulation and examination by the FDIC, which
insures the deposits of the Bank to the maximum extent permitted by law, and
requirements established by the Federal Reserve Board. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
for the purpose of protecting stockholders of financial institutions or their
holding companies.
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<PAGE> 12
The investment and lending authority of a federally-chartered savings
bank is prescribed by federal laws and regulations. The Bank is also subject to
regulatory provisions affecting a wide variety of matters including, but not
limited to, branching, loans to one borrower, investment restrictions,
activities of subsidiaries, loans to "insiders", and transactions with
affiliates. Certain of the regulatory requirements applicable to the Bank and
the Corporation are more particularly described below or may be referred to
elsewhere herein.
INSURANCE OF ACCOUNTS The Bank's savings deposits are insured by SAIF,
which is administered by the FDIC, up to the maximum extent provided by law,
currently $100,000. The Bank is subject to a risk-based insurance assessment
system under which higher insurance assessment rates are charged to those thrift
institutions that are deemed to pose greater risk to the deposit insurance fund.
Under this system, insurance assessments range from 0% of deposits for the
healthiest financial institutions to 0.27% of deposits for the weakest. This
risk-based assessment schedule is identical to that for institutions insured by
the Bank Insurance Fund ("BIF"), which is also administered by the FDIC. Under
both funds, the insurance assessment paid by a particular institution will
depend on the "supervisory rating" it receives from the FDIC ("A", "B", or "C")
and on its regulatory capital level ("well capitalized", "adequately
capitalized", or "undercapitalized"). Based upon its current supervisory rating
and regulatory capital level, and assuming no change in the Bank's risk
classification or in overall premium assessment levels, the Bank anticipates
that its insurance assessment for 1998 will be zero, which is the same as the
1997 rate.
Although the Bank's risk-based insurance assessment for 1998 is
expected to be zero, the Bank will still be required to pay approximately 0.065%
of deposits to cover its pro rata share of the bond obligation of a government
agency known as the Finance Corporation ("FICO"). This rate is not tied to the
FDIC's risk classification; as a result, it is the same for all SAIF-insured
institutions. BIF-insured institutions, however, will only be subject to a rate
of approximately 0.013% of deposits.
CAPITAL STANDARDS The Bank is subject to minimum regulatory capital
requirements as specified by OTS regulations. As more fully described in such
regulations, the Bank is subject to a leverage limit of at least 3% of total
assets, a tangible capital limit of at least 1.5% of total assets, and a
risk-based capital limit of at least 8% of risk-weighted assets. As of December
31, 1997, the Bank exceeded all minimum regulatory capital requirements as
specified by the OTS.
The Bank is also subject to minimum regulatory capital requirements as
specified by FDIC regulations. As more fully described in such regulations, the
Bank must meet the following capital standards to be classified as "adequately
capitalized" under FDIC guidelines: (1) Tier 1 capital in an amount not less
than 4% of total assets, (ii) Tier 1 capital in an amount not less than 4% of
risk-weighted assets, and (iii) total capital in an amount not less than 8% of
risk-weighted assets. As of December 31, 1997, the Bank exceeded all minimum
regulatory capital requirements as specified by the FDIC. For additional
discussion refer to Note 12 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data".
Federal bank regulators such as the OTS and FDIC are required to take
"prompt corrective action" with respect to institutions that become
undercapitalized, the severity of which will depend upon the degree of
undercapitalization. The regulations provide that an insured institution that
has not met one or more of the minimum regulatory capital requirements specified
in the previous paragraph will be considered "undercapitalized". Furthermore, an
insured institution that has Tier 1 capital in an amount less than 3% of total
assets, Tier 1 capital in an amount less than 3% of risk-based assets, or total
capital in an amount less than 6% of risk-weighted assets will be considered
"significantly undercapitalized". Finally, an insured institution that has
tangible capital in an amount less than 2% of total assets will be considered
"critically undercapitalized".
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distributions, or paying a management fee to a controlling person
or entity. Significantly and critically undercapitalized institutions are
subject to additional restrictions. The Bank currently exceeds all applicable
minimum regulatory capital requirements and therefore is not subject to prompt
corrective action.
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<PAGE> 13
LIQUIDITY REQUIREMENTS The Bank is required to maintain liquid assets
(generally defined as cash and investment-grade, short-term or variable-rate
securities) equal to at least 4% of its "liquidity base" (generally defined as
short-term deposit liabilities and other borrowings). This requirement may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
of the liquidity base. As of December 31, 1997, the Bank was in compliance with
the minimum requirements. For additional information refer to Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CLASSIFICATION OF ASSETS As previously described, the Bank's problem
assets are subject to classification according to one of three categories:
Substandard, Doubtful, and Loss. An institution is required to develop an
in-house program to classify its assets, including investments in subsidiaries,
on a regular basis and to set aside appropriate loss reserves on the basis of
such classification. The Bank believes that it is in compliance with the
foregoing requirements.
QUALIFIED THRIFT LENDER TEST A savings association that does not meet
the Qualified Thrift Lender Test ("QTL Test"), as set forth in the HOLA and
implementing regulations, must either convert to a bank charter or comply with
certain restrictions on its operations. Under the QTL Test, a savings
association is required to maintain a certain percentage of its assets in
qualifying investments, as defined by regulations. In general, qualifying
investments consist of housing-related assets. At December 31, 1997, the Bank's
assets invested in qualifying investments exceeded the percentage required to
qualify the Bank under the QTL Test.
FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System,
which consists of 12 regional FHLBs, subject to supervision and regulation by
the Federal Housing Finance Board. The FHLBs provide a central credit facility
primarily for member financial institutions. The Bank, as a member of the FHLB
of Chicago, is required to purchase and hold shares of capital stock in the FHLB
of Chicago. The requirement is equal to the greater of 1% of the Bank's
aggregate unpaid residential mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year or 5% of its outstanding
advances from the FHLB of Chicago. At December 31, 1997, the Bank had a $13.8
million investment in the stock of the FHLB of Chicago and was in compliance
with this requirement.
The Bank's investment in FHLB stock, a large portion of its
single-family mortgage loans, and certain other assets (consisting principally
of CMOs and MBSs) are used to secure advances from the FHLB of Chicago. The
interest rates charged on advances vary with the maturity of the advance and the
FHLB's own cost of funds.
FEDERAL RESERVE SYSTEM Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against
transaction accounts (which consist of NOW accounts, Super NOW accounts, and
regular checking accounts) and against certain non-personal time deposits. At
December 31, 1997, the Bank's required reserves were approximately $12.1
million.
DIVIDEND RESTRICTIONS The payment of dividends by the Bank is subject
to various limitations set forth in federal regulations and as briefly described
in Note 12 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data".
COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act of
1977, as amended (the "CRA"), as implemented by OTS regulations, a savings
institution has a continuing and affirmative obligation, consistent with its
safe and sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution. The CRA also requires all institutions
to make public disclosure of their CRA ratings. The Bank's latest CRA rating,
received in 1995, was "outstanding".
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<PAGE> 14
TAXATION
FEDERAL TAXATION The Bank is subject to those rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code
("IRC"). The Corporation, the Bank, and the Bank's wholly-owned subsidiaries
file consolidated federal income tax returns, which has the effect of
eliminating or deferring the tax consequences of intercompany distributions,
including dividends, in the computation of consolidated taxable income. Refer to
Notes 1 and 9 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data" for additional discussion.
The federal income tax returns of the Bank have been audited and closed
by the Internal Revenue Service ("IRS") through 1991 and no material disputes
are outstanding as a result of these audits.
WISCONSIN TAXATION The State of Wisconsin imposes a tax on the
Wisconsin taxable income of corporations, including savings institutions, at the
rate of 7.9%. Wisconsin taxable income is generally similar to federal taxable
income except that interest from state and municipal obligations is taxable, no
deduction is allowed for state income taxes, and net operating losses may be
carried forward but not back. In addition, Wisconsin law does not provide for
filing of consolidated state income tax returns.
ITEM 2--PROPERTIES
As of December 31, 1997, the Bank conducted its business from its
corporate offices in La Crosse, Wisconsin, 48 other retail banking facilities
located throughout Wisconsin, as previously described, and two separate loan
production offices, also located in Wisconsin. At such date, the Bank owned the
building and land for 19 of its offices and leased the building and/or the land
for its remaining 31 properties, including 18 located in supermarkets. The Bank
also owns or leases certain other properties to meet various business needs. For
additional information, refer to Note 6 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
ITEM 3--LEGAL PROCEEDINGS
The information required herein is included in Note 11 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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<PAGE> 15
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") National Market System under
the symbol FTFC. As of February 12, 1998, the Corporation had 9,228,930 common
shares outstanding (net of 741,885 shares of treasury stock), 1,510 stockholders
of record, 2,780 estimated beneficial stockholders, and 4,290 estimated total
stockholders.
Dividend and stock price information required by this item, as well as
information relating to the Corporation's stock repurchase plans, is included
under the following sections of this report:
(1) "Liquidity and Capital Resources", included herein under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
(2) "Note 12--Stockholder's Equity", included herein under Item 8,
"Financial Statements and Supplementary Data--Audited Consolidated Financial
Statements".
(3) "Quarterly Financial Information", included herein under Item 8,
"Financial Statements and Supplementary Data--Supplementary Data".
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<PAGE> 16
ITEM 6--SELECTED FINANCIAL DATA
The information in the following table contains selected consolidated
financial and other data. This information has been derived in part from the
Audited Consolidated Financial Statements included herein under Item 8,
"Financial Statements and Supplementary Data". Accordingly, the table should be
read in conjunction with such consolidated statements.
<TABLE>
<CAPTION>
Dollars in thousands, except for per share amounts
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA AS OF DECEMBER 31 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 1,544,294 $ 1,515,413 $ 1,402,479 $ 1,172,886 $941,395
Investment securities:
Available for sale, at fair value 21,377 74,029 80,325 89,476 -
Held for investment, at cost - - - - 126,541
Mortgage-backed and related securities:
Available for sale, at fair value 47,895 61,875 84,173 - -
Held for investment, at cost 124,336 147,835 171,493 269,443 118,021
Loans held for investment, net 1,193,893 1,106,040 932,084 723,826 572,066
Allowance for loan losses 7,638 7,888 8,186 8,074 7,828
Intangible assets 5,921 5,221 5,643 97 78
Deposit liabilities 1,146,534 1,024,093 969,423 778,641 745,509
FHLB advances and other borrowings 275,779 383,593 322,296 308,476 116,504
Stockholders' equity 109,361 95,414 98,939 77,181 71,517
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SELECTED OPERATING DATA FOR YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 114,976 $ 103,977 $ 88,858 $ 73,208 $ 65,852
Interest expense 70,265 63,684 54,954 40,938 35,218
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 44,711 40,293 33,904 32,270 30,634
Provision for loan losses 539 - - - 160
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 44,172 40,293 33,904 32,270 30,474
- --------------------------------------------------------------------------------------------------------------------------------
Gains from sales of loans 6,374 4,331 3,545 2,945 9,198
Gains (losses) from sales of mortgage-backed
securities and other investments (725) (311) (29) 100 728
Other non-interest income 18,645 15,811 13,597 11,262 6,685
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 24,294 19,831 17,113 14,307 16,611
- --------------------------------------------------------------------------------------------------------------------------------
FDIC special assessment - 5,941 - - -
Other non-interest expense 40,197 38,304 34,372 30,889 27,172
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 40,197 44,245 34,372 30,889 27,172
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraodinary charge 28,269 15,880 16,646 15,687 19,913
Income tax expense 10,879 5,806 6,001 5,707 7,868
- --------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary charge 17,390 10,074 10,645 9,980 12,045
Extraordinary charge (1) - - - (203) -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 17,390 $ 10,074 $ 10,645 $ 9,777 $ 12,045
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SELECTED OTHER DATA AT OR FOR THE YEAR ENDED DECEMBER 31 (2) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.13% 0.97% 0.87% 0.93% 1.34%
Return on average equity 17.20 14.21 12.86 13.32 18.11
Average equity to average assets 6.57 6.80 6.75 6.96 7.39
Average interest rate spread 2.63 2.61 2.54 2.82 3.18
Average net interest margin 3.07 3.02 2.92 3.15 3.58
Ratio of allowance for loan losses to total loans
held for investment at end of period 0.64 0.71 0.88 1.12 1.37
Ratio of non-interest expense to average assets (3) 2.62 2.71 2.83 2.89 3.14
Earnings per share: (4)
Diluted earnings per share $ 1.77 $ 1.36 $ 1.14 $ 1.09 $ 1.33
Basic earnings per share 1.90 1.45 1.21 1.16 1.41
Dividends paid per share (4) 0.467 0.413 0.367 0.321 0.215
Stock price at end of period (4) 33.88 15.67 12.00 10.83 9.85
Book value per share at end of period (4) 11.90 10.38 10.05 8.93 8.39
Banking facilities at end of period 50 48 44 35 26
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The extraordinary charge in 1994 consisted of a prepayment penalty, net of
income tax benefit, on certain FHLB advances.
(2) Selected other data excludes the after-tax impact of the FDIC special
assessment as well as the impact of extraordinary charges.
(3) Excludes the FDIC special assessment and provision for real estate losses
and recoveries.
(4) Per share data and historical stock prices have been adjusted for a 10%
stock dividend on June 2, 1994, and a 3-for-2 stock split 0on June 12, 1997.
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<PAGE> 17
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section should be read in conjunction with Item 8, "Financial
Statements and Supplementary Data", as well as Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk", and Part I, Item 1, "Business".
RESULTS OF OPERATIONS
OVERVIEW The Corporation's earnings for the years ended December 31,
1997, 1996, and 1995, were $ 17.4 million, $13.6 million, and $10.6 million,
respectively, excluding $3.5 million related to the after-tax impact of an FDIC
special assessment in 1996. These amounts, as adjusted, represented returns on
average assets of 1.13%, 0.97%, and 0.87%, respectively, and returns on average
equity of 17.20%, 14.21%, and 12.86%, respectively. Diluted earnings per share
during these periods were $1.77, $1.36, and $1.14, respectively, excluding the
after-tax effect of the FDIC special assessment in 1996 ($0.36 per share).
The improvement in earnings from 1996 to 1997 was primarily
attributable to an increase in net interest income. Also contributing, however,
were increases in retail banking fees and gain on sales of loans, as well as a
decrease in federal deposit insurance premiums. These favorable developments
were partially offset by increases in compensation and employee benefits,
advertising and marketing, and other non-interest expenses--the latter due
principally to increases in ATM and debit card transaction costs. Finally, loss
on sales of investment securities increased in 1997 as compared to the previous
year.
The improvement in earnings from 1995 to 1996 was also due primarily to
an increase in net interest income. Also contributing, however, were increases
in retail banking fees, commissions on annuity and insurance sales, and gain on
sales of loans, as well as a decrease in advertising and marketing expenses.
These favorable developments were partially offset by increases in compensation
and employee benefits, occupancy and equipment expenses, and other non-interest
expenses, most notably amortization of goodwill from the 1995 acquisition of
Rock Financial Corp. ("RFC"). In addition, loss on sales of investment
securities increased and loan servicing fees decreased in 1996 as compared to
the previous year.
The following paragraphs discuss the aforementioned changes in greater
detail along with other changes in the components of earnings during the years
ended December 31, 1997, 1996, and 1995.
NET INTEREST INCOME Net interest income increased by $4.4 million or
11.0% and $6.4 million or 18.8% during the years ended December 31, 1997 and
1996, respectively. The improvement in both of these periods was primarily
volume related as the Corporation's average interest-earning assets grew by
$123.7 million or 9.3% and $173.7 million or 15.0% in 1997 and 1996,
respectively. The primary sources of growth in 1997 were increases in mortgage
and consumer loans outstanding, the origination of which were funded by
increases in deposit liabilities, and to a lesser extent, FHLB advances. The
principal source of growth in interest-earning assets in 1996 was the
Corporation's purchase of RFC in December of 1995. Also contributing were
increases in mortgage and consumer loans, the origination of which were funded
by growth in deposit liabilities and FHLB advances.
Also contributing to the increase in net interest income in 1997 and
1996 were modest increases in the Corporation's average interest rate spread.
Management attributes these increases to a higher percentage of interest-earning
assets invested in mortgage and consumer loans, which generally earn higher
yields than the Corporation's other interest-earning assets, such as CMOs, MBSs,
and investment securities. These developments were partially offset by an
increase in both years in the average cost of the Corporation's interest-bearing
liabilities, due to more competitive rate offerings on deposit liabilities and
the repayment of low cost term advances at the FHLB. Also contributing was a 25
basis point increase in the fed funds rate in March 1997. The Corporation's
overnight borrowings from the FHLB are sensitive to changes in the fed funds
rate.
16
<PAGE> 18
The following table sets 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 years ended December 31, 1997,
1996, and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 853,605 $ 69,624 8.16% $ 734,959 $ 59,862 8.14% $ 584,083 $ 47,778 8.18%
Consumer loans 331,226 28,251 8.53 269,951 23,816 8.82 211,797 18,581 8.77
Commercial business loans 817 67 8.14 1,630 108 6.65 1,709 126 7.37
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 1,185,648 97,942 8.26 1,006,540 83,786 8.32 797,589 66,485 8.34
Mortgage-backed and
related securities 193,135 12,126 6.28 234,430 14,495 6.18 258,590 15,803 6.11
Investment securities 49,747 3,079 6.19 72,149 4,347 6.03 85,114 5,319 6.25
Interest-bearing deposits
with banks 10,594 576 5.44 4,756 256 5.39 3,266 206 6.31
Other earning assets 18,540 1,254 6.77 16,126 1,093 6.77 15,775 1,045 6.62
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,457,664 114,976 7.89 1,334,001 103,977 7.79 1,160,334 88,858 7.66
- --------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets:
Office properties and
equipment 25,201 26,670 24,909
Real estate 735 199 63
Other assets 55,838 50,909 40,963
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,539,438 $1,411,779 $1,226,269
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Regular savings accounts $ 88,797 $ 1,800 2.03% $ 89,202 $ 1,775 1.99% $ 82,553 $ 1,753 2.12%
Checking accounts 52,579 524 1.00 52,297 521 1.00 45,928 655 1.43
Money market accounts 142,438 6,322 4.44 118,916 5,103 4.29 101,736 3,987 3.92
Certificates of deposit 710,591 42,504 5.98 654,299 39,091 5.97 557,016 32,592 5.85
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 994,405 51,150 5.14 914,714 46,490 5.08 787,233 38,987 4.95
FHLB advances 325,481 18,569 5.71 297,892 16,642 5.59 277,816 15,885 5.72
Other borrowings 15,650 546 3.49 15,274 552 3.61 7,478 82 1.10
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
Liabilities 1,335,536 70,265 5.26 1,227,880 63,684 5.19 1,072,527 54,954 5.12
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 92,439 78,890 63,398
Other liabilities 10,343 8,943 7,587
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,438,318 1,315,713 1,143,512
Stockholders' equity 101,120 96,066 82,757
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,539,438 $1,411,779 $1,226,269
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 44,711 $ 40,293 $ 33,904
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.63% 2.61% 2.54%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income as a
percent of average earning
assets 3.07% 3.02% 2.92%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average interest-
bearing liabilities 109.14% 108.64% 108.19%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
The following table sets forth the effects of changing rates and
volumes on net interest income of the Corporation for the periods indicated.
Information is provided with respect to (i) effects on net interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) effects on net interest income attributable to changes in rate (changes in
rate multiplied by prior volume); (iii) changes attributable to combined effects
of rate and volume (changes in rate multiplied by changes in volume); and (iv)
the net change.
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
Dollars in thousands INCREASE (DECREASE) INCREASE (DECREASE)
- --------------------------------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 86 $ 9,663 $ 14 $ 9,763 ($206) $12,342 ($54) $12,082
Consumer loans (791) 5,406 (180) 4,435 105 5,102 28 5,235
Commercial business loans 24 (54) (12) (42) (12) (6) 0 (18)
- --------------------------------------------------------------------------------------------------------------------
Total loans (681) 15,015 (179) 14,156 (113) 17,438 (27) 17,300
Mortgage-backed and related
securities 224 (2,553) (40) (2,369) 186 (1,476) (17) (1,306)
Investment securities 119 (1,350) (37) (1,268) (190) (810) 29 (971)
Interest-bearing deposits with
banks 3 314 3 320 (30) 94 (14) 50
Other earning assets (1) 163 (1) 161 24 23 1 47
- --------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (336) 11,589 (253) 10,999 (123) 15,269 (27) 15,119
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits 254 4,367 39 4,660 759 6,597 147 7,503
FHLB advances 355 1,541 31 1,927 (365) 1,148 (26) 756
Other borrowings (19) 14 (1) (6) 188 85 197 470
- --------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 590 5,922 69 6,581 582 7,830 318 8,730
- --------------------------------------------------------------------------------------------------------------------
Net change in net interest
income ($926) $5,667 ($322) $ 4,418 ($705) $ 7,439 ($345) $ 6,389
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES Due to growth in the Corporation's loan
portfolio, management of the Corporation elected to record provision for loan
losses during the year ended December 31, 1997. In general, the provision
recorded during 1997 approximated the Corporation's actual charge-off activity,
except for a $272,000 charge-off related to education loans, as described in a
subsequent paragraph. Management of the Corporation expects the provision for
1998 to also approximate actual charge-off activity for that year, although
there can be no assurances.
The following table summarizes the activity in the Corporation's
allowance for loan losses during each of years indicated.
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,888 $8,186 $8,074 $7,828 $7,227
Provision for losses 539 - - - 160
- --------------------------------------------------------------------------------------------------------------------
Charge-offs:
Mortgage loans 13 - - 27 58
Consumer loans 802 337 334 146 205
Commercial business loans - - 135 108 168
- --------------------------------------------------------------------------------------------------------------------
Total loans charged-off 815 337 469 281 431
Recoveries 26 39 44 49 72
- --------------------------------------------------------------------------------------------------------------------
Charge-offs net of recoveries 789 298 425 232 359
Transfers - - - 478 800
Purchased allowances - - 537 - -
- --------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,638 $7,888 $8,186 $8,074 $7,828
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of average loans outstanding 0.07% 0.03% 0.05% 0.04% 0.06%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Ratio of allowance to total loans held for investment at end of
period 0.64% 0.71% 0.88% 1.12% 1.37%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Recent increases in consumer loan charge-offs have generally been
caused by growth in that loan category, although charge-offs in 1997 and 1995
were also impacted by accrued interest on education loans that was deemed
uncollectible from the United States Government; such charge-offs were $272,000
and $125,000, respectively. Similar charge-offs on education loans are not
anticipated in the future; however, there can be no assurances.
18
<PAGE> 20
The purchased allowances shown for 1995 were from the RFC acquisition.
The transfers shown for 1994 and 1993 resulted from the transfer of excess
general loss allowances from real estate to mortgage loans. Management
considered these transfers to be appropriate given the significant decline in
the Corporation's problem real estate during such periods
The following table shows the Corporation's total allowance for loan
losses and the allocation to the various loan categories as of December 31 for
each of the years indicated.
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans $ 148 0.03% $ 183 0.03% $ 177 0.04% $ 179 0.05% $ 171 0.07%
Multi-family and commercial
real estate loans 7,200 2.90 7,326 3.30 7,710 3.93 7,409 4.38 7,452 4.52
Consumer loans 253 0.07 302 0.10 222 0.09 275 0.15 195 0.15
Commercial business loans 37 6.65 77 6.33 77 3.49 211 11.77 10 0.38
- --------------------------------------------------------------------------------------------------------------------
Total allowance for loan
losses $7,638 0.64% $7,888 0.71% $8,186 0.88% $ 8,074 1.12% $ 7,828 1.37%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The amounts in the preceding table are expressed as a percentage of
gross loans outstanding for each loan category, excluding construction loans.
The total allowance is expressed as a percent of net loans held for investment.
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" and Note 1 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
NON-INTEREST INCOME Non-interest income for the years ended December
31, 1997, 1996, and 1995, was $24.3 million, $19.8 million, and $17.1 million,
respectively. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their changes from 1996 to 1997
and 1995 to 1996.
Retail banking fees and service charges increased by $2.3 million or
22.9% in 1997 and by $1.7 million or 20.3% in 1996. The increase in both years
was due in part to 18.5% growth since December 31, 1995, in the number of
checking accounts serviced by the Corporation. Approximately 25% of this growth
was the result of retail banking offices opened in 1996 and 1997 (refer to
"Results of Operations--Non-Interest Expense" for additional discussion). Also
contributing to the growth in retail banking fees in the most recent year was an
$850,000 increase in fee income from customers' use of "debit cards" and a
$332,000 or 18.1% increase in fees from customers' use of ATMs. The Corporation
introduced debit cards to its checking account customers during the last quarter
of 1996. In addition to giving customers access to virtually any ATM network,
debit cards give customers the ability to make purchases directly from any
merchant that accepts VISA credit cards. The Corporation increased the number of
ATMs it operates in 1997 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 50% in 1998, although there can be no assurances.
Loan servicing fees increased by $146,000 in 1997 and decreased by
$221,000 in 1996. These changes were impacted by declines in carrying value
related to the Corporation's mortgage servicing rights. A declining interest
rate environment during most of 1996 and 1997 resulted in an increase in
mortgage refinance activity which translated into increased loan prepayments
during such periods. As a result of such prepayments, the Corporation recorded
declines in carrying value on its mortgage servicing rights of $650,000 and
$624,000 in 1997 and 1996, respectively, compared to only $250,000 in 1995.
Interest rates have remained at low levels in early 1998. If this interest rate
environment continues, or if rates decline further, the Corporation may be
required to record additional declines in carrying value on its mortgage
servicing rights as a result of likely increases in mortgage refinance and
prepayment activity. For additional discussion, refer to Notes 1 and 5 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
Excluding the effects of the aforementioned declines in carrying value
of mortgage servicing rights, loan servicing fees would have increased by
$172,000 or 6.1% and $153,000 or 5.7% in 1997 and 1996, respectively.
19
<PAGE> 21
These increases were attributable to a $216.8 million or 18.3% increase and a
$51.2 million or 4.5% increase in mortgage loans serviced for others during such
periods, respectively. The significant growth in 1997 was due in part to the
Corporation's purchase of mortgage servicing rights related to $106.9 million of
mortgage loans. Such loans consisted principally of fixed-rate, single-family
mortgage loans on properties located in Iowa. Also contributing to the growth in
loans serviced for others in 1997 was an interest rate environment that
encouraged borrowers to convert single-family adjustable-rate mortgage loans,
which the Corporation generally retains in portfolio, to fixed-rate mortgage
loans. Upon conversion, such loans are generally sold in the secondary market
and the Corporation retains the servicing.
Commissions on annuity and insurance sales decreased by $253,000 or
12.2% in 1997 and increased by $1.1 million or approximately 105% in 1996. The
Corporation's current sources of commission revenues are primarily from sales of
tax-deferred annuity contracts, credit life insurance policies, and mortgage
loan insurance policies. The increase in 1996 was principally due to increased
commissions on sales of annuity contracts due to a more aggressive promotion of
such products in that period. The decline in 1997 was principally due to
decreased commissions on sales of annuities--primarily as a result of a
generally lower interest rate environment, which tends to make tax-deferred
annuities less attractive to customers.
Gains on sales of mortgage loans for the years ended December 31, 1997,
1996, and 1995, were $6.4 million, $4.3 million, and $3.5 million, respectively.
The increases in 1997 and 1996 were primarily attributable to a $69.8 million or
approximately 30% increase and an $84.8 million or approximately 50% increase,
respectively, in the Corporation's mortgage loan sales. These increases were due
in part to declining interest rates in both periods 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 were generally sold in the
secondary market. Interest rates have remained at low levels in early 1998. If
this situation continues, or if interest rates continue to decline, the
Corporation will most likely experience increased refinance activity, as well as
increased conversions by borrowers of their adjustable-rate loans into
fixed-rate loans. Such activity is expected to result in increased gain on sales
of mortgage loans in the immediate future, although there can be no assurances.
To a certain extent, such gains are expected to be offset by declines in the
carrying value of the Corporation's mortgage servicing rights--similar to that
experienced in 1997 and as described under "Lending Activities--Servicing
Mortgage Loans" in Part I, Item 1, "Business".
Also contributing to the increase in gain on sales of mortgage loans in
1997 was the Corporation's sale of $17.4 million in single-family
adjustable-rate mortgage loans; these loans were sold out of the Corporation's
"held for investment" portfolio and resulted in a $583,000 gain. In the future,
the Corporation may elect to sell modest amounts of its single-family
adjustable-rate loans in an effort to manage its liquidity position and/or its
borrowing capacity at the FHLB.
Losses on sales of other investments for the years ended December 31,
1997, 1996, and 1995, were $(725,000), $(311,000), and $(29,000), respectively.
The losses in 1997 and 1996 were caused by the Corporation's sale of mutual
funds that invested primarily in adjustable-rate mortgage loans and short-term
government securities. During 1997, the Corporation sold its remaining
investment in such funds and the proceeds from the sale were principally used
to reduce outstanding FHLB advances. Refer to "Financial Condition--Investment
Securities" for additional discussion.
The recognition of gains or losses from sales of loans, mortgage-backed
and related securities, and other investments is dependent on market and
economic conditions. Accordingly, there can be no assurance that the gains
reported in prior periods can be achieved in the future or that there will not
be significant inter-period variations in the results from such activities.
Furthermore, the Corporation is subject to accounting principles established by
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which limits
the Corporation's ability to sell investments classified as "held for
investment". For additional discussion refer to Note 1 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
Other income was $1.9 million, $1.3 million, and $1.6 million for the
years ended December 31, 1997, 1996, and 1995, respectively. The increase in
1997 was due in part to a change in the manner in which the Corporation accounts
for certain fees and costs to originate consumer loans. Prior to 1997, such fees
and costs were netted and were recorded in other income. However, due to the
increased materiality of these fees and costs, the
20
<PAGE> 22
Corporation elected to conform its accounting for such with that which is done
for mortgage loans. That is, loan origination fees and certain direct costs of
origination were deferred and amortized over the life of the related loans as an
adjustment of yield. Also contributing to the increase in other income in 1997
was increased fee income from customers that converted their adjustable-rate
mortgage loans to fixed rate loans, as previously described.
The decrease in other income in 1996 was primarily due to a $168,000
decline 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").
NON-INTEREST EXPENSE Non-interest expense for the years ended December
31, 1997, 1996, and 1995, was $40.2 million, $38.3 million, and $34.4 million,
respectively, excluding a $5.9 million special assessment from the FDIC in 1996.
Non-interest expense as a percent of average assets during these periods was
2.62%, 2.71%, and 2.83%, respectively (excluding the special assessment). The
following paragraphs discuss the principal components of non-interest expense
and the primary reasons for their changes from 1996 to 1997 and 1995 to 1996.
Compensation and employee benefits increased by $1.9 million or 9.6% in
1997 and $1.6 million or 8.8% in 1996. In general, the increase in both periods
was due to normal annual merit increases and to general growth in the number of
banking facilities operated by the Corporation. Since December 31, 1995, the
Corporation has opened eight retail banking facilities (four of which were
opened in the most recent year) and one loan production facility. The
Corporation also closed two retail banking facilities in 1996 and one in 1997.
In 1998 the Corporation intends to open or acquire up to ten retail banking
facilities and one loan production facility, although there can be no
assurances.
Also contributing to the increase in compensation and employee benefits
in both periods, was an increase in commissions paid in the Corporation's
Residential Lending Division, due primarily to increased originations of
mortgage loans, as previously described.
As of December 31, 1997, the Corporation had 690 full-time equivalent
employees. This compares to 641 and 623 as of December 31, 1996 and 1995,
respectively.
Occupancy and equipment expense increased by $263,000 or 4.1% in 1997
and by $677,000 or 11.8% in 1996. The increase in both years was due primarily
to general growth in the number of banking facilities operated by the
Corporation, as previously described. In addition, in late 1995 the Corporation
completed the construction of an office building located in La Crosse,
Wisconsin, which houses a large portion of its retail support operations.
Federal insurance premiums decreased by $1.5 million or approximately
70% in 1997 and increased by $262,000 or 14.1% in 1996. The significant decrease
in 1997 was due to the recapitalization of the SAIF in the third quarter of
1996, which resulted in a substantial reduction in the Bank's deposit insurance
premiums. During the third quarter of 1996, the Bank incurred a $5.9 million
charge from the FDIC which represented its share of the recapitalization of the
SAIF (substantially all SAIF-insured institutions participated in the
recapitalization). Although the charge adversely impacted the Bank's 1996
results of operations, it provided what management expects to be a long-term
benefit to the Bank in the form of lower federal deposit insurance premiums, as
demonstrated in 1997. The increase in insurance premiums in 1996 was principally
due to an increase in the Bank's deposit liabilities during that period.
Advertising and marketing expense increased by $463,000 or 27.1% in
1997 and decreased by $254,000 or 13.0% in 1996. The increase in 1997 was
principally due to a larger branch network and increased expenditures related to
checking and consumer loan promotions. The decrease in 1996 was due in part to
fewer openings of new banking facilities than the previous year. Also
contributing, however, was the increased use of deposit premiums that qualify as
interest payments. As such, the expenditures were reported as a component of
interest expense over the term of the related deposit rather than advertising
and marketing expense.
Other non-interest expenses increased by $740,000 or 9.1% in 1997 and
$1.6 million or 25.0% in 1996. These increases were caused by a variety of
factors, the most significant of which were increased costs related to ATMs and
debit cards, increased office supply costs, increased communication and postage
costs, increased losses on customers' deposit accounts, and increased servicing
costs on education loans--the latter due principally to
21
<PAGE> 23
increased originations of such loans. In addition, compared to 1995, other
non-interest expense in 1996 included $344,000 in amortization of goodwill as a
result of the December 1995 acquisition of RFC and a $155,000 increase in
merger-related expenses.
INCOME TAX EXPENSE Income tax expense for the years ended December 31,
1997, 1996, and 1995, was $10.9 million, $5.8 million, and $6.0 million,
respectively, or 38.5%, 36.6%, and 36.1%, of pretax income, 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 and which has no corporate state income tax. Refer to Part I, Item 1,
"Business--Subsidiaries" for additional discussion.
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $28.9 million or
1.9% during the year ended December 31, 1997. This increase was primarily the
result of an $87.9 million or 7.9% increase in loans held for investment due to
continued growth in the Corporation's consumer installment, education, and
commercial real estate loan portfolios. Also contributing was a $25.2 million or
approximately 125% increase in residential mortgage loans held for sale. The
growth in these loan categories was principally funded by a $122.4 million or
12.0% increase in deposit liabilities. The majority of this growth occurred in
certificates of deposits due in part to a popular CD program that was offered to
customers in the third quarter of the year. Management also attributes the
growth in deposit liabilities to the combined effects of the Corporation's
expansion efforts in recent years, its convenient banking locations, and the
strong local economies in its market areas. Management expects deposits to
continue to grow modestly in the immediate future, although there can be no
assurances.
Also during 1997, proceeds from the sale and/or maturity of $90.1
million in mortgage-related and other investment securities, as well as a
portion of the growth in deposits, were used to reduce FHLB advances and other
borrowings. As a result, FHLB advances and other borrowings declined by $107.8
million or approximately 30% during the year ended December 31, 1997.
LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
increased by $87.9 million or 7.9% during the year ended December 31, 1997. This
increase was principally due to strong demand for consumer installment,
education, and commercial real estate loans during the year. Demand for
single-family residential mortgage loans was also substantial during the period,
but the Corporation's policy of selling most of its fixed-rate residential loan
production, as well as most adjustable-rate loans that convert to fixed-rate,
contributed to a decline in single-family residential loans held for investment.
Also contributing was the Corporation's sale of $17.4 million in adjustable-rate
loans during the year, as previously described. Interest rates have remained at
low levels in early 1998. If this interest rate environment continues, or if
rates decline further, the Corporation may experience additional declines in its
single-family residential loans held for investment due to increased conversions
of adjustable-rate loans into fixed-rate loans, which will likely be sold in the
secondary market.
22
<PAGE> 24
The following table sets forth the composition of the Corporation's
portfolio of loans held for investment as of December 31 for each of the years
indicated.
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $538,393 45% $544,066 49% $464,043 49% $343,969 47% $256,685 44%
Multi-family residential 140,589 12 127,334 11 119,955 13 102,356 14 96,857 17
Commercial real estate
loans 107,315 9 94,401 8 76,242 8 66,848 9 67,882 12
Construction (1) 51,319 4 46,641 4 31,364 3 29,847 4 28,258 5
- --------------------------------------------------------------------------------------------------------------------
Total real estate loans 837,616 70 812,442 73 691,604 73 543,020 74 449,682 77
- --------------------------------------------------------------------------------------------------------------------
Consumer loans:
Second mortgage and home
equity loans 163,231 14 119,645 11 83,993 9 53,931 7 33,627 6
Education loans 159,893 13 134,094 12 108,003 11 84,604 12 60,992 10
Automobile loans 31,182 3 36,831 3 39,653 4 39,822 5 27,060 5
Other consumer loans (2) 9,149 1 10,724 1 16,238 2 10,613 1 8,185 1
- --------------------------------------------------------------------------------------------------------------------
Total consumer loans 363,455 30 301,294 27 247,887 26 188,970 26 129,864 22
- --------------------------------------------------------------------------------------------------------------------
Other loans:
Small Business
Administration loans 377 - 1,006 - 1,237 - 1,381 - 1,702 -
Commercial business loans 179 - 211 - 968 - 411 - 898 -
- --------------------------------------------------------------------------------------------------------------------
Total other loans 556 - 1,217 - 2,205 - 1,792 - 2,600 -
- --------------------------------------------------------------------------------------------------------------------
Subtotal 1,201,628 100% 1,114,953 100% 941,696 100% 733,782 100% 582,146 100%
Less:
Unearned discounts and
net deferred loan fees
(costs) 97 1,025 1,426 1,882 2,252
Allowance for loan losses 7,638 7,888 8,186 8,074 7,828
- --------------------------------------------------------------------------------------------------------------------
Total loans held for
investment $1,193,893 $1,106,040 $932,084 $723,826 $572,066
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1997, construction loans consisted of $32.5 million in
single-family residences, $7.7 million in multi-family residences, and
$11.1 million in commercial real estate.
(2) At December 31, 1997, other consumer loans included $0.5 million of mobile
home loans, $1.5 million of recreational and household good loans,
$5.9 million of unsecured loans, and $1.2 million of deposit account-secured
loans.
The weighted average contractual interest rate for all loans was 8.20%,
8.16%, 8.24%, 7.83%, and 7.78% at December 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
LOANS HELD FOR SALE The Corporation's loans held for sale increased by
$25.2 million or approximately 125% during the year ended December 31, 1997.
This increase was due to a declining interest rate environment during most of
1997 that increased consumer demand for fixed-rate mortgage loans and resulted
in increased conversions of adjustable-rate loans into fixed-rate loans, as
previously described. Both of these categories of loans are classified as "held
for sale" until the date of sale, which typically occurs within 30 to 60 days of
origination and/or conversion.
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios decreased by
$37.5 million or 17.9% during the year ended December 31, 1997. This decrease
was principally due to the normal periodic amortization of the mortgage loans
that support these types of securities. The proceeds from such amortization were
generally used to reduce borrowings at the FHLB, as previously described. There
were no purchases of mortgage-backed and related securities during 1997.
The following table sets forth the composition of the Corporation's
mortgage-backed and related securities portfolios as of December 31 for each of
the years indicated.
<TABLE>
<CAPTION>
Dollars in thousands AVAILABLE FOR SALE
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Collateralized mortgage obligations $48,953 $47,895 $64,890 $61,875 $85,763 $84,173
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
Dollars in thousands HELD FOR INVESTMENT
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Collateralized mortgage obligations $115,847 $115,057 $136,184 $133,584 $156,233 $154,006
Mortgage-backed securities 8,489 8,557 11,651 11,633 15,260 15,360
- --------------------------------------------------------------------------------------------------------------------
Total $124,336 $123,614 $147,835 $145,217 $171,493 $169,366
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average yield on all mortgage-backed and related
securities was 6.29%, 6.30%, and 6.16% at December 31, 1997, 1996, and 1995,
respectively.
INVESTMENT SECURITIES The Corporation's investment securities available
for sale decreased by $52.7 million or approximately 70% during the year ended
December 31, 1997. This decrease was due primarily to the maturity of a number
of investment securities during the year, as well the sale of mutual funds, as
previously described. The proceeds from these transactions were generally used
to reduce borrowings at the FHLB, as previously described.
Historically, the primary purpose of the Corporation's investment
securities portfolio has been to meet liquidity requirements imposed on the Bank
by the OTS (refer to Part I, Item 1, "Business--Regulation of the Bank", for
additional discussion). During the fourth quarter of 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 was substantially reduced. In
anticipation of these changes, the Bank did not purchase any investment
securities during 1997. Furthermore, the Bank anticipates that it will not need
to maintain a portfolio of investment securities in the future that is as large
as it has been in the past, although there can be no assurances.
The following table sets forth the composition of the Corporation's
investments available for sale as of December 31 for each of the years indicated
(at December 31, 1997, the amount invested in any single issuer did not exceed
10% if the Corporation's stockholders' equity).
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate obligations $21,045 $21,083 $41,083 $41,078 $32,168 $32,294
Asset-backed securities 294 294 1,076 1,076 2,340 2,338
U.S. Treasury securities - - 262 262 3,023 3,048
Adjustable-rate mortgage and short-term
Government mutual funds - - 32,436 31,613 43,767 42,645
- --------------------------------------------------------------------------------------------------------------------
Total $21,339 $21,377 $74,857 $74,029 $81,298 $80,325
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average yield on all investment securities was 6.34%,
6.24%, and 5.90% at December 31, 1997, 1996, and 1995, respectively.
DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$122.4 million or 12.0% during the year ended December 31, 1997. The majority of
this growth occurred in certificates of deposits due in part to a popular CD
program that was offered to customers in the third quarter of the year.
Management also attributes the growth in deposit liabilities to the combined
effects of the Corporation's expansion efforts in recent years, its convenient
banking locations, and 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.
24
<PAGE> 26
The following table sets forth the composition of the Corporation's
deposit liabilities as of December 31 for each of the years indicated.
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regular savings accounts $87,605 1.98% $85,675 1.98% $88,179 2.07%
Interest-bearing checking accounts 54,994 0.99 53,907 1.00 55,967 0.97
Non-interest bearing checking accounts 93,323 - 75,341 - 69,861 -
Money market accounts 143,116 4.36 134,977 4.35 106,802 4.08
Variable-rate IRA accounts 2,956 4.41 3,345 4.43 3,626 4.67
Certificates of deposit 764,540 6.04 670,848 6.01 644,988 6.08
- --------------------------------------------------------------------------------------------------------------------
Total $1,146,534 4.79% $1,024,093 4.74% $969,423 4.77%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, certificates of deposit in denominations of
$100,000 or more amounted to $63.6 million and mature as follows: $9.2 million
within three months, $5.6 million over three through six months, $16.0 million
over six through 12 months, $30.6 million over 12 through 24 months, and $2.2
million over 24 months. At December 31, 1997, the Bank had no brokered deposits
outstanding.
FHLB ADVANCES AND OTHER BORROWINGS The Corporation's FHLB advances and
other borrowings decreased by $107.8 million or approximately 30% during the
year ended December 31, 1997. This decrease was funded by proceeds from the
maturity and/or sale of mortgage-related and other investment securities, as
well as growth in deposit liabilities, as previously described.
The following table presents certain information regarding the
Corporation's short-term FHLB advances and other borrowings (original maturity
of less than one year) at or for the years ended December 31, 1997, 1996, and
1995.
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
FHLB advances:
<S> <C> <C> <C>
Average balance outstanding (1) $298,797 $271,537 $207,895
Maximum amount outstanding at any month-end during the period 351,566 347,109 258,300
Balance outstanding at end of period 229,605 347,109 258,300
Average interest rate during the period (2) 5.61% 5.52% 5.70%
Weighted-average interest rate at the end of period 5.47% 5.46% 5.73%
Other borrowings: (3)
Average balance outstanding (1) $3,846 $2,308 $308
Maximum amount outstanding at any month-end during the period 10,000 5,000 4,000
Balance outstanding at end of period 10,000 5,000 -
Average interest rate during the period (2) 5.95% 5.98% 7.79%
Weighted-average interest rate at the end of period 4.81% 5.64% -
Total short-term borrowings:
Average balance outstanding (1) $302,643 $273,845 $208,203
Maximum amount outstanding at any month-end during the period 356,566 352,109 262,300
Balance outstanding at end of period 239,605 352,109 258,300
Average interest rate during the period (2) 5.61% 5.52% 5.70%
Weighted-average interest rate at the end of period 5.44% 5.46% 5.73%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated using month-end balances.
(2) Calculated using month-end weighted average interest rates.
(3) Consists primarily of an overnight line of credit with another financial
institution.
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 $4.9 million or
0.32% of total assets at December 31, 1997, compared to $2.4 million or 0.16% at
December 31, 1996.
25
<PAGE> 27
The following table contains information regarding the Corporation's
non-performing assets during the five year period ended December 31, 1997.
<TABLE>
<CAPTION>
Dollars in thousands 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
<S> <C> <C> <C> <C> <C>
Single-family residential $ 738 $1,003 $ 547 $ 428 $ 361
Multi-family and commercial real estate 3,000 - 104 - 13
- -------------------------------------------------------------------------------------------------------------------
Total real estate loans 3,738 1,003 651 428 374
Consumer loans 672 973 605 313 218
Commercial business loans - - - 129 -
- -------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 4,410 1,976 1,256 870 592
Real estate owned and in judgement 492 460 193 265 2,929
- -------------------------------------------------------------------------------------------------------------------
Total non-performing assets $4,902 $2,436 $1,449 $1,135 $3,521
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Ratio of non-accrual loans to total net loans receivable 0.37% 0.18% 0.13% 0.12% 0.10%
===================================================================================================================
Ratio of total non-performing assets to total assets 0.32% 0.16% 0.10% 0.10% 0.37%
===================================================================================================================
Ratio of total allowance for loan and real estate losses
to total non-performing assets 159% 331% 577% 727% 246%
===================================================================================================================
</TABLE>
The $2.5 million or approximately 100% increase in non-performing
assets during the year ended December 31, 1997, was principally due to a $3.0
million loan on a 248-unit apartment complex located in Indianapolis, Indiana.
As of December 31, 1997, this loan was three payments past due and had been
placed on non-accrual. The Corporation took a deed-in-lieu of foreclosure on the
loan during the first quarter of 1998 and also entered into a contract for the
sale of the property to another party. The Corporation agreed to finance the
sale of the property at normal rate and terms, except that the loan will be
interest-only for a period of two years. The Corporation also committed an
additional $2.0 million to the loan for purposes of refurbishing the property.
The new borrower is also required to contribute $1.1 million towards
refurbishing, which will be collected at the time of closing. The Corporation
will incur a modest loss on the sale of the property, which is expected to close
before March 31, 1998, although there can be no assurances.
In addition to non-performing assets, at December 31, 1997, 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 $11.0 million in such assets at
December 31, 1996. The decline from 1996 was primarily due to the aforementioned
apartment complex in Indianapolis, Indiana, which was classified as substandard
at the end of 1996, but was performing at that time. The following paragraphs
describe certain classified assets in more detail.
At December 31, 1997, management of the Corporation is closely
monitoring a $1.4 million first mortgage loan and $190,000 second mortgage loan
on a 93-unit apartment complex located in La Crosse, Wisconsin. These loans are
classified as Substandard. Cash flow from the property is sufficient to fund
debt service, taxes, and operating expenses, but is insufficient for capital
improvements. However, the borrower has funded capital improvements
"out-of-pocket". As a result, the property remains in good condition with a high
occupancy rate. The last appraisal of the property indicated that the
Corporation would not incur a significant loss were it to foreclose on this
property.
Management of the Corporation is also closely monitoring a $1.4 million
loan on a 44,500 square-foot office/warehouse located near Atlanta, Georgia.
This loan is classified as Substandard. The loan is current, but the cash flow
from the property, which is 100% leased, is not sufficient to cover the debt
service. The borrower, an individual which management believes has significant
personal net worth, has been maintaining the debt service with funds from other
sources. Management expects the status of this loan to improve as the borrower
is in the process of executing a new contract with the lessee for a larger
rental amount. However, there can be no assurances.
Management of the Corporation is also closely monitoring a $1.3 million
loan on a 38,000 square-foot shopping center located in Richmond, Virginia. This
loan is classified as Substandard. The property is approximately 81% leased, but
the cash flow is not enough to cover debt service. Management believes the
guarantors have significant personal net worth to maintain the debt service with
funds from other sources. Management does not expect to incur a loss on this
loan at this time.
26
<PAGE> 28
As of December 31, 1997, management does not believe that the
Corporation has any significant concentration of real estate loans or other
loans in areas experiencing deteriorating economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits obtained
through its retail branch offices, borrowings from the FHLB and other sources,
amortization, maturity, and prepayment of outstanding loans and investments, and
sales of loans and other assets. During 1997, 1996, and 1995, the Corporation
used these sources of funds to primarily fund loan commitments, purchase
investment securities, and cover maturing liabilities and deposit withdrawals.
At December 31, 1997, the Corporation had approved real estate loan commitments
of $31.5 million outstanding, undisbursed commitments on construction loans of
$37.0 million, and mortgage loan sale commitments of $51.2 million outstanding.
In addition, the Corporation had $362.3 million in time deposits and $198.3
million in FHLB term advances that were scheduled to mature within one year.
Management believes that the Corporation has adequate resources to fund all of
these commitments, that all of these commitments will be funded by the required
date, and that the Corporation can adjust the rates it offers on certificates of
deposit to retain such deposits in changing interest rate environments. Under
current FHLB lending and collateralization guidelines, the Corporation has
approximately $225 million in unused borrowing capacity at the FHLB.
The Corporation's stockholder's equity ratio as of December 31, 1997,
was 7.08% 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 is above its target range as
of December 31, 1997, primarily as a result of the Corporation's sale in 1997 of
loans and investment securities, as described elsewhere in this report. Also
contributing was the aforementioned conversion of adjustable-rate mortgage loans
to fixed-rate loans in 1997, and their subsequent sale in the secondary market.
These transactions had the effect of reducing the Corporation's asset base
relative to the growth that occurred in stockholders' equity during 1997. In
light of the current interest rate environment and the effects such may have on
the Corporation's single-family residential loan portfolio, as described
elsewhere in this report, management expects the Corporation to operate with a
higher than normal equity ratio in the foreseeable future, although there can be
no assurances.
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 December 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. For additional
discussion, refer to Note 12 of the Corporation's Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data".
The Corporation paid cash dividends of $4.3 million, $3.9 million, and
$3.2 million during the years ended December 31, 1997, 1996, and 1995,
respectively. These amounts equated to dividend payout ratios of 24.6%, 38.6%,
and 30.0% of the 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 (for
additional discussion refer to Note 12 of the Corporation's Audited Consolidated
Financial Statements, included herein under Part II, Item 8, "Financial
Statements and Supplementary Data"). 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 January 29, 1998, the Corporation's Board of Directors approved a
regular quarterly dividend of $0.12 per share payable on March 12, 1998, to
shareholders of record on February 19, 1998.
During 1997, the Corporation repurchased 132,000 shares of common stock
at a cost of $2.9 million under its 1996 stock repurchase plan (the "1996
Plan"). Furthermore, in January 1997 the Corporation's Board of Directors
authorized the repurchase of an additional 459,526 shares over twelve months
(the "1997 Plan"). On January 29, 1998, both of these plans were extended for an
additional twelve months. As of December 31, 1997,
27
<PAGE> 29
23,550 shares remained to be purchased under the 1996 Plan and all of the shares
remained under the 1997 Plan. For additional discussion, refer to Note 12 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
During 1997, the Corporation reissued 120,165 shares of common stock
out of its inventory of treasury stock with a cost basis of $2.6 million. In
general, these shares were issued upon the exercise of stock options by
employees and directors of the Corporation.
OTHER MATTERS
SALES OF LOANS TO THE FHLB OF CHICAGO In December 1997 the Corporation
began participating in a pilot program involving the sale of up to $30.0 million
in fixed-rate residential loans to the FHLB of Chicago. Similar to FHLMC and
FNMA sales, the Corporation will retain the servicing on loans sold under the
program, which is known as the Mortgage Partnership Finance Program (or "MPF").
In general, loans sold under MPF will meet the conforming loan limits
established by FHLMC and FNMA.
Management expects that loans sold under MPF will result in gains or
losses substantially the same as those realized on loans sold to FHLMC and
FNMA--with one exception. For loans sold under MPF, the FHLB will establish a
first-loss credit reserve out of the interest payments it receives as investor
in the loans. The Corporation, however, will provide a second-loss credit
enhancement to the FHLB in exchange for a monthly fee. Management estimates this
fee to have a present value of between 30 and 50 basis points of the principal
balance at the time of the loan sale, depending on the term of the underlying
loans and the assumed discount rate, loan prepayment speed, and expected credit
loss rate. Management has elected to record the present value of this fee as
additional gain at the time of the sale, similar to its accounting treatment for
originated mortgage servicing rights, which will also be recorded on these loan
sales (refer to Note 1 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data").
Unlike its other mortgage servicing rights, the Corporation is exposed
to future credit loss on loans sold under the MPF program as a result of its
second-loss credit enhancement. It is management's estimate, as well as the
Corporation's historical experience, that this enhancement will not expose the
Corporation to significant risk of loss. However, there can be no assurances the
future loss allowances will not be required as a result of this off-balance
sheet credit risk.
The Corporation expects to fulfill the initial $30.0 million master
commitment by the end of 1998. Depending on the FHLB's review of the pilot
program, there may or may not be additional master commitments.
SECURITIZATION OF ADJUSTABLE-RATE MORTGAGE LOANS The Corporation is
currently exploring an opportunity to securitize a large portion of its
adjustable-rate residential loans into FHLMC MBSs. Conversion of such loans into
MBSs will improve the liquidity of the asset and will increase the Corporation's
borrowing capacity by making such loans acceptable as collateral for
reverse-repurchase agreements. MBSs also receive more favorable treatment under
the FHLB's current collateralization guidelines. If the Corporation is
successful in securitizing a portion of its adjustable-rate residential loans,
it will transfer the related assets from "loans held for investment" to
"mortgage-backed and related securities" on its statement of financial
condition. The Corporation has not yet determined whether or to what extent such
securities will be classified as "available for sale" or "held for investment",
although the Corporation has no intent at this time to sell any of the MBSs.
Management also anticipates that it will transfer the securities to the
Bank's wholly-owned investment subsidiary in Nevada. In addition to being more
efficient from an accounting and safekeeping stand point, this action will
result in a lower effective tax rate on earnings from the securities due to the
fact that Nevada does not currently impose a corporate income tax. Management
estimates that the after tax savings, net of the initial and on-going costs of
securitization, could range between 30 and 40 basis points per year on the
principal balance transferred to Nevada. The Corporation intends to take steps
to minimize the costs of securitization, the most significant of which is the
payment of a monthly "guarantee fee" to FHLMC, by retaining the credit risk
associated with the underlying loans. This should have the effect of reducing
the guarantee fee that is normally paid to FHLMC. This is not expected to have
any impact on the marketability of the securities, although there can be no
28
<PAGE> 30
assurances. Furthermore, this action does not change the credit risk profile of
the Corporation's assets, as it is currently exposed to credit risk on the
loans.
Management estimates that between $150 million to $300 million of its
current single-family loan portfolio may be eligible for securitization under
this plan. Furthermore, management expects to complete the first securitization
in the second quarter of 1998 and expects to complete periodic securitizations
thereafter. However, there can be no assurances that any of the Corporation's
adjustable-rate residential loans will be eligible for securitization or that
management will be able to meet the timeline described herein.
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 second 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 years ended December
31, 1997, 1996, and 1995, the Corporation earned commission revenue from sales
of credit insurance policies of $731,000, $648,000, and $434,000, respectively.
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
amount to $200,000 to $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") contains a provision that will change the rate received 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 is expected to substantially reduce the
Corporation's interest rate spread on education loans. Accordingly, the
Corporation would most likely eliminate or significantly reduce its originations
of this loan type, although its current portfolio of education loans is not
expected to be impacted by the Act. During the years ended December 31, 1997,
1996, and 1995, the Corporation originated $38.4 million, $36.2 million, and
$31.3 million in student loans, respectively.
The banking and thrift industries and other interested parties have
been working with federal legislators to eliminate this provision of the Act.
However, there can be no assurances that they will be successful or that
significant compromises will not have to be made that may affect the
Corporation's willingness to originate education loans in the future.
YEAR 2000 COMPLIANCE Potential software failures arising from
calculations that use the year 2000 represent a significant risk exposure to the
Corporation. If not corrected, software 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 and amount of which cannot be
estimated at this time. Accordingly, management has implemented an on-going
program designed to ensure that the Corporation's systems will not be adversely
impacted by the year 2000. Management presently believes that, with
modifications to existing software and conversions to new software, the year
2000 will not pose significant operational problems to the Corporation.
Furthermore, correction of the problem is not expected to result in material
cost to the Corporation. Although management believes it is doing everything
possible to assure year 2000 compliance, it is to some extent dependent upon the
cooperation of software vendors. Accordingly, management has required all of the
Corporation's software vendors
29
<PAGE> 31
to represent that their products are, or will be, year 2000 compliant prior to
December 31, 1998. Any vendors that cannot demonstrate year 2000 compliance will
be replaced.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk" or "market 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 CMOs and MBSs, as well as medium-term, fixed-rate, single-family
mortgage loans--although the Corporation has not invested significant amounts in
these asset types in recent years. 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. In addition, it should be noted that for purposes of its funding gap
analysis, the Corporation classifies its interest-bearing checking, savings, and
money market deposits in the shortest category, due to their potential to
reprice. However, it is the Corporation's experience that these deposits do not
reprice as quickly or to the same extent as other financial instruments,
especially in a rising rate environment.
30
<PAGE> 32
The following table summarizes the Corporation's funding gap as of
December 31, 1997.
<TABLE>
<CAPTION>
MORE THAN MORE THAN MORE THAN
6 MONTHS 6 MONTHS 1 YEAR TO 3 YEARS TO OVER
Dollars in thousands OR LESS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans:
Fixed $78,377 $35,566 $38,249 $12,710 $16,415 $181,317
Adjustable 98,440 138,066 459,631 4,101 $791 701,029
Consumer loans 220,043 33,878 82,685 19,427 6,745 362,778
Mortgage-backed and related securities 21,154 20,292 61,818 40,007 30,041 173,312
Investment securities and other
earning assets 22,567 5,865 - - 13,811 42,243
- ---------------------------------------------------------------------------------------------------------------------------
Total $440,581 $233,667 $642,383 $76,245 $67,803 $1,460,679
===========================================================================================================================
Interest-bearing liabilities:
Deposits liabilities:
Regular savings and checking accounts $142,412 - - - - $142,412
Money market deposit accounts 143,304 - - - - 143,304
Variable-rate IRA accounts 2,956 - - - - 2,956
Time deposits 147,658 $211,436 $399,465 $5,956 $25 764,540
FHLB advances and other borrowings 210,883 31,728 33,128 16 24 275,779
- ---------------------------------------------------------------------------------------------------------------------------
Total $647,213 $243,164 $432,593 $5,972 $49 $1,328,991
===========================================================================================================================
Excess (deficiency) of earning assets
over interest-bearing liabilities ($206,632) ($9,497) $209,790 $70,273 $67,754
===========================================================================================================================
Cumulative excess (deficiency) of
earning assets over interest-bearing
liabilities ($206,632) ($216,129) ($6,339) $63,934 $131,688
===========================================================================================================================
Cumulative excess (deficiency) of
earning assets over interest-bearing
liabilities as a percent of total assets -13.38% -14.00% -0.41% 4.14% 8.53%
===========================================================================================================================
Cumulative earning assets as a
percentage of interest-bearing liabilities 68.07% 75.73% 99.52% 104.81% 109.91%
===========================================================================================================================
</TABLE>
Note: If interest-bearing checking, savings, and money market deposits were
deemed to reprice after one year, the Corporation's one-year funding gap would
have been -4.77% as of December 31, 1997, which compares to -14.12% and -16.88%
as of December 31, 1996 and 1995, respectively.
The Corporation's one-year funding gap was -14.00% at December 31,
1997, compared to -23.32% and -26.87% at December 31, 1996 and 1995,
respectively. The primary reason for the change from 1996 was a shift in the
maturity of a large portion of the Corporation's certificates of deposits from
the "6 Month or Less" category as of the end of 1996 to the "More than 1 Year to
3 Years" category as of the end of 1997. This shift was due in part to
Corporation's success in 1997 at attracting new deposits with one to two year
terms, as well as its success in directing maturities of existing deposits into
new certificates with one to two year terms. Also contributing was a $107.8
million decrease in FHLB advances and other borrowings during 1997, most of
which had floating rates of interest or terms of less than twelve months as of
the previous year end. Offsetting these developments somewhat was a shift in the
repricings of a large portion of the Corporation's adjustable-rate loans from
the "6 Months or Less" and the "More than 6 Months to 1 Year" categories as of
the end of 1996 to the "More than 1 Year to 3 Years" category as of the end of
1997. This shift was due to a variety of factors including increased conversions
in 1997 of adjustable-rate mortgage loans into fixed-rate loans and their
subsequent sale in the secondary market, increased origination of
adjustable-rate mortgage loans with terms to first reprice of two to three
years, and increased originations of second mortgage loans, which tend to have
maturities of up to ten years.
Certain shortcomings are inherent in using funding gap to quantifying
exposure to interest rate risk. For example, although certain assets and
liabilities may have similar maturities or repricings in the table, they may
react differently to actual changes in market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. This is especially true in circumstances where
management has a certain amount of control over interest rates, as it does to in
the case of deposit liabilities. Additionally, certain assets such as
adjustable-rate mortgage loans have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Furthermore, the
proportion of adjustable-rate loans in the Corporation's portfolio may change as
interest rates change. For example, if current market interest rates remain at
or below current levels the proportion of adjustable-rates loans in the
Corporation's portfolio may decline for reasons described elsewhere in this
report. Finally, as
31
<PAGE> 33
interest rates change, actual loan prepayment speeds will most likely differ
from those assumed by management in the table.
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.
The Corporation does not use derivative financial instruments such as
futures, swaps, caps, floors, options, interest- or principal-only strips, or
similar financial instruments to manage its interest rate risk. 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. This pipeline consists of mortgage loans held for sale as of
the balance sheet date as well commitments to originate mortgage loans that are
intended for sale, but are not closed as of the balance sheet date. Loans held
for sale are generally 100% matched against forward sales that require delivery
within 30 to 60 days of the balance sheet date. The Corporation's policy is to
cover its commitments to originate loans intended for sale with forward sales
that have a value of 40% to 130% of the value of such commitments, depending on
management's expectations for near-term changes in interest rates and
anticipated cancellations by borrowers. These forward sales generally require
delivery within 60 to 90 days. Given these policies, as well as the short-term
nature of the Corporation's pipeline and its related forward sales, management
believes these financial instruments pose little market risk to the Corporation.
The Bank is required by the OTS to estimate the sensitivity of its
market value of portfolio equity ("MVPE") to immediate and sustained changes in
interest rates and to measure such sensitivity on at least a quarterly basis.
MVPE is defined as the estimated net present value of an institution's existing
assets, liabilities, and off-balance sheet instruments at a given level of
market interest rates. Computation of the estimated net present value of assets,
liabilities, and off-balance sheet instruments requires management to make
numerous assumptions with respect to such items. These assumptions include, but
are not limited to, appropriate discount rates, loan prepayment speeds, deposit
decay rates, etc., for each interest rate scenario. In general, the Bank has
used substantially the same assumptions for computing the net present value of
financial assets and liabilities in the base scenario as it uses in preparing
the fair value disclosures required under GAAP (refer to Notes 1 and 13 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data"). Computations of
net present values for other interest rate scenarios follow the same basic
approach except that discount rates, loan prepayment speeds, and other
assumptions are adjusted accordingly. The net present values of non-financial
assets and liabilities are generally estimated to be equal to their carrying
values under all interest rate scenarios as permitted by OTS regulations. With
respect to off-balance sheet items, the Bank generally relies on estimates
provided by the OTS. The same is true for certain other financial assets such as
mortgage servicing rights and deposit-based intangibles, which are not included
in the disclosures required under GAAP.
The following table summarizes as of December 31, 1997, the sensitivity
of the Bank's MVPE and net interest income to immediate and sustained changes in
interest rates, as shown (parallel shifts in the term structure of interest
rates are assumed as permitted by OTS regulations; dollars are presented in
millions).
Estimated
Change in Interest Rates MVPE
------------------------ ---------
200 basis point increase $141.4
Base scenario 146.0
200 basis point decline 154.3
The Bank's MVPE declines when interest rates increase and increases
when interest rates decline. These results are consistent with the Bank's
general strategy of funding investments in adjustable-rate mortgage loans (the
majority of which carry fixed rates of interest during the first two to three
years of their terms), as well as consumer loans (which have average lives of
approximately two to three years), 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.
32
<PAGE> 34
On a quarterly basis the OTS publishes industry statistics that permit
the Bank to compare changes in its MVPE given immediate and sustained changes in
interest rates, as shown in the table, with those of the rest of the industry.
The Bank consistently places in the fourth or fifth quintile, or lowest 40% to
20%, when compared to the rest of the thrift industry. That is, in general, the
Bank's MVPE exhibits less sensitivity to +/- 200 basis point changes in interest
rates than at least 60% of other thrift institutions. As of June 30, 1997, which
is the latest date for which industry statistics are available from the OTS, the
Bank's MVPE exhibited less sensitivity to changes in interest rates than at
least 80% of other thrift institutions.
Certain shortcomings are inherent in using MVPE to quantify exposure to
market risk. For example, actual and future values of assets, liabilities, and
off-balance sheet items will differ from those determined by the model for a
variety of reasons to include, but not limited to, differences in actual market
discount rates, differences in actual loan prepayment activity, and differences
in deposit customers' responses to changes in interest rates and the resulting
impact on the Bank's offering rates. Furthermore, the analysis does not
contemplate future shifts in asset or liability mix or any actions management
may take in response to changes in interest rates. As a result of these
shortcomings, it is highly unlikely that actual or future values of the Bank's
assets, liabilities, and off-balance sheet items are or will be equal to those
presented in the MVPE analysis. Furthermore, the reader is cautioned that
although the estimated changes in the Bank's MVPE as of December 31, 1997, are
within limits established by the Bank's Board of Directors, management and the
Board of Directors do not rely on MVPE to manage exposure to interest rate risk.
Management's primary tool for managing exposure to interest rate risk is the
Corporation's funding gap, as previously described.
33
<PAGE> 35
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $29,939,484 $24,644,254
Interest-bearing deposits with banks 7,113,756 2,456,901
Investment securities available for sale, at fair value 21,376,678 74,029,474
Mortgage-backed and related securities:
Available for sale, at fair value 47,895,297 61,875,130
Held for investment, at cost (fair value of $123,613,629 and $145,217,199,
respectively) 124,335,969 147,834,733
Loans held for sale 45,576,945 20,338,790
Loans held for investment, net 1,193,893,087 1,106,039,995
Federal Home Loan Bank stock 13,811,300 18,823,200
Accrued interest receivable, net 11,547,757 11,487,427
Office properties and equipment 24,243,132 26,210,947
Mortgage servicing rights, net 16,290,903 11,887,202
Intangible assets 5,921,443 5,221,245
Other assets 2,348,647 4,564,171
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,544,294,398 $1,515,413,469
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Deposit liabilities $1,146,533,896 $1,024,092,887
Federal Home Loan Bank advances and other borrowings 275,778,770 383,592,983
Advance payments by borrowers for taxes and insurance 3,872,764 3,912,206
Accrued interest payable 2,030,153 2,432,796
Other liabilities 6,717,469 5,968,239
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,434,933,052 1,419,999,111
- --------------------------------------------------------------------------------------------------------------------
Preferred stock, $.10 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares authorized, 9,970,815 and
9,954,489 shares issued and outstanding, respectively, including 780,285 and 768,450
shares of treasury stock, respectively 997,082 663,933
Additional paid-in capital 35,537,146 35,580,114
Unearned restricted stock (211,006) (414,392)
Securities valuation allowance, net (664,999) (2,450,764)
Retained earnings 84,548,291 72,569,092
Treasury stock, at cost (10,845,168) (10,533,625)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 109,361,346 95,414,358
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,544,294,398 $1,515,413,469
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
34
<PAGE> 36
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on loans $97,941,595 $83,786,180 $66,484,567
Interest on mortgage-backed and related securities 12,125,868 14,494,999 15,802,529
Interest and dividends on investments 4,908,793 5,695,818 6,571,240
- --------------------------------------------------------------------------------------------------------------------
Total interest income 114,976,256 103,976,997 88,858,336
- --------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 51,149,724 46,490,086 38,987,042
Interest on FHLB advances and other borrowings 19,115,333 17,193,577 15,967,433
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 70,265,057 63,683,663 54,954,475
- --------------------------------------------------------------------------------------------------------------------
Net interest income 44,711,199 40,293,334 33,903,861
Provision for loan losses 538,957 - -
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 44,172,242 40,293,334 33,903,861
- --------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 12,583,927 10,237,623 8,509,906
Loan servicing fees 2,367,828 2,221,690 2,443,004
Commissions on annuity and insurance sales 1,810,667 2,063,520 1,012,990
Gain on sales of loans 6,373,747 4,330,550 3,544,575
Loss on sales of investment securities (725,142) (311,151) (28,598)
Other income 1,882,658 1,288,940 1,631,207
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 24,293,685 19,831,172 17,113,084
- --------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 21,827,232 19,913,513 18,295,649
Occupancy and equipment 6,675,597 6,412,307 5,735,799
Advertising and marketing 2,173,031 1,710,140 1,964,587
Federal deposit insurance premiums 637,353 2,124,036 1,861,879
FDIC special assessment - 5,941,000 -
Other expenses 8,883,839 8,143,731 6,513,253
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 40,197,052 44,244,727 34,371,167
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 28,268,875 15,879,779 16,645,778
Income tax expense 10,878,512 5,805,862 6,001,144
- --------------------------------------------------------------------------------------------------------------------
Net income $17,390,363 $10,073,917 $10,644,634
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $1.77 $1.00 $1.14
Basic earnings per share 1.90 1.07 1.21
Dividends paid per share 0.467 0.413 0.367
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
35
<PAGE> 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $17,390,363 $10,073,917 $10,644,634
Adjustments to reconcile net income to net cash provided
(used) by operations:
Provision for loan and real estate losses
(recoveries), net 458,070 (10,240) (311,523)
Net loan fees (costs) deferred (835,277) 73,827 75,300
Depreciation and amortization 6,363,677 5,950,546 4,872,988
Gains on sales of loans, and other investments (5,648,605) (4,019,400) (3,515,977)
Increase in accrued interest receivable (60,330) (1,354,216) (1,528,313)
Increase (decrease) in accrued interest payable (402,643) (199,862) 201,148
Increase in current and deferred income taxes 1,554,525 1,819,263 882,970
Other accruals and prepaids, net (202,660) (414,056) (243,569)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan
originations and sales 18,617,120 11,919,779 11,077,658
Loans originated for sale (258,817,745) (237,592,344) (180,319,098)
Sales of loans originated for sale 252,349,050 240,578,067 164,476,609
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations 12,148,425 14,905,502 (4,764,831)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with
banks (4,656,855) 1,594,387 3,479,866
Purchases of investment securities - (34,828,051) (7,459,642)
Sales of investment securities 31,710,769 11,019,370 8,097,820
Maturities of investment securities 20,785,762 29,482,069 16,106,502
Mortgage-backed and related securities principal
repayments 39,303,822 44,170,348 26,915,207
Loans originated for investment (492,325,180) (472,812,233) (297,401,986)
Loans purchased for investment (6,372,996) (9,692,282) (1,968,075)
Loan principal repayments 317,290,692 292,198,986 186,023,943
Sales of loans originated for investment 75,122,123 17,124,014 8,470,485
Sales of real estate 1,380,170 242,993 586,314
Additions to office properties and equipment (2,595,908) (1,954,572) (5,874,671)
Purchases of mortgage servicing rights (1,374,069) - (4,088,169)
Purchase of net assets of Rock Financial Corp. - - (21,040,620)
Other, net 6,108,616 (330,466) 839,839
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (15,623,054) (123,785,437) (87,313,187)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposit liabilities 122,441,009 54,670,368 87,598,932
Deposits purchased - - 5,336,084
Long-term advances from Federal Home Loan Bank 25,000,000 132,000,000 50,000,000
Repayment of long-term Federal Home Loan Bank advances (215,507,000) (114,905,000) (61,175,000)
Net increase in short-term Federal Home Loan Bank
borrowings 79,698,000 38,207,000 1,715,000
Increase in other borrowings 2,994,787 5,995,202 3,995,611
Increase (decrease) in advance payments by borrowers for
taxes and insurance (39,442) 171,688 (1,616,241)
Proceeds from sale of common stock 484,179 194,225 13,551,631
Purchase of treasury stock (2,868,938) (9,674,875) (858,750)
Dividends paid (4,283,617) (3,874,954) (3,192,137)
Other, net 850,881 356,051 747,920
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,769,859 103,139,705 96,103,050
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 5,295,230 (5,740,230) 4,025,032
Cash and due from banks at beginning of period 24,644,254 30,384,484 26,359,452
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $29,939,484 $24,644,254 $30,384,484
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $114,915,926 $102,622,781 $87,330,023
Interest paid on deposits and borrowings 70,667,700 63,883,525 54,753,327
Income taxes paid 9,689,000 4,540,490 5,376,067
Income taxes refunded 339,171 543,978 70,262
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
36
<PAGE> 38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
COMMON
STOCK AND
ADDITIONAL GUARANTEE UNEARNED SECURITIES
PAID-IN OF ESOP RESTRICTED VALUATION RETAINED TREASURY
CAPITAL DEBT STOCK ALLOWANCE EARNINGS STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $20,996,452 ($115,331) ($457,402) ($2,159,980) $58,917,632 - $77,181,371
Net income 10,644,634 10,644,634
Proceeds from sale of stock 13,358,743 13,358,743
Exercise of stock options 559,592 559,592
Restricted stock award 939,239 (864,968) 74,271
Repayment of ESOP 115,331
indebtedness 115,331
Restricted stock award
amortization 505,120 505,120
Valuation adjustment, net 550,819
of taxes 550,819
Dividends paid (3,192,137) (3,192,137)
Purchase of treasury stock ($858,750) (858,750)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 35,854,026 - (817,250) (1,609,161) 66,370,129 (858,750) 98,938,994
Net income 10,073,917 10,073,917
Exercise of stock options 390,021 390,021
Restricted stock award
amortization 402,858 402,858
Valuation adjustment, net (841,603)
of taxes (841,603)
Dividends paid (3,874,954) (3,874,954)
Purchase of treasury stock (9,674,875) (9,674,875)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 36,244,047 - (414,392) (2,450,764) 72,569,092 (10,533,625) 95,414,358
Net income 17,390,363 17,390,363
Exercise of stock options 290,181 (1,127,547) 2,557,395 1,720,029
Restricted stock award
amortization 203,386 203,386
Valuation adjustment, net 1,785,765
of taxes 1,785,765
Dividends paid (4,283,617) (4,283,617)
Purchase of treasury stock (2,868,938) (2,868,938)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $36,534,228 - ($211,006) ($664,999) $84,548,291 ($10,845,168) $109,361,346
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial
Statements.
37
<PAGE> 39
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Corporation provides a wide range of financial services to
individuals and businesses in Wisconsin through its wholly-owned subsidiary
bank. The Corporation is subject to competition from other financial
institutions. The Corporation, the Bank, and the Bank's subsidiaries are also
subject to the regulations of certain governmental agencies and undergo periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting
policies of the Corporation, the Bank, and the Bank's subsidiaries conform to
GAAP and to general practices within the financial services industry. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts and balances of the Corporation, the Bank, and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
INVESTMENT SECURITIES, INCLUDING MORTGAGE-BACKED AND RELATED
SECURITIES, AND STOCK HELD FOR REGULATORY PURPOSES Investment securities,
including mortgage-backed and related securities, are classified in one of two
categories and accounted for as follows: (1) securities that the Corporation has
the positive intent and ability to hold to maturity are classified as "held for
investment" and reported at amortized cost; (2) securities not classified as
"held for investment" are classified as "available for sale" and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity ("securities valuation
allowance"), net of estimated income taxes. Management determines the
appropriate classification for its securities at the time of purchase. The
specific identification method is used to determine the cost of securities sold.
The Corporation does not maintain a trading account for investment securities or
mortgage-backed and related securities.
The Corporation occasionally enters into purchases of securities and/or
whole-loans under agreements to resell ("repurchase agreements"). The amounts
advanced under these agreements represent short-term loans and are reflected as
a receivable in the Corporation's Consolidated Statement of Financial Condition.
Stock of the FHLB of Chicago is owned due to regulatory requirements
and is carried at cost.
INTEREST ON LOANS Interest income is accrued on loan balances
outstanding. Accrued interest on impaired loans is reversed when management
determines that the collection of interest or principal is considered unlikely.
In general, this occurs when a loan is 90 days past due. Interest income is
subsequently recognized only to the extent cash payments are received. Loans are
restored to accrual status when the obligation is brought current and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
DISCOUNTS, PREMIUMS, AND DEFERRED LOAN FEES Discounts and premiums on
loans are amortized over the life of the related loans using the level-yield
method. Loan origination fees and certain direct loan origination costs are
deferred and amortized over the life of the related loans as an adjustment of
yield. Such fees are amortized using a method that approximates the level-yield
method.
LOANS HELD FOR SALE Loans originated and held for sale are carried at
the lower of aggregate cost or market. Net unrealized losses are recognized
through a valuation allowance and a charge to income.
MORTGAGE SERVICING RIGHTS Servicing mortgage loans includes such
functions as collecting monthly payments of principal and interest from
borrowers, passing such payments through to third-party investors, maintaining
escrow accounts for taxes and insurance, and making such payments when they are
due. The Corporation generally earns a fee of 25 basis points or more on the
outstanding loan balance for performing these services as well as fees and
interest income from ancillary sources such as delinquency charges and float.
38
<PAGE> 40
The Corporation records originated mortgage servicing rights ("OMSR")
as a component of gain on the sale of mortgage loans. The value recorded for
OMSR approximates the present value of the servicing fee (typically 25 basis
points or more) adjusted for expected future costs to service the loans, as well
as income and fees expected to be received from ancillary sources, as previously
described. The carrying value of OMSR is amortized against service fee income
over the estimated lives of the loans using the income-forecast method. The
Corporation also purchases mortgage servicing rights ("PMSR") from
third-parties. PMSR is recorded at cost and is also amortized over the estimated
lives of the loans using the income-forecast method.
The value of OMSR and PMSR (collectively "mortgage servicing rights")
is subject to impairment as a result of changes in loan prepayment expectations
and in market discount rates used to value the future cash flows associated with
such assets. If, based on periodic evaluations, the estimated present value of
mortgage servicing rights is determined to be less than carrying value, a
valuation adjustment is recorded against such assets and against the
Corporation's loan servicing fee income in the period of the prepayment. The
valuation adjustment is calculated using the current outstanding principal
balance of the related loans, a long-term prepayment assumption as determined by
management, and a discount rate that the Corporation has experienced in recent
bids on mortgage servicing rights in the secondary market.
The Corporation purchases or originates mortgage servicing rights on
single-family residential mortgage loans only. In valuing the mortgage servicing
rights recorded on such loans, the Corporation stratifies the loans by type of
loan (i.e., non-government-guaranteed loans versus government-guaranteed loans),
year of original funding, contractual interest rate, and original term to
maturity.
On January 1, 1997, the Corporation adopted certain aspects of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"). This standard established new accounting and financial reporting rules
for sales, securitizations, and servicing of receivables and other financial
assets, for secured borrowing and collateral transactions, and for
extinguishment of liabilities. SFAS 125 also eliminated the distinction between
OMSR and a mortgage servicing asset formerly know as "excess mortgage servicing
rights" ("EMSR"), which is now included as a component of OMSR. Certain other
aspects of SFAS 125 were delayed until 1998 by the issuance in 1997 of Statement
of Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" ("SFAS 127). The Corporation's
adoption of certain aspects of SFAS 125, and its future adoption of SFAS 127,
had no or will have no material impact on the financial condition or operations
of the Corporation.
REAL ESTATE Real estate acquired through foreclosure or deed in lieu of
foreclosure and real estate subject to redemption are recorded at the lower of
cost or estimated fair market value. Costs relating to the development and
improvement of the property are capitalized. Income and expenses incurred in
connection with holding and operating the property are included in the
Corporation's Consolidated Statements of Operations.
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE A periodic review of
loans and real estate is made to determine whether the estimated fair value of
the related assets is equal to or in excess of the related carrying amounts. In
making such determination, consideration is given to estimated sales prices,
refurbishing costs, selling costs, and market discount rates. Where loss is
indicated, a specific allowance for loss is established. In addition, the
Corporation maintains a general loss allowance against its loan and real estate
portfolios which is based on its own loss experience, that of the financial
services industry, and management's ongoing assessment of current economic
conditions, and the credit risk inherent in the portfolios.
OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are
recorded at cost less accumulated depreciation which is provided over the
estimated useful lives (five to forty years) of the respective assets on a
straight-line basis. The cost of leasehold improvements is being amortized on
the straight-line basis over the lesser of the term of the respective lease or
the estimated economic life. When properties are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts and the resulting gain or loss is recorded in income.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Corporation
occasionally enters into sales of securities under agreements to repurchase
("reverse-repurchase agreements"). Reverse-repurchase agreements are treated as
financing, and the obligations to repurchase securities sold are reflected as a
liability in the Corporation's
39
<PAGE> 41
Consolidated Statement of Financial Condition. The securities underlying the
agreements remain in the asset accounts.
INCOME TAXES The Corporation, the Bank, and the Bank's subsidiaries
file a consolidated federal income tax return and separate state income tax
returns. Provision is made in the income tax expense accounts for deferred taxes
applicable to income and expense items reported in different periods for
financial statement purposes than for income tax purposes.
PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS The Corporation's net
periodic pension cost consists of the expected cost of benefits earned by
employees during the current period and an interest cost on the projected
benefit obligation, reduced by the earnings on assets held by the retirement
plan, by amortization of a transitional assets over a period of 15 years
(beginning in 1987), and by amortization of any actuarial gains and losses over
the estimated future service period of existing plan participants. The projected
unit credit actuarial cost method is used to determine expected pension costs.
The Corporation's funding policy is to contribute amounts deductible for federal
income tax purposes.
The Corporation's cost of postretirement benefits, which consists of
medical reimbursements for retirees, is recognized during the years that the
employees render the necessary service, adjusted for interest costs on the
projected benefit obligation and for the amortization of a transitional
obligation over 20 years (beginning in 1993). The projected unit credit
actuarial cost method is used to determine expected postretirement benefit
costs. The Corporation's postretirement benefit plan is not currently funded.
FAIR VALUES OF FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS The following methods and assumptions were used by the Corporation
in estimating fair value disclosures for financial instruments (refer to Note 13
for actual fair value amounts):
CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS WITH
BANKS The face amounts presented in the Corporation's Consolidated Statements of
Financial Condition for cash and interest-bearing deposits approximates fair
value for such assets.
INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED
SECURITIES Fair values for this group of financial instruments are based on
average quoted market prices obtained from one or more independent pricing
sources. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
LOANS HELD FOR SALE The fair value of loans held for sale is
estimated by matching such loans against outstanding commitments to sell such
loans. The method used for unmatched commitments is discussed under Off-Balance
Sheet Financial Instruments", below.
LOANS HELD FOR INVESTMENT The estimated fair value of loans
held for investment is determined using discounted cash flow techniques.
Scheduled principal and interest payments are adjusted for estimated future
prepayments as provided by third-party market sources or as estimated by
management using historical prepayment experience. Discount rates used in the
fair value computations are generally based on interest rates offered by the
Corporation on similar loans as of December 31, 1997 and 1996, adjusted for
management's estimate of differences in liquidity, credit risk, remaining term
to maturity, etc.
FEDERAL HOME LOAN BANK STOCK FHLB stock held in excess of
minimum requirements can be returned to the FHLB of Chicago for face value.
Accordingly, the fair value of all FHLB stock is estimated to be equal to the
face amount presented in the Corporation's Consolidated Statements of Financial
Condition.
DEPOSIT LIABILITIES The fair values of demand deposit accounts
(i.e., interest-bearing and non-interest-bearing checking accounts and money
market and regular savings accounts) are equal to the face amount presented in
Note 7. The fair value of fixed-rate time deposits is estimated using a
discounted cash flow calculation that applies interest rates offered by the
Corporation as of the measurement date to a schedule of aggregate contractual
maturities of such deposits as of the same dates.
40
<PAGE> 42
FEDERAL HOME LOAN BANK ADVANCES The fair value of FHLB
advances is estimated using a discounted cash flow calculation that applies
interest rates quoted by the FHLB as of the measurement date to a schedule of
aggregate contractual maturities of such liabilities as of the same date. The
fair value of FHLB advances excludes the effect of any prepayment penalties that
may be incurred if the Corporation were to prepay any of its term advances.
OTHER BORROWINGS Other borrowings consist of short-term
borrowings from third-party financial institutions and borrowings under
long-term contracts. Other borrowings are not material to the Corporation either
individually or in the aggregate. As such, the Corporation has estimated the
fair value of such borrowings to approximate carrying value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE The fair
value of advance payments by borrowers for taxes and insurance is equal to the
face amount presented in the Corporation's Consolidated Statement of Financial
Condition.
ACCRUED INTEREST RECEIVABLE AND PAYABLE The fair value of
accrued interest is equal to the face amount presented in the Corporation's
Consolidated Statement of Financial Condition.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. The Corporation has
become a party to financial instruments with off-balance-sheet risk in the
normal course of its business in order to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, lines of credit, commitments to sell loans, and financial
guarantees.
Off-balance-sheet financial instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statement of financial condition. In the event of
non-performance by the other party to a financial instrument, the Corporation's
exposure to credit loss is represented by the contractual amount of the
instrument. The Corporation uses the same credit policies in granting
commitments, letters and lines of credit, and financial guarantees as it does
for on-balance-sheet financial instruments.
The fair values of commitments to extend credit and unmatched
commitments to sell loans, both which are generally short-term in nature, are
estimated to be equal to their respective face values.
Home equity lines of credit carry floating market rates of
interest. Accordingly, the fair value of outstanding home equity lines of credit
is estimated to be equal to the face value of such commitments.
The Corporation does not issue material amounts of stand-by
letters of credit or financial guarantees. Accordingly, the fair value of such
exposures are estimated to be equal to their face value in all material
respects.
STOCK SPLITS Earnings per share and dividends paid per share, as
presented in the Corporation's Consolidated Statements of Operations, have been
adjusted to recognize a three-for-two stock split on June 12, 1997. Common
shares issued and outstanding, as presented in the Corporation's Consolidated
Statements of Financial Condition, have also been adjusted for such stock split
and dividend.
STOCK-BASED COMPENSATION The Corporation records expense relative to
stock-based compensation using the "intrinsic value method". Since the intrinsic
value of the Corporation's stock options is generally "zero" at the time of the
award, no expense is recorded. With respect to restricted stock awards, the
intrinsic value is generally equal to the fair value of the Corporation's common
stock on the date of the award. Such value is amortized as expense over the
vesting period of the award.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Corporation has not
adopt the "fair value method" of expense recognition for stock-based
compensation awards. Rather, the effects of the fair value method on the
Corporation's earnings have been disclosed on a pro forma basis, as permitted by
SFAS 123. Refer to Note 10 for the appropriate disclosures.
41
<PAGE> 43
EARNINGS PER SHARE On December 31, 1997, the Corporation adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). This standard replaced "primary earnings per share" with "basic earnings
per share". In general, basic earnings per share is computed using the actual
number of shares outstanding during the period, unadjusted for common stock
equivalents. "Fully-diluted earnings per share" was retained under the new
standard, but is referred to as "diluted earnings per share". As required by
SFAS 128, all prior-period earnings per share data have been restated.
Both basic and diluted earnings per share are based on the
weighted-average number of common shares outstanding during each period,
including any restricted shares. Diluted earnings per share is adjusted for
common stock equivalents outstanding at the end of each period. Common stock
equivalents are computed using the treasury stock method and consist of stock
options outstanding under the stock incentive plans described in Note 10. All
stock options are assumed to be 100% vested for purposes of the earnings per
share computations. The computation of earnings per share for the years ended
December 31, 1997, 1996, and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $17,390,363 $17,390,363 $10,073,917 $10,073,917 $10,644,634 $10,644,634
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Average common shares issued,
net of actual treasury shares 9,160,951 9,160,951 9,392,358 9,392,358 8,772,120 8,772,120
Common stock equivalents based
on the treasury stock method - 684,405 - 670,226 - 578,900
- --------------------------------------------------------------------------------------------------------------------
Average common shares and
common stock equivalents 9,160,951 9,845,356 9,392,358 10,062,584 8,772,120 9,351,020
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Earnings per share $ 1.90 $ 1.77 $ 1.07 $ 1.00 $ 1.21 $ 1.14
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PENDING ACCOUNTING CHANGES During 1997 the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This new standard
establishes new rules for the reporting and display of comprehensive income and
its components in financial reports to shareholders. Comprehensive income is
defined as net income adjusted for other changes in stockholders' equity during
the period that are caused by transactions from non-owner sources. Such
transactions include unrealized gains and losses on "available for sale"
securities and other transactions that are not applicable to the Corporation at
this time. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Accordingly, the Corporation will adopt the standard in 1998. Adoption of
this standard will have no impact on the Corporation's financial condition or
results of operations.
During 1997 the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This new standard significantly changes the basis on
which public business enterprises report information about reportable segments
in financial reports to shareholders, including interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The standard is effective for fiscal
years beginning after December 15, 1997. Accordingly, the Corporation will adopt
the standard in 1998. The Corporation has not completed the complex analysis
necessary to determine what impact SFAS 131 will have on its financial statement
disclosures. However, SFAS 131 will have no impact on the Corporation's
financial condition or results of operations.
CASH AND CASH EQUIVALENTS For purposes of the Corporation's
Consolidated Statements of Cash Flows, cash and cash equivalents consists solely
of cash on hand and non-interest-bearing deposits in banks ("cash and due from
banks"). The Bank is required to maintain a certain amount of cash on hand and
non-interest-bearing account balances at the Federal Reserve Bank of Minneapolis
to meet specific reserve requirements. These requirements approximated $12.1
million at December 31, 1997.
RECLASSIFICATION Certain 1996 and 1995 balances have been reclassified
to conform with the 1997 presentation.
42
<PAGE> 44
NOTE 2--INVESTMENT SECURITIES
Investment securities available for sale at December 31, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate obligations $21,045,130 $39,641 ($1,610) $21,083,161
Asset-backed securities 293,517 - - 293,517
- -------------------------------------------------------------------------------------------------------------------
Total $21,338,647 $39,641 ($1,610) $21,376,678
===================================================================================================================
</TABLE>
Investment securities available for sale at December 31, 1996, are
summarized as follows:
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate obligations $41,083,255 $60,294 ($65,656) $41,077,893
U.S. Treasury securities 261,621 313 - 261,934
Asset-backed securities 1,076,022 1,288 (1,006) 1,076,304
Adjustable-rate mortgage and short-term government mutual
funds 32,435,911 - (822,568) 31,613,343
- -------------------------------------------------------------------------------------------------------------------
Total $74,856,809 $61,895 ($889,230) $74,029,474
===================================================================================================================
</TABLE>
Accrued interest receivable on investment securities was $340,875 and
$781,270 at December 31, 1997 and 1996, respectively.
Realized losses on sales of investment securities were $725,142,
$311,151 and $39,146 during 1997, 1996, and 1995, respectively. Realized gains
were $10,548 during 1995. There were no realized gains on sales of investment
securities during 1997 and 1996.
The amortized cost and estimated fair value of investment securities at
December 31, 1997, by contractual maturity, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
INVESTMENTS MATURING.. COST VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $15,235,528 $15,256,937
In one year to five years 6,103,119 6,119,741
- --------------------------------------------------------------------------------------------------------------------
Total $21,338,647 $21,376,678
====================================================================================================================
</TABLE>
NOTE 3--MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities available for sale at December
31, 1997, are summarized as follows
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $48,953,197 $14,498 ($1,072,398) $47,895,297
===================================================================================================================
</TABLE>
Mortgage-backed and related securities held for investment at December
31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $115,847,369 $73,583 ($863,972) $115,056,980
Mortgage-backed securities 8,488,600 115,668 (47,619) 8,556,649
- -------------------------------------------------------------------------------------------------------------------
Total $124,335,969 $189,251 ($911,591) $123,613,629
===================================================================================================================
</TABLE>
43
<PAGE> 45
Mortgage-backed and related securities available for sale at December
31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $64,889,598 $16,517 ($3,030,985) $61,875,130
===================================================================================================================
</TABLE>
Mortgage-backed and related securities held for investment at December
31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $136,183,410 $17,587 ($2,617,054) $133,583,943
Mortgage-backed securities 11,651,323 98,962 (117,029) 11,633,256
- -------------------------------------------------------------------------------------------------------------------
Total $147,834,733 $116,549 ($2,734,083) $145,217,199
===================================================================================================================
</TABLE>
Accrued interest receivable on mortgage-backed and related securities
was $961,052 and $1,177,988 at December 31, 1997 and 1996, respectively.
Mortgage-backed securities consist of FHLMC, FNMA, and GNMA securities.
Collateralized mortgage obligations consist of securities backed by the
aforementioned agency-backed securities or by whole-loans. As of December 31,
1997, approximately 71% of the Corporation's CMO portfolio consisted of
securities backed by whole loans--all of which were generally rated "AAA" by the
major credit-rating agencies. Approximately 25% of the Corporation's whole-loan
CMOs consisted of loans on properties located in the state of California. No
other geographical location had a material concentration.
There were no realized gains or losses on sales of mortgage-backed and
related securities during 1997, 1996 or 1995.
NOTE 4--LOANS HELD FOR INVESTMENT
Loans held for investment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Single-family $538,392,686 $544,065,060
Multi-family 140,589,481 127,334,307
Commercial 107,315,226 94,400,682
Construction 51,318,856 46,641,024
Education loans 159,893,040 134,093,919
Second mortgage and home equity loans 163,231,165 119,644,928
Consumer loans 40,330,804 47,555,741
Commercial business and Small Business Administration loans 556,270 1,217,477
- -------------------------------------------------------------------------------------------------------------------
Subtotal 1,201,627,528 1,114,953,138
Less:
Unearned discounts and net deferred loan fees 96,914 1,024,820
Allowance for loan losses 7,637,527 7,888,323
- -------------------------------------------------------------------------------------------------------------------
Total $1,193,893,087 $1,106,039,995
===================================================================================================================
</TABLE>
Accrued interest receivable on loans held for investment was
$10,232,335 and $9,506,719 at December 31, 1997 and 1996, respectively.
Loans serviced for investors were $1.4 billion, $1.2 billion, and $1.1
billion at December 31, 1997, 1996, and 1995, respectively. These loans are not
reflected in the Corporation's Consolidated Statements of Financial Condition.
44
<PAGE> 46
At December 31, 1997 and 1996, loans on non-accrual status were $4.4
million and $2.0 million, respectively. The Corporation has no loans
contractually past due ninety or more days for which interest is being accrued.
With respect to single-family mortgage loans, it is the Corporation's
general policy to restrict lending to its primary market areas in Wisconsin as
well as contiguous counties in Iowa and Minnesota, though from time to time the
Corporation will purchase single-family loans originated outside of its primary
market area. It is also the Corporation's general policy to limit an individual
single-family mortgage loan to 80% of the appraised value of the property
securing the loan. The Corporation will occasionally lend more than 80% of the
appraised value of the property, but generally will require the borrower to
obtain private mortgage insurance on the portion of the loan amount that exceeds
80% of the collateral.
With respect to multi-family and commercial real estate loans, it is
the Corporation's policy to restrict its lending area to loans secured by
property located within a 300-mile radius of La Crosse, to include the states of
Nebraska, Illinois, Iowa, and Minnesota, although in the past the Corporation
originated multi-family and commercial real estate loans outside of this area.
It is also the Corporation's general policy to limit loans on multi-family
residential complexes, retail shopping centers, office buildings, and
multi-tenant industrial buildings to 80% of the appraised value of the property
securing the loan. Loans on other types of commercial properties, such as
nursing homes, hotels/motels, churches, and single-tenant industrial buildings
are limited to 75% or less of the appraised value of the property securing the
loan. In addition, it is the Corporation's policy that no more than 20% of its
multi-family and commercial real estate loans consist of this second category of
loans. Multi-family and commercial real estate loans originated or purchased
outside of the Corporation's market area amounted to $27.3 million and $25.3
million, at December 31, 1997 and 1996, respectively.
With respect to consumer loans, it is the Corporation's policy that
such loans be supported primarily by the borrower's ability to repay the loan
and secondarily by the value of the collateral securing the loan, if any.
Education loans are guaranteed by the U.S. government.
A summary of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $7,888,323 $8,186,077 $8,073,670
Provision charged to expense 538,957 - -
- -------------------------------------------------------------------------------------------------------------------
Loans charged-off (816,217) (336,989) (468,737)
Recoveries 26,464 39,235 44,036
- -------------------------------------------------------------------------------------------------------------------
Charge-offs, net (789,753) (297,754) (424,701)
Purchased allowances - - 537,108
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,637,527 $7,888,323 $8,186,077
===================================================================================================================
</TABLE>
45
<PAGE> 47
NOTE 5--MORTGAGE SERVICING RIGHTS
A summary of the activity in mortgage servicing rights ("MSR") is as
follows:
<TABLE>
<CAPTION>
PURCHASED ORIGINATED ALLOWANCE FOR
MSR MSR LOSS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 461,773 $4,863,604 ($347,958) $ 4,977,419
Purchased servicing 4,088,169 4,088,169
Originated servicing 2,487,951 2,487,951
Amortization charged to earnings (355,977) (654,958) (1,010,935)
Valuation adjustments charged to earnings (250,000) (250,000)
Charge-offs (190,226) 190,226 -
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,193,965 6,506,371 (407,732) 10,292,604
Originated servicing 3,726,336 3,726,336
Amortization charged to earnings (485,880) (1,021,960) (1,507,840)
Valuation adjustments charged to earnings (623,898) (623,898)
Charge-offs (157,346) (463,284) 620,630 -
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,550,739 8,747,463 (411,000) 11,887,202
Purchased servicing 1,374,068 1,374,068
Originated servicing 5,543,993 5,543,993
Amortization charged to earnings (503,539) (1,360,821) (1,864,360)
Valuation adjustments charged to earnings (650,000) (650,000)
Charge-offs (164,749) (341,850) 506,599 -
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $4,256,519 $12,588,785 ($554,401) $16,290,903
==================================================================================================================
</TABLE>
NOTE 6--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office buildings and improvements $18,679,458 $18,637,456
Furniture and equipment 15,407,247 15,710,546
Land and improvements 4,265,028 3,683,478
Leasehold improvements 4,170,200 4,681,491
Property acquired for expansion 358,470 1,179,808
Construction in progress 237,706 388,138
- ------------------------------------------------------------------------------------------------------------------
Subtotal 43,118,109 44,280,917
- ------------------------------------------------------------------------------------------------------------------
Less allowances for depreciation and amortization 18,874,977 18,069,970
- ------------------------------------------------------------------------------------------------------------------
Total $24,243,132 $26,210,947
==================================================================================================================
</TABLE>
Depreciation expense was $2,533,147, $2,599,431, and $2,399,505 for the
years ended December 31, 1997,
1996, and 1995, respectively.
The Corporation rents office space and land under operating leases at
certain of its locations. These leases have terms expiring between 1998 and 2006
and provide for renewals subject to escalation clauses. Rental expense was
$1,168,705, $988,483, and $821,236 for the years ended December 31, 1997, 1996,
and 1995, respectively.
46
<PAGE> 48
NOTE 7--DEPOSIT LIABILITIES
Deposit liabilities at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Checking accounts:
Non-interest-bearing $ 93,322,644 $ 75,340,636
Interest-bearing 54,993,534 53,907,106
Money market savings:
Great Rate accounts 98,457,235 89,889,046
Insured Market Fund accounts 17,238,632 16,886,876
Market Rate accounts 27,420,923 28,200,632
Regular savings accounts 87,605,203 85,674,670
Variable-rate IRA accounts 2,955,620 3,344,848
Time deposits maturing...
Within three months 102,853,066 172,798,057
Four to six months 45,787,447 104,522,278
Seven to twelve months 213,706,514 218,640,578
Thirteen to thirty-six months 395,293,914 160,998,554
Thirty-seven to sixty months 6,899,163 13,889,606
- --------------------------------------------------------------------------------------------------------------------
Total time deposits 764,540,105 670,849,073
- --------------------------------------------------------------------------------------------------------------------
Total $1,146,533,896 $1,024,092,887
====================================================================================================================
</TABLE>
Time deposits include $63.6 million and $47.4 million of certificates
in denominations of $100,000 or more at December 31, 1997 and 1996,
respectively. Accrued interest payable on deposit liabilities was $781,597 and
$740,828 at December 31, 1997 and 1996, respectively.
Included in non-interest-bearing checking accounts at December 31, 1997
and 1996, were $17.3 million and $12.2 million, respectively, which represented
amounts held in custody for third-party investors in loans serviced by the
Corporation.
Interest expense on deposit liabilities for the year ended December 31
is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Checking accounts $ 524,432 $ 521,038 $ 654,496
Money market savings accounts 6,321,899 5,103,182 3,987,442
Regular savings 1,799,864 1,774,934 1,753,301
Time deposits 42,503,529 39,090,932 32,591,803
- --------------------------------------------------------------------------------------------------------------------
Total $51,149,724 $46,490,086 $38,987,042
====================================================================================================================
</TABLE>
NOTE 8--FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank advances and other borrowings at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank advances maturing in...
1997 - - $290,507,000 5.43%
1998 $198,305,000 5.69% 18,305,000 5.49
1999 6,715,000 6.16 6,715,000 6.16
2000 26,400,000 5.56 1,400,000 6.93
Open line of credit 31,300,000 5.84 56,602,000 5.61
- --------------------------------------------------------------------------------------------------------------------
Total FHLB advances 262,720,000 5.71 373,529,000 5.48
Other borrowings 13,058,770 5.94 10,063,983 6.52
- --------------------------------------------------------------------------------------------------------------------
Total $275,778,770 5.72% $383,592,983 5.50%
====================================================================================================================
</TABLE>
The Corporation's borrowings at the FHLB of Chicago are limited to 35%
of total assets or 60% of the book value of certain mortgage loans plus 75% of
the market value of certain mortgage-backed and related securities, whichever is
less. Interest on the open line of credit is paid monthly at 0.45% above the
FHLB's daily
47
<PAGE> 49
investment deposit rate or approximately 25 basis points above the federal
funds rate. Advances that mature in the year 2000 include $25.0 million that are
"redeemable" quarterly at the option of the FHLB beginning in February 1998.
The Corporation has two lines of credit with two financial
institutions. These lines, which amount to $20.0 million in the aggregate,
permit the overnight purchase of fed funds; $10.0 million was outstanding under
these lines of credit as of December 31, 1997.
The Corporation has a $5 million line of credit with a third financial
institution under which $3.0 million was outstanding as of December 31, 1997.
Interest on the borrowings is payable quarterly at 185 basis points above the
three-month LIBOR, as determined on a quarterly basis. The Corporation has
pledged all issued and outstanding capital stock of the Bank as collateral for
this line of credit.
Accrued interest payable on FHLB advances and other borrowings was
$1,248,781 and $1,691,973 at December 31, 1997 and 1996, respectively.
NOTE 9--INCOME TAXES
Federal and state income tax expense for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 9,795,713 $5,007,142 $5,289,144
State 979,799 77,720 108,000
- ------------------------------------------------------------------------------------------------------------------
Total current 10,775,512 5,084,862 5,397,144
- ------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (104,000) 582,000 450,000
State 207,000 139,000 154,000
- ------------------------------------------------------------------------------------------------------------------
Total deferred 103,000 721,000 604,000
- ------------------------------------------------------------------------------------------------------------------
Total $10,878,512 $5,805,862 $6,001,144
==================================================================================================================
</TABLE>
The significant components of the Corporation's deferred tax expense
for the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing rights $ 901,452 $818,705 $ 724,766
Office properties and equipment depreciation (828,725) (56,321) 73,138
Asset valuation allowances (657,090) (311,288) (580,554)
Deferred loan fees 380,707 288,351 496,927
Provision for loan and real estate losses, net 107,907 128,248 284,857
Deferred compensation 2,473 (147,559) (406,795)
FHLB stock dividends - - 155,126
Other 196,276 864 (143,465)
- -------------------------------------------------------------------------------------------------------------------
Total deferred $ 103,000 $721,000 $ 604,000
===================================================================================================================
</TABLE>
The income tax provision differs from the provision computed at the
federal statutory corporate tax rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal statutory rate of 35% $9,894,106 $5,557,922 $5,826,022
State income taxes net of federal income tax benefit 771,420 140,868 170,300
Other 212,986 107,072 4,822
- -------------------------------------------------------------------------------------------------------------------
Income tax provision $10,878,512 $5,805,862 $6,001,144
===================================================================================================================
</TABLE>
48
<PAGE> 50
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan and real estate loss allowances $2,509,642 $2,617,549
Deferred compensation 1,001,671 1,004,144
Asset valuation allowances 664,175 7,085
State tax loss carryforwards 397,394 473,760
Office properties and equipment depreciation 384,033 -
Securities valuation allowance 354,870 1,391,038
Other 78,056 36,876
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 5,389,841 5,530,452
Valuation allowance (326,959) (212,980)
- -------------------------------------------------------------------------------------------------------------------
Adjusted deferred tax assets 5,062,882 5,317,472
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Mortgage servicing rights 2,481,629 1,580,177
FHLB stock dividends 625,814 625,814
Deferred loan fees 550,833 170,127
Purchase acquisition adjustments 329,151 413,251
Federal tax effect of state deferred taxes, net 161,714 184,208
Investment in unconsolidated partnerships 82,234 85,771
Office properties and equipment depreciation - 444,692
Other 221,355 64,112
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 4,452,730 3,568,152
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $610,152 $1,749,320
===================================================================================================================
</TABLE>
The Bank qualifies under provisions of the IRC that prior to 1996
permitted it to deduct from taxable income an allowance for bad debts that
generally exceeded losses charged to income for financial reporting purposes.
Accordingly, no provision for income taxes has been made for $21.1 million of
retained income at December 31, 1997. If in the future the Bank no longer
qualifies as a bank for tax purposes, income taxes may be imposed at the
then-applicable rates. If income taxes had been provided, the deferred tax
liability would have been approximately $8.5 million.
NOTE 10--EMPLOYEE BENEFIT PLANS
PENSION PLAN The Corporation has established a pension plan for the
benefit of full-time employees that have at least one year of service and have
attained the age of 20. Benefits under the plan are based on the employee's
years of service and compensation during the years immediately preceding
retirement. The table on the following page summarizes the components of pension
expense, the funded status of the plan, and the amount recognized in the
Corporation's consolidated financial statements for the years ended December 31,
1997, 1996, and 1995.
49
<PAGE> 51
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of pension expense:
Service cost $ 317,232 $ 304,387 $ 260,146
Interest cost 458,386 402,318 410,126
Actual return on plan assets (1,208,023) (910,319) (1,211,311)
Net amortization and deferral 464,683 256,735 735,350
- -------------------------------------------------------------------------------------------------------------------
Total pension expense $ 32,278 $53,121 $194,311
===================================================================================================================
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested $ 5,444,752 $4,494,897 $ 4,202,359
Non-vested 558,803 485,933 346,494
Provision for future salary increases 998,547 711,202 1,564,221
- -------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 7,002,102 5,692,032 6,113,074
- -------------------------------------------------------------------------------------------------------------------
Plan assets at fair market value 7,125,080 6,218,479 5,495,832
- -------------------------------------------------------------------------------------------------------------------
Plan assets (over) under projected benefit obligation (122,978) (526,447) 617,242
Unrecognized loss (868,634) (714,114) (1,090,109)
Unrecognized net asset 206,379 301,831 397,283
Unrecognized prior service cost 921,055 1,042,274 126,007
- -------------------------------------------------------------------------------------------------------------------
Accrued (prepaid) pension cost at end of period $ 135,822 $ 103,544 $ 50,423
===================================================================================================================
</TABLE>
At December 31, 1997, assets of the Corporation's pension plan
consisted of various institutional money market, bond, and equity funds, as well
as individual equity securities.
The discount rate used to determine the actuarial present value of the
projected benefit obligation was 7.0%, 7.5%, and 7.5% for 1997, 1996, and 1995,
respectively. The rate of increase in future compensation used to determine the
actuarial present value of such obligation was 5.5% for all periods presented.
The expected long-term rate of return on plan assets was 9.0% for all periods
presented.
POSTRETIREMENT EMPLOYEE BENEFITS The Corporation provides certain
health care insurance benefits to retired employees. Substantially all of the
employees of the Corporation may become eligible for these benefits if they
reach normal retirement age while working for the Corporation. The following
table summarizes the components of postretirement benefit expense and the amount
recognized in the Corporation's consolidated financial statements for the years
ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of postretirement benefits expense:
Service cost $ 53,899 $ 24,924 $ 54,216
Interest cost 108,130 76,498 105,297
Amortization of unrecognized transitional obligation 34,230 34,230 59,807
Amortization of (gain) loss 629 (7,311) (20,461)
- -------------------------------------------------------------------------------------------------------------------
Total postretirement benefit expense $ 196,888 $ 128,341 $ 198,859
===================================================================================================================
Accumulated postretirement benefit obligation:
Retirees $ 658,794 $ 637,742 $ 561,430
Fully eligible active plan participants 59,602 37,992 40,835
Other active plan participants 891,796 422,058 338,750
- -------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 1,610,192 1,097,792 941,015
Unrecognized gain (loss) (242,843) 169,843 264,474
Unrecognized transition obligation (513,449) (547,679) (581,909)
- -------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost at end of period $ 853,900 $ 719,956 $ 623,580
===================================================================================================================
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits for 1997 is 11.1% and is assumed to decrease gradually
to 5.5% in 2004 and thereafter. The discount rate used to determine the
actuarial present value of the projected postretirement benefit obligation was
7.0%, 7.5%, and 7.5% for 1997, 1996 and 1995, respectively.
The assumed rate of increase in the per capita cost of covered benefits
has an effect on the amounts reported in the Corporation's consolidated
financial statements. For example, a one percentage point increase in the
assumed trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1997, by
50
<PAGE> 52
approximately $400,000 and the aggregate service and interest cost components of
postretirement benefit expense for 1997 by approximately $53,000.
SAVINGS PLANS The Corporation maintains a 401(k) savings plan for the
benefit of substantially all of its employees. Employees may contribute up to a
certain percentage of their compensation to the plan and the Corporation will
match their contributions within certain limits. In addition, the employee may
also receive discretionary profit sharing contributions from the Corporation.
The Corporation provided matching and discretionary contributions of
approximately $248,000, $181,000, and $140,000 during the years ended December
31, 1997, 1996, and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation makes annual
discretionary contributions to an Employee Stock Ownership Program ("ESOP") for
the benefit of substantially all of its employees. All contributions are
recorded as compensation expense on the books of the Corporation at the time
they are made. The Corporation recorded approximately $246,000, $217,000, and
$121,000 in ESOP-related compensation expense during the years ended December
31, 1997, 1996, and 1995, respectively.
SUPPLEMENTAL PENSION PLAN The Corporation makes annual contributions to
a supplemental pension plan for certain key members of management. All
contributions are recorded as compensation expense on the books of the
Corporation at the time they are made. The Corporation recorded approximately
$197,000, $146,000, and $143,000 during the years ended December 31, 1997, 1996,
and 1995, respectively.
STOCK INCENTIVE PLANS During 1989, 1992, and 1997, the Corporation
adopted stock incentive plans designed to attract and retain qualified personnel
in key management positions. In addition, during 1995 the Corporation assumed
the stock incentive plan of a financial institution that was acquired by the
Corporation. These plans provide for the grant of stock options, restricted
stock, and stock appreciation rights. In general, stock options granted under
these plans are exercisable at a price equal to the fair value of the stock on
the date of the grant. Furthermore, the options are subject to three- to
five-year graded vesting requirements and a maximum exercise period of ten
years. These plans authorize the issuance of approximately 2.2 million shares in
the aggregate, of which 878,067 shares were unallocated as of December 31, 1997.
Activity in these stock incentive plans for each of the three years ended
December 31, 1997, 1996, and 1995, is summarized in the following paragraphs.
Stock options outstanding at the beginning of each of the three
preceding years were 939,754, 968,615, and 704,037, respectively. These options
had weighted-average exercise prices of $5.71, $5.62, and $3.94, respectively.
Stock options granted during these years were 3,750, 9,000, and 333,978,
respectively, at weighted-average exercise prices of $17.00, $13.59, and $8.53,
respectively. Stock options exercised during these years were 105,585, 30,233,
and 69,400, respectively, at weighted-average exercise prices of $2.67, $4.07,
and $2.61, respectively. Stock options outstanding at the end of each of the
three preceding years were 837,028, 939,754, and 968,615, respectively. These
options had weighted-average exercise prices of $6.14, $5.71, and $5.62,
respectively. Of these options, 763,744, 764,412, and 694,100, respectively,
were fully-vested and exercisable at weighted-average exercise prices of $5.68,
$4.69, and $4.08, respectively. As of December 31, 1997, the exercise prices of
options outstanding on that date ranged from $2.61 to $17.00 and had a
weighted-average remaining life of 4.7 years. Expirations and forfeitures of
stock options during the three years ended December 31, 1997, 1996, and 1995,
were not material.
During the year ended December 31, 1995, 83,078 shares of restricted
stock were granted under the aforementioned plans at a weighted-average fair
value of $10.41. No shares of restricted stock were granted in 1997 and 1996.
During 1989 and 1992, the Corporation also adopted stock incentive
plans designed to attract and retain qualified non-employee directors for the
Corporation and its subsidiaries. The 1989 plan granted each director options to
purchase 8,800 shares of common stock. In addition, under both plans each
director receives options to purchase an additional 4,400 shares upon election
or re-election to the Board of Directors. The stock options are exercisable at a
price at least equal to the fair value of the stock on the date of grant and are
fully-vested on the date of the grant. These plans have authorized the issuance
of 336,471 shares in the aggregate, of which 125,273 shares were unallocated as
of December 31, 1997. Activity in these stock incentive plans for each of the
three years ended December 31, 1997, 1996, and 1995 is summarized in the
following paragraph.
51
<PAGE> 53
Stock options outstanding at the beginning of each of the three
preceding years were 127,328, 120,029, and 111,230, respectively. These options
had weighted-average exercise prices of $6.68, $5.61, and $4.93, respectively.
Stock options granted during these years were 13,200, 17,598, and 13,199,
respectively at weighted-average exercise prices of $17.92, $14.09, and $10.33,
respectively. Stock options exercised during these years were 26,645, 10,299,
and 4,400, respectively, at weighted-average exercise prices of $7.59, $6.93,
and $2.61, respectively. Finally, stock options outstanding at the end of
December 31, 1997, were 113,883. These options had a weighted-average exercise
price of $7.77, a range of exercise prices from $2.61 to $17.92, and a
weighted-average remaining life of 4.9 years. There were no expirations or
forfeitures of stock options during these years.
As described in Note 1, the Corporation has elected to provide pro
forma disclosure of the effects of its stock incentive plans. If the Corporation
had accounted for its stock incentive plans using the fair value method, the
Corporation's pro forma net income would have been $17,195,000, $9,700,000 and
$10,369,000 during the years ended December 31, 1997, 1996, and 1995,
respectively. Pro forma diluted earnings per share would have been $1.75, $0.97,
and $1.11, and pro forma basic earnings per share would have been $1.88, $1.02,
and $1.17 during the same periods, respectively. It should be noted, however,
that because SFAS 123 prohibited the pro forma disclosure of the effects of
stock options granted in years prior to 1995, the pro forma disclosures for
1997, 1996, and 1995, may not be representative of the pro forma effects in
future years.
The weighted-average fair value of the options granted in 1997, 1996,
and 1995, were $5.31, $4.17, and $2.58, respectively. The fair values of these
options were estimated as of the dates they were granted using a Black-Scholes
option pricing model. Weighted-average assumptions for all periods were as
follows: 6.5% risk-free interest rate, 2.6% dividend yield, 30% volatility, and
a seven-year expected life.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS 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 U.S. 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 1980's.
In addition to this judgement, FEI also has a pending claim against the
defendant for punitive damages which could substantially increase the final
award, if any. A hearing on this claim was conducted in 1997; the Corporation
does not know at this time when it will be informed of the court's decision with
respect to this hearing. The defendant may appeal the initial judgement and/or
may 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.
OTHER COMMITMENTS AND CONTINGENCIES At December 31, 1997, the
Corporation had commitments to originate mortgage loans at market terms
aggregating approximately $31.5 million which expire on various dates in 1998.
At December 31, 1997, the Corporation also had commitments to fund $37.0 million
in additional proceeds on construction loans. As of the same date the
Corporation had approximately $3.9 million in commitments outstanding under
standby letters of credit and $8.9 million in commitments outstanding under
unused home equity lines of credit. Furthermore, the Corporation had commitments
to sell approximately $51.2 million in mortgage loans to FHLMC, FNMA, and the
FHLB at various dates in 1998.
52
<PAGE> 54
NOTE 12--STOCKHOLDERS' EQUITY
PREFERRED STOCK The Corporation is authorized to issue up to 5,000,000
shares of preferred stock, $.10 par value per share, although no such stock was
outstanding at December 31, 1997. The Board of Directors of the Corporation is
authorized to establish the voting powers, designations, preferences, or other
special rights of such shares and the qualifications, limitations, and
restrictions thereof. The preferred stock may be issued in distinctly designated
series, may be convertible to common stock, and may rank prior to the common
stock in dividend rights, liquidation preferences, or both.
SHAREHOLDERS' RIGHTS PLAN In 1995, the Corporation's Board of Directors
adopted a shareholders' rights plan (the "Rights Plan"). Under the terms of the
Rights Plan, the Board of Directors declared a dividend of one preferred share
purchase right on each outstanding share of common stock of the Corporation.
However, the rights can only be exercised if a person or group acquires 20% or
more of the common stock or announces a tender or exchange offer that would
result in a 20% or greater position in the stock. Initially, each right will
entitle shareholders to buy one one-hundredth share of the Corporation's
preferred stock at a price of $50.00, subject to adjustment. Under certain
circumstances, including the acquisition of beneficial ownership of 25% or more
of the Corporation's common stock, holders of the Corporation's common stock,
other than the acquirer, will be entitled to exercise the rights to purchase
common stock from the Corporation having a value equal to two times the exercise
price of the right. If the Corporation is acquired in a merger, share exchange,
or other business combination in which the Corporation is not the survivor,
after a person or group's acquisition of beneficial ownership of 20% or more of
the common stock, rights holders will be entitled to purchase the acquirer's
shares at a similar discount. Issuance of the rights has no dilutive effect,
will not affect reported earnings per share, is not taxable to the Corporation
or its shareholders, and will not change the way in which the Corporation's
shares are traded. The rights expire in ten years.
STOCK REPURCHASE PLANS AND TREASURY STOCK In January of 1997 and 1996
the Corporation's Board of Directors authorized the repurchase of up to 459,526
and 492,000 shares of the Corporation's outstanding common stock, respectively
(the "1997" and "1996" Plans", respectively). Such repurchases may be made from
time to time in the open market during the next twelve months as conditions
permit (both plans were extended for an additional twelve months in January
1998). Repurchased shares are held as treasury stock and are available for
general corporate purposes.
During 1997, 1996, and 1995, the Corporation repurchased 132,000,
697,200, and 71,250 shares under the 1996 Plan and a prior plan (the "1995
Plan"), which is no longer active. These shares were repurchased at an average
cost of $21.73, $13.88, and $12.05 per share during 1997, 1996, and 1995,
respectively. As of December 31, 1997, 23,550 shares remained to be purchased
under the 1996 Plan and all of the shares remained under the 1997 Plan.
During 1997, the Corporation reissued 120,165 shares of common stock
out of treasury stock with an average cost basis of $21.28 per share. In
general, these shares were issued upon the exercise of stock options by
employees and directors of the Corporation. The Corporation uses the
"last-in/first-out" method to determine the cost basis of shares removed from
treasury stock.
DIVIDEND RESTRICTIONS The ability of the Corporation to pay dividends
will depend primarily upon the receipt of dividends from the Bank. The Bank may
not declare or pay a cash dividend without regulatory approval if such dividend
would cause its net capital to be reduced below either the amount required for
the liquidation account or the current risk-based capital requirements imposed
by the Office of Thrift Supervision ("OTS"). The Bank is a "Tier 1" association
under current OTS regulations. As such, the Bank's dividend payments are limited
to 100% of its net income during the year plus an amount that would reduce by
one-half its excess risk-based regulatory capital as of the beginning of the
year, or 75% of its net income during the most recent four-quarter period,
whichever is greater.
REGULATORY CAPITAL REQUIREMENTS Financial institutions such as the Bank
are subject to minimum regulatory capital requirements as specified in federal
banking law and supporting regulations. Failure of a financial institution to
meet such requirements may subject the institution to certain mandatory--and
possibly discretionary--actions on the part of its regulators (referred to as
"prompt corrective actions"). Such actions, if undertaken, could
53
<PAGE> 55
severely restrict the activities of the institution. During each of the years
ended December 31, 1997 and 1996, the Bank's regulatory capital was sufficient
for it to be classified as "well capitalized" under the prompt corrective action
provisions of the federal banking law and supporting regulations. Accordingly,
the Bank is not subject to prompt corrective actions by its regulators.
The following table summarizes the Bank's current regulatory capital in
both percentage and dollar terms as of December 31, 1997 and 1996. It also
summarizes the minimum capital levels that must be maintained by the Bank for it
to be classified as "adequately capitalized" and "well capitalized" under the
prompt corrective action provisions of federal banking law and supporting
regulations.
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS
TO BE CLASSIFIED AS...
-----------------------------------
ADEQUATELY WELL
DECEMBER 31, 1997 CAPITALIZED CAPITALIZED ACTUAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 leverage ratio 4.0% 5.0% 6.39%
Tier 1 risk-based capital ratio 4.0% 6.0% 11.45%
Total risk-based capital ratio 8.0% 10.0% 12.23%
Tier 1 leverage ratio capital $ 61,625,000 $ 77,031,000 $ 98,430,000
Tier 1 risk-based capital 34,394,000 51,591,000 98,430,000
Total risk-based capital 68,788,000 85,985,000 105,193,000
====================================================================================================================
DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------------
Tier 1 leverage ratio 4.0% 5.0% 6.13%
Tier 1 risk-based capital ratio 4.0% 6.0% 11.53%
Total risk-based capital ratio 8.0% 10.0% 12.47%
Tier 1 leverage ratio capital $ 60,639,000 $ 75,799,000 $ 92,971,000
Tier 1 risk-based capital 32,246,000 48,370,000 92,971,000
Total risk-based capital 64,493,000 80,616,000 100,533,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 29,939,484 $ 29,939,484 $ 24,644,254 $ 24,644,254
Interest-bearing deposits with banks 7,113,756 7,113,756 2,456,901 2,456,901
Investment securities available for sale 21,376,678 21,376,678 74,029,474 74,029,474
Mortgage-backed and related securities:
Available for sale 47,895,297 47,895,297 61,875,130 61,875,130
Held for investment 124,335,969 123,613,629 147,834,733 145,217,199
Loans held for sale 45,576,945 46,600,000 20,338,790 20,700,000
Loans held for investment, gross 1,201,530,614 1,210,700,000 1,113,928,318 1,130,000,000
Federal Home Loan Bank stock 13,811,300 13,811,300 18,823,200 18,823,200
Accrued interest receivable 11,547,757 11,547,757 11,487,427 11,487,427
Financial liabilities:
Deposit liabilities $1,146,533,896 $1,149,400,000 $1,024,092,887 $1,027,200,000
Federal Home Loan Bank advances and other borrowings 275,778,770 275,800,000 383,592,983 383,300,000
Advance payments by borrowers for taxes and
insurance 3,872,764 3,872,764 3,912,206 3,912,206
Accrued interest payable 2,030,153 2,030,153 2,432,796 2,432,796
===================================================================================================================
</TABLE>
Refer to Note 1 for the methods and assumptions used by the Corporation
in estimating the fair value of financial instruments. The carrying value shown
for loans held for investment excludes the impact of the Corporation's allowance
for loan losses.
54
<PAGE> 56
NOTE 14--PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION: 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash in bank $ 405,267 $ 221,993
Interest-bearing deposits with subsidiary bank 2,757,648 2,415,879
Investment in subsidiary 108,994,270 97,643,105
Other assets 236,485 195,821
- -------------------------------------------------------------------------------------------------------------------
Total assets $112,393,670 $100,476,798
===================================================================================================================
Other borrowings $ 3,000,000 $ 5,000,000
Other liabilities 32,324 62,440
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 3,032,324 5,062,440
- -------------------------------------------------------------------------------------------------------------------
Common stock 997,082 663,933
Additional paid-in capital 35,537,146 35,580,114
Unearned restricted stock (211,006) (414,392)
Valuation allowance (664,999) (2,450,764)
Retained earnings 84,548,291 72,569,092
Treasury stock, at cost (10,845,168) (10,533,625)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 109,361,346 95,414,358
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $112,393,670 $100,476,798
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS: 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income $ 67,605 $ 133,581 $ 273,810
Other expense 743,276 693,068 353,478
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes and equity in earnings of (675,671) (559,487) (79,668)
subsidiary
Income tax benefit 236,485 195,820 27,884
- -------------------------------------------------------------------------------------------------------------------
Loss before equity in earnings of subsidiary (439,186) (363,667) (51,784)
Equity in earnings of subsidiary 17,829,549 10,437,584 10,696,418
- -------------------------------------------------------------------------------------------------------------------
Net income $17,390,363 $10,073,917 $10,644,634
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS: 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 17,390,363 $ 10,073,917 $10,644,634
Equity in earnings of subsidiary (17,829,550) (10,437,583) (10,696,418)
Other accruals and prepaids (70,780) (76,584) 97,243
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations (509,967) (440,250) 45,459
- -------------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest-bearing deposits with
subsidiary bank (341,769) 4,449,181 (320,316)
Sale of investment securities - - 2,311,367
Dividends received from subsidiary 9,500,000 8,000,000 6,250,000
Purchase of net assets of Rock Financial Corp. - - (21,040,620)
Other, net - (3,200) 451,007
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 9,158,231 12,445,981 (12,348,562)
- -------------------------------------------------------------------------------------------------------------------
Proceeds from sale of common stock 484,179 194,225 13,551,631
Increase (decrease) in other borrowings (2,000,000) 1,000,000 4,000,000
Dividends paid to shareholders (4,283,617) (3,874,954) (3,192,137)
Purchase of treasury stock (2,868,938) (9,674,875) (858,750)
Other, net 203,386 238,637 (1,333,492)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (8,464,990) (12,116,967) 12,167,252
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash in bank 183,274 (111,236) (135,851)
Cash at beginning of period 221,993 333,229 469,080
- -------------------------------------------------------------------------------------------------------------------
Cash in bank at end of period $ 405,267 $ 221,993 $ 333,229
===================================================================================================================
</TABLE>
55
<PAGE> 57
REPORT OF MANAGEMENT
The management of First Federal Capital Corp has prepared the
accompanying financial statements and is responsible for their integrity and
objectivity. The statements, which include amounts that are based on
management's best estimates and judgements, have been prepared in conformity
with generally accepted accounting principles and are free of material
misstatement. Management also prepared the other information in the annual
report on Form 10-K and is responsible for its accuracy and consistency with the
financial statements.
The Corporation maintains a system of internal control over financial
reporting, which is designed to provide reasonable assurance to the
Corporation's management and Board of Directors regarding the preparation of
reliable published annual and interim financial statements. The system contains
self-monitoring mechanisms, and actions are taken to correct deficiencies as
they are identified. However, even an effective internal control system, no
matter how well designed, has inherent limitations--including the possibility of
circumvention or overriding of controls--and therefore can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, internal control system effectiveness may vary
over time.
The Corporation assessed its internal control system as of December 31,
1997, in relation to criteria for effective internal control over the
preparation of its published annual and interim financial statements described
in "Internal Control--Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
the Corporation believes that, as of December 31, 1997, its system of internal
control over the preparation of its published annual and interim financial
statements met those criteria.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Thomas W. Schini /s/Jack C. Rusch /s/Michael W. Dosland
Thomas W. Schini Jack C. Rusch Michael W. Dosland
Chairman of the Board and Executive Vice President and Vice President and Controller
Chief Executive Officer Chief Financial Officer
</TABLE>
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated statements of financial
condition of First Federal Capital Corp as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those statements require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Federal Capital Corp at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Milwaukee, Wisconsin
January 23, 1998
56
<PAGE> 58
SUPPLEMENTARY DATA
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Dollars in thousands, except for per share DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH
amounts 1997 1997 1997 1997 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest on loans $25,349 $25,138 $24,153 $23,302 $22,736 $21,080 $19,963 $20,008
Interest on mortgage-backed and related
securities 2,817 2,965 3,128 3,215 3,371 3,539 3,710 3,873
Interest and dividends on investments 889 1,245 1,335 1,440 1,511 1,369 1,353 1,461
- --------------------------------------------------------------------------------------------------------------------
Total interest income 29,055 29,347 28,617 27,956 27,619 25,988 25,027 25,343
- --------------------------------------------------------------------------------------------------------------------
Interest on deposits 13,718 13,076 12,377 11,978 11,880 11,668 11,486 11,456
Interest on borrowings 3,924 4,929 5,090 5,172 4,885 4,242 3,734 4,333
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 17,643 18,005 17,467 17,150 16,765 15,910 15,220 15,789
- --------------------------------------------------------------------------------------------------------------------
Net interest income 11,413 11,342 11,150 10,806 10,854 10,078 9,806 9,554
Provision for loan losses 164 123 132 121 - - - -
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision 11,249 11,220 11,019 10,685 10,854 10,078 9,806 9,554
- --------------------------------------------------------------------------------------------------------------------
Gain on sale of loans 2,155 2,438 992 789 873 777 1,134 1,547
Loss on sale of investments - (628) (43) (55) (59) (62) (136) (54)
Other non-interest income 4,859 4,691 4,676 4,364 4,110 4,401 3,958 3,288
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 7,014 6,501 5,625 5,153 4,924 5,116 4,956 4,835
- --------------------------------------------------------------------------------------------------------------------
FDIC special assessment - - - - - 5,941 - -
Other non-interest expense 10,603 10,134 9,747 9,712 9,647 9,631 9,537 9,488
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 10,603 10,134 9,747 9,712 9,647 15,572 9,537 9,488
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,660 7,587 6,897 6,125 6,131 (377) 5,225 4,901
Income tax expense 2,927 2,896 2,688 2,367 2,322 (317) 1,969 1,832
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 4,733 $ 4,691 $ 4,209 $ 3,758 $ 3,809 ($60) $3,256 $ 3,069
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Income before FDIC special assessment $ 4,733 $ 4,691 $ 4,209 $ 3,758 $ 3,809 $ 3,515 $ 3,256 $ 3,069
FDIC special assessment, net of income
taxes - - - - - 3,575 - -
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 4,733 $ 4,691 $ 4,209 $ 3,758 $ 3,809 ($60) $ 3,256 $ 3,069
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income before FDIC special assessment $ 0.48 $ 0.48 $ 0.43 $ 0.38 $ 0.38 $ 0.36 $ 0.32 $0.30
FDIC special assessment, net of income
taxes - - - - - (0.36) - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 0.48 $ 0.48 $ 0.43 $ 0.38 $ 0.38 $ 0.00 $ 0.32 $0.30
====================================================================================================================
Dividends paid per share $ 0.120 $ 0.120 $0.120 $ 0.107 $ 0.107 $ 0.107 $0.107 $0.093
====================================================================================================================
Stock price at end of period $ 33.88 $ 29.00 $24.50 $ 18.67 $ 15.67 $ 15.00 $13.50 $13.33
====================================================================================================================
High stock price during period $ 34.00 $ 29.00 $24.50 $ 19.67 $16.17 $ 15.33 $14.83 $13.67
====================================================================================================================
Low stock price during period $ 25.00 $ 23.00 $16.83 $ 15.67 $15.00 $ 13.00 $13.50 $12.33
====================================================================================================================
</TABLE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
57
<PAGE> 59
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from pages
5 to 6 and page 8 of the definitive proxy statement of the Corporation dated
March 20, 1998.
ITEM 11--EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages
11 to 20 of the definitive proxy statement of the Corporation dated March 20,
1998.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages
9 to 10 of the definitive proxy statement of the Corporation dated March 20,
1998.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page
22 of the definitive proxy statement of the Corporation dated March 20, 1998.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following financial statements are included herein under Part II, Item
8, "Financial Statements and Supplementary Data":
Consolidated Statements of Condition at December 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997
Notes to Audited Consolidated Financial Statements
Report of Management
Report of Independent Auditors
(2) All financial statement schedules required under this item are omitted
because the required information is either not applicable or the required
information is included in the Audited Consolidated Financial Statements or in
the notes thereto.
58
<PAGE> 60
(3) Exhibit Index.
No. Exhibit Description
3.1 Articles of Incorporation (1)
3.2 Bylaws, as amended (7)
4.1 Specimen stock certificate (1)
4.2 Rights Agreement, dated as of January 24, 1995 (1)
10.1 1989 Stock Incentive Plan (1)
10.2 1989 Directors' Stock Option Plan, as amended (2)
10.3 1992 Stock Incentive Plan (3)
10.4 1992 Stock Option and Incentive Plan (3)
10.5 Rock Financial Corp. 1992 Stock Option and Incentive Plan (4)
10.6 1997 Stock Option and Incentive Plan (7)
10.7 Employee Stock Ownership Plan (1)
10.8 Employment agreements between the Bank and the following executive
officers:
a) Thomas W. Schini (5)
b) Bradford R. Price (1)
c) Jack C. Rusch (1)
d) Joseph M. Konradt (1)
e) Milne J. Duncan (1)
f) Robert P. Abell (1)
g) Jeffrey J. Johnson (6)
10.9 Employment agreement between the Bank and John T. Bennett (6)
10.10 First Federal of La Crosse Directors' Deferred Compensation Plan (1)
10.11 First Federal of La Crosse Annual Incentive Bonus Plan (1)
10.12 First Federal of La Crosse Incentive Bonus Plan for Group Life
Insurance (1)
10.13 First Federal of Madison Deferred Compensation Plan for Directors (1)
11.1 Computation of Earnings Per Share--Reference is made to Note 1 of the
Corporation's Audited Consolidated Financial Statements, included
herein under Part II, Item 8, "Financial Statements and Supplementary
Data"
13.1 1997 President's Message (8)
21.1 Subsidiaries of the Registrant--Reference is made to Part I, Item 1,
"Business--Subsidiaries"
23.1 Consent of Ernst & Young LLP (7)
27.1 Financial Data Schedule (7)
99.1 1997 Proxy Statement (7)
(1) Incorporated herein by reference to exhibits filed with the Corporation's
Form S-1 Registration Statement declared effective by the SEC on September
8, 1989 (Registration No. 33-98298-01).
(2) Incorporated herein by reference to exhibits filed with the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1989, filed with
the SEC on March 30, 1990.
(3) Incorporated herein by reference to the Corporation's definitive proxy
statement dated March 11, 1992.
(4) Incorporated herein by reference to exhibits filed with the Corporation's
Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration
Statement filed with the SEC on December 26, 1995 (Registration No.
33-98298-01)
(5) Incorporated herein by reference to the exhibits filed with the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1994, filed with the SEC on March 30, 1995.
(6) Incorporated herein by reference to exhibits filed with the Corporation's
Form S-4 Registration Statement declared effective by the SEC on October 18,
1995 (Registration No. 33-98298-01).
(7) Filed herewith.
(8) Filed in paper format pursuant to Rule 101(b) of Regulation S-T.
(b) The Corporation filed no reports on Form 8-K during the fourth quarter of
1997.
(c) Refer to item (a)(3) above for all exhibits filed herewith.
(d) Refer to items (a)(1) and (2) above for financial statements required under
this item.
59
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
February 28, 1998 By: /s/Thomas W. Schini
Thomas W. Schini
President, Chairman of
the Board, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas W. Schini February 28, 1998
Thomas W. Schini
President, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ Dale A. Nordeen February 28, 1998
Dale A. Nordeen
Vice Chairman of the Board
/s/ Marjorie A. Davenport February 28, 1998
Marjorie A. Davenport
Director
/s/ Henry C. Funk February 28, 1998
Henry C. Funk
Director
/s/ John F. Leinfelder February 28, 1998
John F. Leinfelder
Director
/s/ Richard T. Lommen February 28, 1998
Richard T. Lommen
Director
/s/ Patrick J. Luby February 28, 1998
Patrick J. Luby
Director
60
<PAGE> 62
/s/ David C. Mebane February 28, 1998
David C. Mebane
Director
/s/ Phillip J. Quillin February 28, 1998
Phillip J. Quillin
Director
/s/ Don P. Rundle February 28, 1998
Don P. Rundle
Director
/s/ Jack C. Rusch February 28, 1998
Jack C. Rusch
Executive Vice President and
Chief Financial Officer
(principal financial officer)
/s/ Michael W. Dosland February 28, 1998
Michael W. Dosland
Vice president and Controller
(principal accounting officer)
61
<PAGE> 1
BYLAWS OF
FIRST FEDERAL CAPITAL CORP
ARTICLE I. 0FFICES
1.1 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of
First Federal Capital Corp ("Corporation") shall be located in the State of
Wisconsin, County of La Crosse at 605 State Street, La Crosse, Wisconsin 54601,
or at such other place as may be fixed from time to time by the Board of
Directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office.
1.2 OTHER OFFICES. The Corporation may have other offices within or
outside the State of Wisconsin at such place or places as the Board of
Directors may from time to time determine.
ARTICLE II. STOCKHOLDERS' MEETINGS
2.1 MEETING PLACE. All meetings of the stockholders shall be held at
such place within or without the State of Wisconsin as shall be determined from
time to time by the Board of Directors, and the place at which any such meeting
shall be held shall be stated in the notice of the meeting.
2.2 ANNUAL MEETING TIME. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year on the second Monday
of April at the hour of 2:00 p.m., if not a legal holiday, and if a legal
holiday, then on the day following, at the same hour, or at such other date and
time following the Corporation's year-end as may be determined by the Board of
Directors and stated in the notice of such meeting.
2.3 ORGANIZATION. Each meeting of the stockholders shall be presided
over by the Chairman of the Board, or in his absence by the Vice Chairman, of if
neither the Chairman nor the Vice Chairman is present, by the President. The
Secretary, or in his absence a temporary Secretary, shall act as secretary of
each meeting of the stockholders. In the absence of the Secretary and any
temporary Secretary, the chairman of the meeting may appoint any person present
to act as secretary of the meeting. The chairman of any meeting of the
stockholders, unless prescribed by law or regulation or unless the Chairman of
the Board has otherwise determined, shall determine the order of the business
and the procedure at the meeting, including such regulation of the manner of
voting and the conduct of discussions as seem to him in order.
2.4 SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose may be called at any time by (i) the Board of Directors; (ii) the
Chairman of the Board; (iii) the President or, (iv) by the holders of at least
one-tenth of the votes entitled to be cast at the meeting.
<PAGE> 2
2.5 NOTICE. Unless otherwise provided by the Business Corporation Law of
the State of Wisconsin (the "WBCL"), notice of the place, day and hour of a
meeting of stockholders and, in the case of a special meeting of stockholders,
the purpose or purposes for which the meeting is called, shall be given by
delivering personally or by mailing a written or printed notice of the same, at
least 10 days and not more than 50 days prior to the meeting, to each
stockholder of record entitled to vote at such meeting.
2.6 VOTING LIST. The officer or agent of the Corporation having charge
of the stock transfer books for shares of capital stock of the Corporation
shall, before each meeting of stockholders, make a complete record of the
stockholders entitled to vote at such meeting or any adjournment thereof, with
the address of and the number of shares held by each. Such record shall be
produced and kept open at the time and place of the meeting and shall be
subject to inspection of any stockholder during the whole time of the
meeting for the purposes of the meeting. The original stock transfer books
shall be prima facie evidence as to who are the stockholders entitled to
examine such record or transfer books or to vote at any meeting of
stockholders.
2.7 QUORUM AND ACTION BY STOCKHOLDERS. Shares entitled to vote as a
separate voting group as defined in the WBCL may take action on a matter at a
meeting only if a quorum of those shares exists with respect to that matter.
Unless the Articles of Incorporation or the WBCL provides otherwise, a majority
of the votes entitled to be cast on the matter by the voting group constitutes
a quorum of that voting group for action on that matter.
Once a share is represented for any purpose at a meeting, other than
for the purpose of objecting to holding the meeting or transacting business at
the meeting, it is considered present for purposes of determining whether a
quorum exists, for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for that adjourned meeting.
Notice need not be given of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken, unless a new
record date is fixed for such adjourned meeting.
If a quorum exists, action on a matter, other than the election of
directors, by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
Articles of Incorporation or the WBCL requires a greater number of affirmative
votes. Unless otherwise provided in the Articles of Incorporation of the
Corporation, directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. "Plurality" means that the individuals with the largest number of
votes are elected as directors up to the maximum number of directors to be
chosen at the election.
"Voting group" means any of the following:
(i) All shares of one or more classes or series that
under the Articles of Incorporation or the WBCL are entitled to vote and be
counted together collectively on a matter at a meeting of shareholders.
<PAGE> 3
(ii) All shares that under the Articles of Incorporation
or the WBCL are entitled to vote generally on a matter.
Though less than a quorum of the outstanding shares are represented
at a meeting, a majority of the shares so represented may adjourn the meeting
from time to time without further notice. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
2.8 VOTING OF SHARES. Except as otherwise provided in these Bylaws, the
Articles of Incorporation or the Business Corporation Law of the State of
Wisconsin, each stockholder, on each matter submitted to a vote at a meeting of
stockholders, shall have one vote for each share of Common Stock registered in
his name on the books of the Corporation. Stockholders shall not be permitted
to cumulate their votes for the election of directors.
2.9 CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. For the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders, or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may provide that the stock transfer
books shall be closed for a stated period not to exceed 50 days, provided that
any such closing in the case of a meeting of stockholders shall not be less
than 10 days preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a record date for any such
determination of stockholders, such date not to be more than 50 days and, in
case of a meeting of stockholders, not less than 10 days prior to the date on
which the particular action requiring such determination of stockholders is to
be taken. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting.
2.10 PROXIES. A stockholder may vote either in person or by proxy
executed in writing by the stockholder, or his duly authorized
attorney-in-fact. Except as otherwise provided in the WBCL, (i) no proxy shall
be valid after eleven months from the date of its execution, unless otherwise
provided in the proxy; (ii) the attendance at any meeting by a stockholder who
shall have previously given a proxy applicable thereto shall not, as such, have
the effect of revoking the proxy; and (iii) the Corporation may treat any duly
executed proxy as not revoked and in full force and effect until it receives a
duly executed instrument revoking it, or a duly executed proxy bearing a later
date.
2.11 WAIVER OF NOTICE BY SHAREHOLDERS. Whenever any notice whatsoever is
required to be given to any shareholder of the Corporation under the Articles
of Incorporation or Bylaws or any provision of law, a waiver thereof in
writing, signed at any time, whether before or after the time of meeting, by
the shareholder entitled to such notice, shall be deemed equivalent to the
giving of such notice and the Corporation shall include copies of such waivers
in its corporate records; provided that such waiver in respect to any matter of
which notice is required under any provision of the WBCL, shall contain the same
information as would have been required to be included in such notice, except
the time and place of meeting.
<PAGE> 4
2.12 INFORMAL ACTION. Any action required to be taken at a meeting of
stockholders, or any other action which may be taken at a meeting of
stockholders, may be taken without a meeting if consent in writing, setting
forth the action so taken, shall be given by all of the stockholders entitled
to vote with respect to the subject matter thereof and filed with the Secretary
of the Corporation as part of the corporate records.
2.13 VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When ownership
stands in the name of two or more persons, in the absence of written directions
to the Corporation to the contrary, at any meeting of the stockholders of the
Corporation any one or more of such stockholders may cast, in person or by
proxy, all votes to which such ownership is entitled. In the event an attempt
is made to cast conflicting votes, in person or by proxy, by the several
persons in whose names shares of stock stand, the vote or votes to which those
persons are entitled shall be cast as directed by a majority of those holding
such stock and present in person or by proxy at such meeting. In the event
that a majority cannot agree, then such shares may be voted proportionally or,
upon application to a court of competent jurisdiction, an additional person may
be appointed to determine a majority for the purpose of voting such shares.
2.14 VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of
another corporation, domestic or foreign, may be voted either in person or by
proxy by the president or any other officer appointed by the president of such
other corporation; a proxy executed by any principal officer of such other
corporation or assistant thereto shall be conclusive evidence of the signer's
authority to act, in the absence of express notice of the designation of some
other person by the board of directors or bylaws of such other corporation.
Shares held by an administrator, executor, guardian, conservator, trustee in
bankruptcy, receiver or assignee for creditors may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a fiduciary may be voted by him, either in person or by
proxy. A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
2.15 INSPECTORS. For each meeting of stockholders, the Board of Directors
may appoint one or more inspectors of election. If for any meeting the
inspector(s) appointed by the Board of Directors shall be unable to act or the
Board of Directors shall fail to appoint any inspector, one or more inspectors
may be appointed at the meeting by the chairman thereof. Such inspectors shall
conduct the voting in each election of directors and, as directed by the Board
of Directors or the chairman of the meeting, the voting on the matter voted on
at such meeting, and after the voting shall make a certificate of the vote
taken. Inspectors need not be stockholders.
2.16 STOCKHOLDER PROPOSALS. At an annual meeting of stockholders, only
such business shall be conducted, and only such proposals shall be acted upon,
as shall have been properly brought before the meeting. To be properly brought
before an annual meeting, business must be (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board
of Directors; (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a
<PAGE> 5
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal executive offices of
the Corporation (to the attention of the Secretary of the Corporation) not
later than (i) with respect to the first annual meeting of stockholders of the
Corporation, the close of business on the tenth day following the date on which
notice of such annual meeting is first given to stockholders; and (ii) with
respect to any succeeding annual meeting of stockholders, 60 days prior to the
anniversary date of the mailing of proxy materials by the Corporation in
connection with the immediately preceding annual meeting of stockholders of the
Corporation. A stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting; (b) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (c) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (d) any
material interest of the stockholder in such business. Notwithstanding
anything herein to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Article II,
Section 2.17. The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Article II,
Section 2.17, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted. This provision is not a limitation on any other applicable laws
and regulations.
ARTICLE III. CAPITAL STOCK
3.1 CERTIFICATES. Certificates of stock shall be issued in numerical
order, and each stockholder shall be entitled to a certificate signed by the
President or a Vice President, and countersigned by the Secretary or an
Assistant Secretary, and may be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of such officers may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or registrar,
other than the Corporation itself or an employee of the Corporation. If an
officer who has signed or whose facsimile signature has been placed upon such
certificate ceases to be an officer before the certificate is issued, it may be
issued by the Corporation with the same effect as if the person were an officer
on the date of issue. Each certificate of stock shall state upon the face
thereof:
(a) that the Corporation is organized under the laws of the State
of Wisconsin;
(b) the name of the person to whom it is issued;
(c) the number and class of shares, and the designation of the
series, if any, which such certificate represents; and
(d) the par value of each share represented by such certificate.
<PAGE> 6
Each certificate of stock shall state upon the back thereof the
designation of each class of shares having preferences or special rights in the
payment of dividends, in voting, upon liquidation or otherwise and such other
information concerning such shares as may be desired and that the Corporation
will upon request furnish any stockholder, without charge, information as to
the number of shares authorized and outstanding and a copy of the portions of
the Articles of Incorporation containing the designations, preferences,
limitations and relative rights of all shares and any series thereof.
3.2 TRANSFERS.
(a) Transfers of stock shall be made only upon the stock transfer
books of the Corporation, kept at the registered office of the Corporation
or at its principal place of business, or at the office of its transfer
agent or registrar, and before a new certificate is issued the old
certificate shall be surrendered for cancellation. The Board of Directors
may, by resolution, open a share register in any state of the United
States, and may employ an agent or agents to keep such register,
and to record transfers of shares therein.
(b) Shares of stock shall be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on
the back of the certificate or an assignment separate from the
certificate, or by a written power of attorney to sell, assign and
transfer the same, signed by the holder of said certificate. No shares of
stock shall be transferred on the books of the Corporation until the
outstanding certificates therefor have been surrendered to the
Corporation.
3.3 REGISTERED OWNER. Registered stockholders shall be treated by the
Corporation as the holders in fact of the stock standing in their respective
names and the Corporation shall not be bound to recognize any equitable or
other claim to or interest in any share on the part of any other person,
whether or not it shall have express or other notice thereof, except as
expressly provided below or by the laws of the State of Wisconsin. The Board
of Directors may adopt by resolution a procedure whereby a stockholder of the
Corporation may certify in writing to the Corporation that all or a portion of
the shares registered in the name of such stockholder are held for the account
of a specified person or persons. The resolution shall set forth:
(a) the classification of stockholder who may certify;
(b) the purpose or purposes for which the certification may be
made;
(c) the form of certification and information to be contained
therein;
(d) if the certification is with respect to a record date or
closing of the stock transfer books, the date by which the certification
must be received by the Corporation; and
(e) such other provisions with respect to the procedure as are
deemed necessary or desirable.
<PAGE> 7
Upon receipt by the Corporation of a certification complying with the
above requirements, the persons specified in the certification shall be deemed,
for the purpose or purposes set forth in the certification, to be the holders
of record of the number of shares specified in place of the stockholder making
the certification.
3.4 MUTILATED, LOST OR DESTROYED CERTIFICATES. In case of any
mutilation, loss or destruction of any certificate of stock, another may be
issued in its place upon receipt of proof of such mutilation, loss or
destruction. The Board of Directors may impose conditions on such issuance and
may require the giving of a satisfactory bond or indemnity to the Corporation
in such sum as it may determine or establish such other procedures as it may
deem necessary.
3.5 FRACTIONAL SHARES OR SCRIP. The Corporation may (a) issue fractions
of a share which shall entitle the holder to exercise voting rights, to receive
dividends thereon and to participate in any of the assets of the Corporation in
the event of liquidation; (b) arrange for the disposition of fractional
interests by those entitled thereto; (c) pay in cash the fair value of
fractions of a share as of the time when those entitled to receive such shares
are determined; or (d) issue scrip in registered or bearer form which shall
entitle the holder to receive a certificate for a full share upon the surrender
of such scrip aggregating a full share.
3.6 SHARES OF ANOTHER CORPORATION. Shares owned by the Corporation in
another corporation, domestic or foreign, may be voted by such officer, agent
or proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the Corporation.
ARTICLE IV. BOARD OF DIRECTORS
4.1 POWERS. The business and affairs of the Corporation shall be managed
by the Board of Directors. In addition to the powers and authorities expressly
conferred upon it by these Bylaws and the Articles of Incorporation, all powers
of the Corporation may be exercised by or under the authority of the Board of
Directors, except as conferred on or reserved to the stockholders by these
Bylaws, the Articles of Incorporation or the Business Corporation Law of the
State of Wisconsin.
4.2 NUMBER AND ELECTION OF DIRECTORS.
(a) The Board of Directors, other than those who may be elected by
the holders of any class or series of stock having preference over the
Common Stock as to dividends or upon liquidation, shall be divided into
three classes. At the first annual meeting of stockholders following the
effective date of the Corporation's Articles of Incorporation, directors
of the first class shall be elected to hold office for a term expiring at
the next succeeding annual meeting, directors of the second class shall be
elected to hold office for a term expiring at the second succeeding annual
meeting, and directors of the third class shall be elected to hold office
for a term expiring at the third succeeding annual meeting, and, with
respect to directors of each class, until their
<PAGE> 8
respective successors are elected and qualified. At each subsequent
annual meeting of stockholders, directors elected to succeed those whose
terms are expiring shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders and until their respective
successors are elected and qualified. Directors need not be stockholders
or residents of the State of Wisconsin.
(b) The number of directors of the Corporation that shall
constitute the Board of Directors shall be ten. The number of directors
may at any time be increased or decreased by a vote of a majority of the
Board of Directors, provided that no decrease shall have the effect of
shortening the term of any incumbent director. Notwithstanding anything
to the contrary contained in these Bylaws, the number of directors may not
be less than seven nor more than 20.
4.3 VACANCIES.
(a) A majority of the directors then in office, whether or not
sufficient to constitute a quorum, may fill a vacancy on the Board of
Directors which results from any cause, including a vacancy created by an
increase in the number of directors, provided, however, that if the
stockholders of any class or series are entitled separately to elect one
or more directors, a majority of the remaining directors elected by that
class or series or the sole remaining director elected by that class or
series may fill any vacancy among the number of directors elected by that
class or series.
(b) A director elected by the Board of Directors to fill a vacancy
shall serve until the next annual meeting of stockholders and until his
successor is elected and qualified.
4.4 REMOVAL. Subject to the rights of any class or series of stock
having preference over the Common Stock as to dividends or upon liquidation to
elect directors, any director may be removed from office only with cause by (i)
the affirmative vote of the holders of not less than two-thirds of the issued
and outstanding shares of capital stock of the Corporation entitled to vote
generally in an election of directors at a duly constituted meeting of
stockholders called expressly for the purpose, or (ii) a majority of the total
number of directors. Except as may otherwise be provided by law, cause for
removal shall be construed to exist only if the director whose removal is
proposed (i) has been convicted of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal, or (ii)
has been adjudicated by a court of competent jurisdiction to be liable for
gross negligence or misconduct in the performance of such director's duty to
the Corporation and such adjudication is no longer subject to direct appeal. No
director may be removed as a director except for cause.
4.5 REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held without other notice than this bylaw immediately after the annual
meeting of shareholders, and each adjourned session thereof. The place of such
regular meeting shall be the same as the place of the meeting of shareholders
which precedes it, or such other suitable place as may be
<PAGE> 9
announced at such meeting of shareholders. The Board of Directors may provide,
by resolution, the time and place, either within or without the State of
Wisconsin, for the holding of additional regular meetings without other notice
then such resolution.
4.6 SPECIAL MEETINGS.
(a) Special meetings of the Board of Directors may be called by or
at the request of the President, Secretary or any two Directors. The
President, Secretary or Directors calling any special meeting of the
Board of Directors may fix any place, either within or without the State
of Wisconsin, as the place for holding any special meeting of the Board of
Directors called by them, and if no other place is fixed, the place of
meeting shall be the principal business office of the Corporation in the
State of Wisconsin.
(b) Special meetings of any committee of the Board of Directors may
be called at any time by such person or persons and with such notice as
shall be specified for such committee by the Board of Directors, or in the
absence of such specification, in the manner and with the notice required
for special meetings of the Board of Directors.
4.7 NOTICE; WAIVER. Notice may be communicated in person, by telephone,
telegraph, teletype, facsimile or other form of wire or wireless communication,
or by mail or private carrier, and, if these forms of personal notice are
impracticable, notice may be communicated by a newspaper of general circulation
in the area where published, or by radio, television or other form of public
broadcast communication. Notice of each meeting of the Board of Directors
(unless otherwise provided in or pursuant to Section 4.6) shall be communicated
to each Director at his or her business address or telephone number or at such
other address or telephone number as such Director shall have designated in
writing filed with the Secretary, in each case not less than 48 hours prior
thereto. Written notice is effective at the earliest of the following:
(i) when received;
(ii) on deposit in the U.S. Mail, if mailed postpaid and correctly
addressed; or
(iii) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested and
the receipt is signed by or on behalf of the addressee.
Oral notice is effective when communicated and the Corporation shall maintain a
record setting forth the date, time, manner and recipient of the notice.
Whenever any notice whatsoever is required to be given to any Director of
the Corporation under the Articles of Incorporation or Bylaws or any provision
of law, a waiver thereof in writing, signed at any time, whether before or
after the time of meeting, by the Director entitled to such notice, shall be
deemed equivalent to the giving of such notice, and the Corporation shall
retain copies of such waivers in its corporate records. A Director's
attendance at, or participation in, a meeting waives any required notice to him
or her of the meeting unless
<PAGE> 10
the Director at the beginning of the meeting or promptly upon his or her
arrival objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
4.8 QUORUM AND ACTION BY THE BOARD OF DIRECTORS. Except as otherwise
provided in these Bylaws, the Articles of Incorporation or the Business
Corporation Law of the State of Wisconsin, a majority of the number of
directors fixed in the manner set forth in Article IV, Section 4.2(b) hereof
shall be necessary at all meetings of the Board of Directors to constitute a
quorum for the transaction of business and the action of a majority of the
directors present at a meeting at which a quorum is present shall be the action
of the Board of Directors.
4.9 REGISTERING DISSENT. A director who is present at a meeting of the
Board of Directors at which action on a corporate matter is taken shall be
presumed to have assented to such action unless (i) he announces his dissent at
the meeting, and (ii) his dissent is entered in the minutes of the meeting, he
files his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment thereof or he forwards such
dissent by certified mail, return receipt requested, to the Secretary of the
Corporation within 24 hours of the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
4.10 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors, by
resolution adopted by a majority of the number of directors fixed in the manner
set forth in Article IV, Section 4.2(b) hereof, may appoint from its own number
standing or special committees composed of three or more directors and may in
the same manner from time to time invest such committees with such powers as it
may see fit, subject to such conditions as may be prescribed by the Board,
these Bylaws and the Business Corporation Law of the State of Wisconsin. An
Executive Committee appointed by resolution of the Board of Directors shall
have and exercise all of the authority of the Board of Directors when such
Board is not in session, except in reference to declaring dividends or
distributions on stock, election of the principal officers of the Corporation
or the filling of vacancies in the Board of Directors or committees thereof.
The designation of any committee of the Board of Directors, and the delegation
of authority thereto, shall not relieve the Board of Directors, or any member
thereof, of any responsibility imposed by law.
4.11 REMUNERATION. The Board of Directors, by the affirmative vote of a
majority of the directors then in office, and irrespective of any personal
interest of any of its members shall have authority to establish reasonable
compensation of all directors for services to the Corporation as directors,
officers or otherwise, or to delegate such authority to an appropriate
committee. The Board of Directors also shall have authority to provide for or
to delegate authority to an appropriate committee to provide for reasonable
pensions, disability or death benefits, and other benefits or payments, to
directors, officers and employees and to their estates, families, dependents or
beneficiaries on account of prior services rendered by such Directors, officers
and employees to the Corporation.
<PAGE> 11
4.12 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or which
may be taken at a meeting of the directors, or of a committee thereof, may be
taken without a meeting if a consent in writing, setting forth the action so
taken or to be taken, shall be signed by all of the directors, or all of the
members of the committee, as the case may be. Such consent shall have the same
effect as a unanimous vote.
4.13 ACTION OF DIRECTORS BY COMMUNICATIONS EQUIPMENT. To the extent
permitted by the Business Corporation Law of the State of Wisconsin, any action
required or which may be taken at a meeting of directors, or of a committee
thereof, may be taken by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time.
4.14 NOMINATIONS OF DIRECTORS. Subject to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, nominations for the election of directors may be
made by the Board of Directors or a committee appointed by the Board of
Directors or by any stockholder entitled to vote generally in an election of
directors. However, any stockholder entitled to vote generally in an election
of directors may nominate one or more persons for election as directors at a
meeting only if written notice of such stockholder's intent to make such
nomination or nominations has been delivered to or mailed and received at the
principal executive offices of the Corporation (to the attention of the
Secretary of the Corporation) not later than (i) with respect to the first
annual meeting of stockholders of the Corporation, the close of business on the
tenth day following the date on which notice of such annual meeting is first
given to stockholders; (ii) with respect to an election to be held at any
succeeding annual meeting of stockholders, 60 days prior to the anniversary
date of the mailing of proxy materials by the Corporation in connection with
the immediately preceding annual meeting of stockholders of the Corporation;
and (iii) with respect to a special meeting of stockholders for the election of
directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to stockholders. Each such notice shall
set forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (e)
the consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedures.
4.15 AGE LIMITATION. No person shall be eligible for election,
reelection, appointment, or reappointment to the Board of Directors of the
Corporation if such person is then 75 or more years of age. Any Director
attaining the age of 75 or more years of age may complete the unexpired portion
of the term being served on such date.
<PAGE> 12
ARTICLE V. OFFICERS
5.1 DESIGNATIONS. The officers of the Corporation shall be a Chairman of
the Board, a Vice Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Treasurer, each of whom shall be elected by the
Board of Directors. The President shall be the Chief Executive Officer of the
Corporation. The Board of Directors may designate one or more vice presidents
as Executive Vice President or Senior Vice President. The Board of Directors
also may elect or authorize the appointment of such other officers as the
business of the Corporation may require. Any two or more offices may be held
by the same person, except that the President may not also serve as Vice
President and/or Secretary of the Corporation.
5.2 POWERS AND DUTIES. The officers of the Corporation shall have such
authority and perform such duties as the Board of Directors may from time to
time authorize or determine. In the absence of action by the board of
Directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
5.3 ELECTION AND TERM OF OFFICE. The officers of the Corporation shall
be elected annually at the first meeting of the Board of Directors held after
each annual meeting of stockholders. If the election of officers is not held
at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation, or removal in
the manner hereinafter provided. Election or appointment of any officer,
employee or agent shall not of itself create contractual rights.
5.4 REMUNERATION. The remuneration of the officers of the Corporation
shall be fixed from time to time by the Board of Directors.
5.5 DELEGATION. In the case of absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director of other person
whom it may select.
5.6 VACANCIES. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting of the
Board.
5.7 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed at any time, with or without cause, by the affirmative
vote of a majority of the Board of Directors, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
5.8 BONDS. The Board of Directors may, by resolution, require any and
all of the officers to give bonds to the Corporation, with sufficient surety or
sureties, conditioned for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time
to time be required by the Board of Directors.
<PAGE> 13
ARTICLE VI. INDEMNIFICATION
6.1 CERTAIN DEFINITIONS. The following terms shall have the meanings set
forth below for purposes of this Article VI.
(a) "Director or officer" means any of the following:
(1) An individual who is or was a director or officer of the
Corporation.
(2) An individual who, while a director or officer of the
Corporation, is or was serving at the Corporation's request as a
director, officer, partner, trustee, member of any government or
decision-making committee, employee or agent of another
corporation, foreign or domestic, partnership, joint venture,
trust, employee benefit plan or other enterprise.
(3) An individual who, while a director or officer of the
Corporation, is or was serving an employee benefit plan of the
Corporation because his duties to the Corporation also impose
duties on, or otherwise involve services by, the person to the plan
or to participants in or beneficiaries of the plan.
(4) Unless the context requires otherwise, the estate or
personal representative of a director or officer.
(b) "Expenses" include fees, costs, charges, disbursements,
attorney fees and any other expenses incurred in connection with a
proceeding.
(c) "Liability" includes the obligation to pay a judgment,
settlement, penalty, assessment, forfeiture or fine, including an excise
tax assessed with respect to an employee benefit plan, in connection with
a proceeding and reasonable expenses.
(d) "Party" includes an individual who was, or is, or who is
threatened to be made, a named defendant or respondent in a proceeding.
(e) "Proceeding" means any threatened, pending or completed civil,
criminal, administrative or investigative action, suit, arbitration or
other proceeding, whether formal or informal and including any appeal
therefrom, which involves foreign, federal, state or local law and which
is brought by or in the right of the Corporation or by any other person.
6.2 RIGHT TO INDEMNIFICATION. As required by the WBCL, the Corporation
shall indemnify a Director, Officer or Employee to the extent he or she has
been successful on the merits or otherwise in the defense of a proceeding, for
all reasonable expenses incurred in the proceeding if the Director, Officer or
Employee was a party because he or she is a Director, Officer or Employee of
the Corporation.
<PAGE> 14
6.3 OTHER INDEMNIFICATION. In cases not included under Section 6.2
hereof, and as provided by Section 180.0851 (2) of the WBCL (or any successor
statutory provision), the Corporation shall indemnify a Director or Officer
against liability incurred by the Director or Officer in a proceeding to which
the Director or Officer was a party because he or she is a Director or Officer
of the Corporation, unless liability was incurred because the Director or
Officer breached or failed to perform a duty that he or she owes to the
Corporation and the breach or failure to perform constitutes any of the
following:
(i) A wilful failure to deal fairly with the Corporation or
its shareholders in connection with a matter in which the Director
or Officer has a material conflict of interest;
(ii) A violation of the criminal law, unless the Director or
Officer has reasonable cause to believe that his or her conduct was
lawful or no reasonable cause to believe that his or her conduct
was unlawful;
(iii) A transaction from which the Director or Officer
derived an improper personal profit; or
(iv) Wilful misconduct.
6.4 ADVANCEMENT OF EXPENSES. Within ten days after receipt of a written
request by a Director or Officer who is a party to a proceeding, the
Corporation shall pay or reimburse his or her reasonable expenses as incurred,
whether subsequent to or in advance of a final disposition of the matter in
connection with which such payment or reimbursement is sought, if the Director
or Officer provides the Corporation with all of the following:
(i) A written affirmation of his or her good faith belief
that he or she has not breached or failed to perform his or her
duties to the Corporation; and
(ii) A written undertaking, executed personally or on his or
her behalf, to repay the allowance (together with reasonable
interest thereon) to the extent that it is ultimately determined
under Section 7.01 and 7.02 hereof and pursuant to Section 180.0855
of the WBCL (or any successor statutory provision) that
indemnification is not required, will not be provided, or is not so
ordered by a court under Section 180.0854 of the WBCL (or any
successor statutory provision). The undertaking under this
subsection shall be an unlimited general obligation of the Director
or Officer, and may be accepted without reference to his or her
ability to repay the allowance. The undertaking may be secured or
unsecured as determined by the Board of Directors.
6.5 RIGHT TO INDEMNIFICATION ENFORCEABLE. Except as provided otherwise
by written agreement between the Director or Officer and the Corporation, a
Director or Officer who is a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction pursuant to Section 180.0854 of the WBCL (or any
successor statutory provision).
<PAGE> 15
6.6 SUBSEQUENT AMENDMENT. No amendment or repeal of this Article VI or
of relevant provisions of applicable law shall affect or diminish in any way the
right of any director or officer to indemnification under the provisions hereof
with respect to any proceeding arising out of, or relating to, any actions,
transactions or facts occurring prior to the final adoption of such amendment
or repeal.
6.7 OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION.
(a) Nothing contained in this Article VI shall preclude any
additional right to indemnification or allowance of expenses that a
director or officer may have under:
(1) Except as provided in sub. (2), ss. 180.0851 and
180.0853 do not preclude any additional right to indemnification or
allowance of expenses that a director or officer may have under any
of the following:
(i) The articles of incorporation or other provisions of
these bylaws.
(ii) A written agreement between the director or officer and
the Corporation.
(iii) A resolution of the Board of Directors.
(iv) A resolution that is adopted, after notice, by a
majority vote of all of the corporation's voting shares then issued
and outstanding.
(b) Regardless of the existence of an additional right under sub.
(a), the corporation may not indemnify a director or officer, or permit a
director or officer to retain any allowance of expenses unless it is
determined by or on behalf of the corporation that the director or
officer did not breach or fail to perform a duty that he or she owes to
the corporation which constitutes conduct under Sections 180.0851 (2) (a)
1,2,3 or 4 of the WBCL. A director or officer who is a party to the same
or related proceeding for which indemnification or an allowance of
expenses is sought may not participate in a determination of the nature
of conduct for which indemnification or allowance is sought under this
subsection.
(c) All rights to indemnification under this Article VI shall be
deemed to be a contract between the Corporation and each director or
officer and this Article VI shall be binding upon any successor
corporation to the Corporation, whether by way of acquisition, merger,
consolidation or otherwise.
(d) If this Article VI or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Corporation
shall nevertheless indemnify each director or officer against any
liabilities and expenses to the fullest extent permitted by any
applicable portion of this Article VI that shall not have been
invalidated and to the fullest extent permitted by the Business
Corporation Law of the State of Wisconsin.
<PAGE> 16
6.8 INSURANCE. The Corporation may purchase and maintain insurance on
behalf of a director or officer against liability asserted against or incurred
by him in his capacity as a director or officer or arising from his status as
such, regardless whether the Corporation is required or authorized to indemnify
or advance expenses to such director or officer under this Article VI.
6.9 EMPLOYEES AND AGENTS. The Corporation may, but need not, to the
extent authorized from time to time by the Board of Directors by general or
specific action or by contract, grant rights to indemnification, and to the
advancement of expenses, to any employee or agent of the Corporation who is not
a director or officer to the fullest extent of the provisions of this Article
VI and may impose such conditions and limitations thereon as the Board of
Directors deems appropriate.
ARTICLE VII. NOTICES
Except as may otherwise be required by law, any notice to any stockholder
or director may be delivered personally or by mail. If mailed, the notice
shall be deemed to have been delivered when deposited in the United States
mail, addressed to the addressee at his last known address in the records of
the Corporation, with postage thereon prepaid.
ARTICLE VIII. SEAL
The corporate seal of the Corporation shall be in such form and bear such
inscription as may be adopted by resolution of the Board of Directors, or by
usage of the officers on behalf of the Corporation.
ARTICLE IX. BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes and proceedings of its stockholders and Board of
Directors, including committees thereof; and shall keep at its registered
office or principal place of business, or at the office of its transfer agent
or registrar, a record of its stockholders, giving the names and addresses of
all stockholders and the number and class of the shares held by each. Any
books, records and minutes may be in written form or any other form capable of
being converted into written form within a reasonable time.
ARTICLE X. AMENDMENTS
10.1 AMENDMENTS. These Bylaws may be altered, amended or repealed in the
manner set forth in the Articles of Incorporation.
<PAGE> 17
10.2 EMERGENCY BYLAWS. The Board of Directors may adopt emergency bylaws,
subject to repeal or change or by action of the stockholders in the manner
specified in the Articles of Incorporation, which shall be operative during any
emergency in the conduct of the business of the Corporation resulting from an
attack on the United States or any nuclear or atomic disaster.
ARTICLE XI. USE OF PRONOUNS
Use of the masculine gender in these Bylaws shall be considered to
represent either masculine or feminine gender whenever appropriate.
Most recently amended by Resolution of the Corporation's Board of
Directors on January 27, 1998.
<PAGE> 1
FIRST FEDERAL CAPITAL CORP.
1997 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE.
The purpose of the First Federal Capital Corp. (the "Company") 1997 Stock
Option and Incentive Plan (the "Plan") is to advance the interests of the
Company and its shareholders by providing those key employees of the Company
and its Affiliates, including First Federal Savings Bank of La Crosse-Madison
(the "Bank"), upon whose judgment, initiative and efforts the successful
conduct of the business of the Company and its Affiliates largely depends, with
additional incentive to perform in a superior manner. A purpose of the Plan
also is to attract and retain personnel of experience and ability to the
service of the Company and its Affiliates, and to reward such individuals for
achievement of corporate and individual performance goals.
2. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of corporations
of which the Company is a member, or (ii) an unincorporated trade or business
which is under common control with the Company as determined in accordance with
Section 414(c) of the Code and the regulations issued thereunder. For purposes
hereof, a "controlled group of corporations" shall mean a controlled group of
corporations as defined in Section 1563(a) of the Code determined without
regard to Section 1563(a)(4) and (e)(3)(C).
(b) "Award" means a Stock Grant or a grant of Non-statutory Stock Options
or Incentive Stock Options pursuant to the provisions of this Plan.
(c) "Board of Directors" or "Board" means the board of directors of the
Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Change in Control" of the Company means a change in control of a
nature that: (i) would be required to be reported in response to Item 1 of the
current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Exchange Act; or (ii) results in a change in control
of the Bank or the Company within the meaning of the Home Owners Loan Act of
1933 and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the effective date of
this Plan; or (iii) without limitation shall be deemed to have occurred at such
time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Bank or the Company representing 25% or more of the Bank's or the Company's
outstanding securities ordinarily having the right to vote in the election of
<PAGE> 2
directors except for any securities purchased by the Bank's employee stock
benefit plans; or (b) individuals who constitute the Board on the date hereof
(the "Incumbent Board"), cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's shareholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (b),
considered as though he or she were a member of the Incumbent Board; or (c) a
plan of reorganization, merger, consolidation, sale of all or substantially all
the assets of the Bank or the Company or similar transaction in which the Bank
or Company is not the surviving institution which is approved by shareholders
and becomes effective; or (d) a proxy statement soliciting proxies from
shareholders of the Company, by someone other than the current management of
the Company, seeking shareholder approval of a plan of reorganization, merger
or consolidation of the Company or the Bank or similar transaction with one or
more corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Company shall be distributed and shareholders approve the action disclosed in
the proxy materials.
(e) "Committee" means a committee consisting of two or more Non-Employee
Directors appointed by the Board pursuant to Section 3 hereof. "Non-Employee
Director," as defined in Rule 16b-3 promulgated by the SEC under the Exchange
Act, means a director who (i) is not currently an officer or otherwise employed
by the Company or the Bank, or a parent or other subsidiary of the Company,
(ii) does not receive compensation for consulting services or in any other
capacity from the Company or the Bank in excess of $60,000 in any one year,
(iii) does not possess an interest in and is not engaged in business
relationships required to be reported under Items 404(a) or 404(b) of
Regulation S-K promulgated under the Exchange Act, and (iv) is an Outside
Director as defined in Treas. Reg. 1.162-27 promulgated under the Code.
(f) "Common Stock" means the Common Stock of the Company, $.10 par value
per share.
(g) "Date of Grant" means the date an Award is effective pursuant to the
terms hereof.
(h) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an Employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or
approved by the Committee must advise the Committee that it is either not
possible to determine when
-2-
<PAGE> 3
such Disability will terminate or that it appears probable that such Disability
will be permanent during the remainder of said participant's lifetime.
(i) "Employee" means any person who is currently employed by the Company
or any Affiliate.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the closing price as reported by the National
Association of Securities Dealers Automated Quotation System (as published by
the Wall Street Journal, if published) on such date or if the Common Stock was
not traded on such date, on the next preceding day on which the Common Stock
was traded thereon or the last previous date on which a sale is reported.
(l) "Incentive Stock Option" means an Option granted by the Committee to
a Participant, which Option is designed as an Incentive Stock Option pursuant to
Section 9 of this Plan.
(m) "Non-statutory Stock Option" means an Option granted to a
Participant and which is not an Incentive Stock Option.
(n) "Option" means an Award granted under Section 8 or Section 9 of this
Plan.
(o) "Participant" means an Employee of the Company or its Affiliates
chosen by the Committee to participate in the Plan.
(p) "Plan Year(s)" means a calendar year or years commencing on or after
January 1, 1997.
(q) "Retirement" means a termination of employment which constitutes a
normal, early or late retirement under the First Federal Savings Bank
LaCrosse-Madison Pension Plan.
(r) "SEC" means the Securities and Exchange Commission.
(s) "Stock Grant" means a grant of shares of Common Stock accompanied by
such restrictions as may be determined by the Committee under Section 7 of this
Plan.
(t) "Termination for Cause" means the termination for personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal
-3-
<PAGE> 4
profit, intentional failure to perform stated duties, or the willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order or the material breach of any
provisions of an Employee's employment contract.
(u) "Threatened Change in Control" shall mean any set of circumstances
which in the opinion of the Board, as expressed through a resolution, poses a
real, substantial and immediate possibility of leading to a Change in Control.
3. ADMINISTRATION.
3.1 General. The Plan shall be administered by the Committee. The
members of the Committee shall be appointed by the Board. The Committee shall
act by vote or written consent of a majority of its members. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it sees necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it deems necessary or advisable with respect to Participants. All
determinations and interpretations made by the Committee shall be binding and
conclusive on such Participants and on their legal representatives and
beneficiaries. In determining the number of shares of Common Stock with
respect to which Options and Stock Grants are exercisable, fractional shares
will be rounded up to the nearest whole number if the fraction is 0.5 or
higher, and down if it less.
3.2 Limitation on Liability. No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan,
any rule, regulation or procedure adopted by it pursuant thereto or any Awards
granted under it. If a member of the Committee is a party or is threatened to
made a party to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of anything done or not done by him or her in such capacity under or with
respect to the Plan, the Company shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner reasonably believed
to be in the best interests of the Company, and its Affiliates and, with
respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
-4-
<PAGE> 5
4. TYPES OF AWARDS.
Awards under the Plan may be granted in any one or a combination of:
(a) Stock Grants;
(b) Non-statutory Stock Options;
(c) Incentive Stock Options;
as defined in paragraphs 7, 8 and 9 of the Plan.
The Committee shall, in its discretion, determine from time to time which
Employees will be granted Awards under the Plan, the number of shares of Common
Stock subject to each Award, whether each Option will be an Incentive Stock
Option or a Non-statutory Stock Option, the exercise price of an Option and the
restrictions, if any, which will be applicable to each Stock Grant. In making
all such determinations, the Committee shall take into account the duties,
responsibilities and performance of each respective Employee, his or her
present and potential contributions to the growth and success of the Company,
his salary and such other factors as the Committee shall deem relevant to
accomplishing the purposes of the Plan.
No optionee shall have any voting or dividend rights or other rights of a
shareholder in respect of any shares of Common Stock covered by an Option prior
to the time that the Participant's name is recorded on the Company's
shareholder records as the holder of record of such shares acquired pursuant to
the exercise of an Option.
5. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for Stock Grants and for purchase pursuant to the exercise of
Options granted under the Plan is 490,000 shares of Common Stock.
Of the total shares of Common Stock available under the Plan, Options to
purchase no more than 122,500 shares of Common Stock shall be issued to any
Participant in any period of three (3) calendar years.
The shares of Common Stock to be subject to the Plan may be either
authorized but unissued shares or shares previously issued and reacquired by
the Company. To the extent that Options are granted and Stock Grants are made
under the Plan, the shares underlying such Options and Stock Grants will be
unavailable for future grants under the Plan except that, to the extent that
the Options and Stock Grants granted under the Plan terminate, expire or are
canceled without having been exercised, new Awards may be made with respect to
such shares.
-5-
<PAGE> 6
6. ELIGIBILITY.
Officers and other Employees (including Employees who also are directors
of the Company or its Affiliates) shall be eligible to receive Stock Grants,
Incentive Stock Options and Non-statutory Stock Options under the Plan. Awards
may not be granted to individuals who are not Employees.
7. STOCK GRANTS.
7.1 General Terms. Each Stock Grant may be accompanied by such
restrictions, or may be made without any restrictions, as may be determined in
the discretion of the Committee. Such restrictions may include, without
limitation, requirements that the Participant remain in the continuous
employment of the Company or its Affiliates for a specified period of time, or
that the Participant meet designated individual performance objectives, or that
the Company and/or one or more of its Affiliates meet designated performance
objectives.
7.2 Issuance Procedures. A stock certificate representing the number of
shares of Common Stock covered by a Stock Grant shall be registered in the
Participant's name and may be held by the Participant; provided however, if a
Stock Grant is subject to certain restrictions, the shares of Common Stock
covered by such Stock Grant shall be registered in the Participant's name and
held in custody by the Company. A Participant who has been awarded a Stock
Grant shall have all rights and privileges of a shareholder of the Company as
to the shares of Common Stock covered by a Stock Grant, including the right to
receive dividends and the right to vote such shares, provided that (a) a
Participant shall not be entitled to delivery of a certificate evidencing such
shares or any certificate evidencing stock dividends until the expiration or
satisfaction of any applicable restrictions, (b) none of the shares of Common
Stock covered by the Stock Grant may be sold, transferred, assigned, pledged or
otherwise encumbered or disposed of prior to the expiration or satisfaction of
any applicable restrictions, and (c) all of the shares of Common Stock covered
by a Stock Grant shall be forfeited and all rights of a Participant who has
been awarded such Stock Grant to such shares shall terminate without further
obligation on the part of the Company in the event that any applicable
restrictions do not expire or are not satisfied. Upon forfeiture of shares of
Common Stock, such shares shall be transferred to the Company without further
action by the Participant. Upon the expiration or satisfaction of any
applicable restrictions, whether in the ordinary course or under circumstances
set forth in Section 7.3, certificates evidencing shares of Common Stock
subject to the related Stock Grant shall be delivered to the Participant, or
the Participant's beneficiary or estate, as the case may be, free of all such
restrictions.
-6-
<PAGE> 7
7.3 Accelerated Vesting.
(a) Death, Disability or Retirement. Unless the Committee shall
specifically state otherwise at the time a Stock Grant is awarded, all Stock
Grants shall become vested in full and all related restrictions shall terminate
and expire on the date that a recipient of a Stock Grant terminates his
employment with the Company or its Affiliates due to death, Disability or
Retirement.
(b) Change in Control. Notwithstanding anything to the contrary herein,
all outstanding Stock Grants shall become immediately vested and all related
restrictions shall terminate and expire in the event there is an actual, or
Threatened, Change in Control of the Company.
8. NON-STATUTORY STOCK OPTIONS.
8.1 Grant of Non-statutory Stock Options.
(a) Grants to Employees. The Committee may, from time to time, grant
Non-statutory Stock Options to Employees and, upon such terms and conditions as
the Committee may determine, grant Non-statutory Stock Options in exchange for
and upon surrender of previously granted Awards under this Plan.
(b) Terms of Non-Statutory Options. Non-statutory Stock Options granted
under this Plan are subject to the following terms and conditions:
(i) Price. The purchase price per share of Common Stock
deliverable upon the exercise of each Non-statutory Stock Option shall be
determined on the date the option is granted. Such purchase price shall be
the Fair Market Value of the Company's Common Stock on the Date of Grant or
such greater amount as determined by the Committee. Shares may be purchased
only upon full payment of the purchase price. Payment of the purchase
price may be made, in whole or in part, through the surrender of shares of the
Common Stock of the Company at the Fair Market Value of such shares on the date
of surrender determined in the manner described in Section 2(k) of the Plan.
(ii) Terms of Options. The term during which each Non-statutory
Stock Option may be exercised shall be ten years from the Date of Grant, or such
shorter period determined by the Committee. The Committee shall determine with
respect to Employees, the date on which each Non-statutory Stock Option shall
become exercisable and may provide that a Non-statutory Stock Option shall
become exercisable in installments. The shares comprising each installment may
be purchased in whole or in part at any time after such installment becomes
purchasable. The Committee may, in its sole discretion, accelerate the time at
which any Non-statutory Stock Option granted to an Employee may be exercised in
whole or in part.
-7-
<PAGE> 8
Notwithstanding the above, in the event of a Change in Control of the
Company or a Threatened Change in Control, all Non-statutory Stock Options
shall become immediately exercisable.
(iii) Termination of Service.
Upon the termination of a Participant's service for any reason other
than death, Disability, Retirement or Termination for Cause, the Participant's
Non-statutory Stock Options shall be exercisable only as to those shares which
were immediately purchasable by the Participant at the date of termination and
only for a period of three months following termination.
In the event of Termination for Cause, all rights under the
Participant's Non-statutory Stock Options shall expire upon termination.
In the event of the death, Disability or Retirement of any
Participant or a Change in Control, all Non-statutory Stock Options held by the
Participant, whether or not exercisable at such time, shall be exercisable by
the Participant or his legal representatives or beneficiaries of the Participant
for one year.
The Committee, at the time of grant or thereafter, may extend the
period of Non-statutory Stock Option exercise on a Participant's termination of
service to a period not exceeding 5 years, provided that in no event shall the
period extend beyond the expiration of the Non-statutory Stock Option term.
9. INCENTIVE STOCK OPTIONS.
9.1 Grant of Incentive Stock Options.
The Committee may, from time to time, grant Incentive Stock Options to
Employees. Incentive Stock Options granted pursuant to the Plan shall be
subject to the following terms and conditions:
(a) Price. The purchase price per share of Common Stock deliverable
upon the exercise of each Incentive Stock Option shall be not less than 100% of
the Fair Market Value of the Company's Common Stock on the Date of Grant.
However, if a Participant owns Common Stock representing more than 10% of the
total combined voting power of all classes of Common Stock of the Company (or
under Section 425(d) of the Code is deemed to own Common Stock representing
more than 10% of the total combined voting power of all such classes of Common
Stock), the purchase price per share of Common Stock deliverable upon the
exercise of each Incentive Stock Option shall not be less than 110% of the
Fair Market Value of the Company's Common Stock on the Date of Grant. Payment
of the purchase price may be made, in whole or in part, through the surrender
of shares of the Common Stock of the
-8-
<PAGE> 9
Company at the Fair Market Value of such shares on the date of surrender
determined in the manner described in Section 2(k).
(b) Amounts of Options. Incentive Stock Options may be granted to any
Employee in such amounts as determined by the Committee. In the case of an
option intended to qualify as an Incentive Stock Option, the aggregate Fair
Market Value (determined as of the time the option is granted) of the Common
Stock with respect to which Incentive Stock Options granted are exercisable for
the first time by the Participant during any calendar year (under all plans of
the Participant's employer corporation and its parent and subsidiary
corporations) shall not exceed $100,000. The provisions of this Section 9.1(b)
shall be construed and applied in accordance with Section 422(d) of the Code
and the regulations, if any, promulgated thereunder. To the extent an award
under this Section 9.1 exceeds this $100,000 limit, the portion of the award in
excess of such limit shall be deemed a Non-statutory Stock Option.
(c) Terms of Options. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than ten years
from the Date of Grant. If at the time an Incentive Stock Option is granted to
an Employee, the Employee owns Common Stock representing more than 10% of the
total combined voting power of the Company (or, under Section 425(d) of the
Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all such classes of Common Stock), the Incentive Stock
Option granted to such Employee shall not be exercisable after the expiration
of five years from the Date of Grant.
No Incentive Stock Option granted under this Plan is transferable except
by will or the laws of descent and distribution and is exercisable in his
lifetime only by the Employee to whom it is granted.
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable and may provide that an Incentive Stock Option
shall become exercisable in installments. The shares comprising each
installment may be purchased in whole or in part at any time after such
installment becomes purchasable, provided that the amount able to be first
exercised in a given year is consistent with the terms of Section 422 of the
Code. The Committee may, in its sole discretion, accelerate the time at which
any Incentive Stock Option may be exercised in whole or in part, provided that
it is consistent with the terms of Section 422 of the Code.
Notwithstanding the above, in the event of a Change in Control of the
Company, or Threatened Change in Control, all Incentive Stock Options shall
become immediately exercisable.
-9-
<PAGE> 10
(d) Termination of Service. Upon the termination of a Participant's
service for any reason other than death, Disability, Retirement, Termination
for Cause or Change in Control, the Incentive Stock Options shall be
exercisable only as to those shares which were immediately purchasable by the
Participant at the date of termination and only for a period of three months
following termination.
In the event of Termination for Cause, all rights under the Participant's
Incentive Stock Options shall expire upon termination.
In the event of death, Disability or Retirement of any Employee, all
Incentive Stock Options held by such Participant, whether or not exercisable at
such time, shall be exercisable by the Participant or the Participant's legal
representatives or beneficiaries for one year following the date of the
Participant's death, Retirement or cessation of employment due to Disability;
provided, however, that such option shall not be eligible for treatment as an
Incentive Stock Option in the event such option is exercised more than three
months following the date of the Participant's cessation of employment.
Upon termination of the Participant's service due to a Change in Control,
all Incentive Stock Options held by such Participant, whether or not
exercisable at such time, shall be exercisable for a period of one year
following the date of Participant's cessation of employment; provided however,
that such option shall not be eligible for treatment as an Incentive Stock
Option in the event such option is exercised more than three months following
the date of the Participant's cessation of employment.
The Committee, at the time of grant or thereafter, may extend the period
of Incentive Stock Option exercise on a Participant's termination of service to
a period not exceeding 5 years, provided, however, that such option shall not
be eligible for treatment as an Incentive Stock Option in the event such option
is exercised more than three months following the date of the Participant's
cessation of employment. Notwithstanding anything to the contrary contained
herein, in no event shall the exercise period extend beyond the expiration of
the Incentive Stock Option term.
(e) Compliance with Code. The options granted under this Section 9 of
the Plan are intended to qualify as incentive stock options within the meaning
of Section 422 of the Code, but the Company makes no warranty as to the
qualification of any option as an incentive stock option within the meaning of
Section 422 of the Code.
-10-
<PAGE> 11
10. SURRENDER OF OPTIONS TO THE COMPANY.
In the event of a Participant's termination of employment, the Participant
(or the Participant's personal representative(s), heir(s), or devisee(s)) may,
in a form acceptable to the Committee, make application to surrender all or
part of options held by such Participant in exchange for a cash payment from
the Company of an amount equal to the difference between the Fair Market Value
of the Common Stock on the date of termination and the exercise price per
share of the option on the Date of Grant. Whether the Committee accepts such
application or determines to make payment, in whole or part, is within its
absolute and sole discretion, it being expressly understood that the Committee
is under no obligation to any Participant whatsoever to make such payments. In
the event that the Committee accepts such application and the Company
determines to make payment, such payment shall be in lieu of the exercise of
the underlying option and such option shall cease to be exercisable.
11. RIGHTS OF A SHAREHOLDER; LIMITED TRANSFERABILITY.
No Participant shall have any rights as a shareholder with respect to any
shares covered by a Non-statutory and/or Incentive Stock Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ of
the Company or its Affiliates or to continue to perform services for the
Company or its Affiliates or interferes in any way with the right of the
Company or its Affiliates to terminate a Participant's services as an officer
or other Employee at any time.
No Incentive Stock Option granted under this Plan is transferable except
by will or the laws of descent and distribution and is exercisable in his or
her lifetime only by the Participant to whom it is granted.
Non-statutory Stock Options granted hereunder may be exercised only during
a Participant's lifetime by the Participant, the Participant's guardian or
legal representative or by a permissible transferee. Non-statutory Stock
Options shall be transferable by Participants pursuant to the laws of descent
and distribution upon a Participant's death, and during a Participant's
lifetime, Non-statutory Stock Options shall be transferable by Participants to
members of their immediate family, trusts for the benefit of members of their
immediate family, and charitable institutions ("permissible transferee") to the
extent permitted under Section 16 of the Exchange Act and subject to federal
and state securities laws. The term "immediate family" shall mean any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, sister-in-law, or brother-in-law and
shall include adoptive relationships.
-11-
<PAGE> 12
The Committee shall have the authority to establish rules and regulations
specifically governing the transfer of Options granted under this Plan as it
deems necessary and advisable.
12. AGREEMENT WITH GRANTEES.
Each Award of Options will be evidenced by a written agreement, executed
by the Participant and the Company or its Affiliates which describes the
conditions for receiving the Options including the date of Option Award, the
purchase price if any, applicable periods, and any other terms and conditions
as may be required by applicable securities law.
The proper officers of the Company shall advise each Participant who is
awarded a Stock Grant, in writing, of the number of shares to which it pertains
and the terms and conditions and any restrictions applicable to such Stock
Grant; provided they are not inconsistent with the terms, conditions and
provisions of the Plan.
13. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a person
or persons to receive, in the event of death, any Option Award to which the
Participant would then be entitled. Such designation will be made upon forms
supplied by and delivered to the Company and may be revoked in writing. If a
Participant fails effectively to designate a beneficiary, then the
Participant's estate will be deemed to be the beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock of
the Company by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Company, the Committee will
make such adjustments to previously granted Awards, to prevent dilution or
enlargement of the rights of the Participant, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
covered by Awards already made under the Plan;
-12-
<PAGE> 13
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award.
15. WITHHOLDING.
There may be deducted from each distribution of cash and/or Common Stock
under the Plan the amount of tax required by any governmental authority to be
withheld.
16. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, terminate,
modify or amend the Plan in any respect; provided however, that Sections 7.1,
8.1 and 9.1 governing grants shall not be amended more than once every six
months other than to comport with the Code or the Employee Retirement Income
Security Act of 1974, as amended, if applicable.
The Board may determine that shareholder approval of any amendment to this
Plan may be advisable for any reason, including but not limited to, for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange listing
requirements.
Such termination, modification or amendment may not affect the rights of a
Participant under an outstanding Award, except the Board may, prior to a Change
in Control, terminate the Plan in connection with a Change in Control and make
a cash payment to all Participants equal to the difference between the Fair
Market Value of the Common Stock on the date of the Change in Control and the
exercise price per share of an Option on the Date of Grant.
17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as of the date the Plan is approved by
shareholders at an annual or special meeting of shareholders (the "Effective
Date"). The Plan also shall be presented to shareholders of the Company for
ratification for purposes of: (i) satisfying one of the requirements of Section
422 of the Code governing the tax treatment for Incentive Stock Options; and
(ii) maintaining listing on the NASDAQ National Market System.
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<PAGE> 14
18. TERMINATION OF THE PLAN.
No Awards under the Plan shall be granted more than ten (10) years after
the Effective Date of the Plan. The Board of Directors has the right to
suspend or terminate the Plan at any time. No termination shall, without the
consent of a Participant, adversely affect such individual's rights under a
previously granted award.
19. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State of
Wisconsin to the extent not preempted by Federal law as now or hereafter in
effect.
20. COMPLIANCE WITH SECTION 16.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
___________________________ ______________________________
Date Adopted (Signature)
Title
___________________________ ______________________________
Date Approved by Secretary
Shareholders
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<PAGE> 1
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8) pertaining to the Employee Stock Option Plan of First
Federal Capital Corp of our report dated January 23, 1998, with respect to the
consolidated financial statements of First Federal Capital Corp included in the
annual report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Milwaukee, Wisconsin
March 20, 1998
62
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,939,484
<INT-BEARING-DEPOSITS> 7,113,756
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,271,975
<INVESTMENTS-CARRYING> 124,335,969
<INVESTMENTS-MARKET> 123,613,629
<LOANS> 1,193,893,087
<ALLOWANCE> 7,637,527
<TOTAL-ASSETS> 1,544,294,398
<DEPOSITS> 1,146,533,896
<SHORT-TERM> 242,663,770
<LIABILITIES-OTHER> 12,620,386
<LONG-TERM> 33,115,000
0
0
<COMMON> 36,534,228
<OTHER-SE> 72,827,118
<TOTAL-LIABILITIES-AND-EQUITY> 1,544,294,398
<INTEREST-LOAN> 97,941,595
<INTEREST-INVEST> 17,034,661
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 114,976,256
<INTEREST-DEPOSIT> 51,149,724
<INTEREST-EXPENSE> 70,265,057
<INTEREST-INCOME-NET> 44,711,199
<LOAN-LOSSES> 538,957
<SECURITIES-GAINS> (725,142)
<EXPENSE-OTHER> 40,197,052
<INCOME-PRETAX> 28,268,875
<INCOME-PRE-EXTRAORDINARY> 28,268,875
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,390,363
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 7.89
<LOANS-NON> 4,410,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,200,000
<ALLOWANCE-OPEN> 7,888,323
<CHARGE-OFFS> 816,217
<RECOVERIES> (26,464)
<ALLOWANCE-CLOSE> 7,637,527
<ALLOWANCE-DOMESTIC> 7,637,527
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to 14a-11(c) or Rule 14a-12
FIRST FEDERAL CAPITAL CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
---------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
---------------------------------------------------------------------
(3) Filing party:
---------------------------------------------------------------------
(4) Date filed:
---------------------------------------------------------------------
<PAGE> 2
FIRST FEDERAL CAPITAL CORP
A FEDERAL SAVINGS BANK HOLDING COMPANY
March 20, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of First Federal Capital Corp., the holding company for First Federal Savings
Bank La Crosse - Madison, which will be held on Wednesday, April 22, 1998, at
10:30 a.m., Central Time, at the Radisson Hotel, 200 Harborview Plaza, La
Crosse, Wisconsin.
The attached Notice of Annual Meeting of Stockholders and Proxy
Statement describe the formal business to be conducted at the Annual Meeting.
The Company's Form 10-K Annual Report for the fiscal year ended December 31,
1997 also is included in this 1997 Annual Report. Directors and officers of the
Company, as well as representatives of Ernst & Young LLP, the Company's
independent auditors, will be present at the Annual Meeting to respond to any
questions that our stockholders may have.
It is very important that you be represented at the Annual Meeting
regardless of the number of shares you own or whether you are able to attend the
Annual Meeting in person. We urge you to mark, sign and date your proxy card
today and return it in the envelope provided, even if you plan to attend the
Annual Meeting. This will not prevent you from voting in person, but will ensure
that your vote is counted if you are unable to attend.
Your continued support of and interest in First Federal Capital Corp.
are sincerely appreciated.
Sincerely,
THOMAS W. SCHINI
Chairman, President and Chief Executive Officer
<PAGE> 3
FIRST FEDERAL CAPITAL CORP
605 STATE STREET
LA CROSSE, WISCONSIN 54601
(608) 784-8000
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 22, 1998
---------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Annual Meeting") of First Federal Capital Corp. (the "Company") will be held on
Wednesday, April 22, 1998, at 10:30 a.m., Central Time, at the Radisson Hotel,
200 Harborview Plaza, La Crosse, Wisconsin, for the following purposes, all of
which are set forth more completely in the accompanying Proxy Statement:
(1) To elect three directors each for three-year terms and in each
case until their successors are elected and qualified;
(2) To ratify the appointment by the Board of Directors of Ernst &
Young LLP as the Company's independent auditors for the fiscal
year ending December 31, 1998; and
(3) To transact such other business as may properly come before
the Annual Meeting or any adjournments or postponements
thereof. The Board of Directors is not aware of any other such
business.
The Board of Directors has fixed March 4, 1998 as the voting record
date for the determination of stockholders entitled to notice of and to vote at
the Annual Meeting and at any adjournments or postponements thereof. Only
stockholders of record as of the close of business on that date will be entitled
to vote at the Annual Meeting or at any adjournments or postponements thereof.
In the event there are not sufficient votes for a quorum or to approve or ratify
any of the foregoing proposals at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit further solicitation of proxies by
the Company.
By Order of the Board of Directors
Bradford R. Price
Executive Vice President and Secretary
La Crosse, Wisconsin
March 20, 1998
===============================================================================
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU
PLAN TO BE PRESENT, YOU ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN
THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE ANNUAL
MEETING, YOU MAY VOTE EITHER IN PERSON OR BY PROXY. ANY PROXY GIVEN MAY BE
REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE
THEREOF.
===============================================================================
<PAGE> 4
FIRST FEDERAL CAPITAL CORP
---------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 22, 1998
---------------------
This Proxy Statement is being furnished to holders of common stock,
$0.10 par value per share ("Common Stock"), of First Federal Capital Corp. (the
"Company"), the holding company for First Federal Savings Bank La Crosse -
Madison (the "Bank"). Proxies are being solicited on behalf of the Board of
Directors of the Company to be used at the Annual Meeting of Stockholders
("Annual Meeting") to be held at the Radisson Hotel, 200 Harborview Plaza, La
Crosse, Wisconsin, on Wednesday, April 22, 1998, at 10:30 a.m., Central Time,
and at any adjournments or postponements thereof for the purposes set forth in
the Notice of Annual Meeting of Stockholders.
The Company's 1997 Annual Report to Stockholders which includes the
Company's Form 10-K Annual Report, including the Company's consolidated
financial statements for the fiscal year ended December 31, 1997, accompany this
Proxy Statement and appointment form of proxy ("proxy"), which are first being
mailed to stockholders on or about March 20, 1998.
Only stockholders of record at the close of business on March 4, 1998
(the "Voting Record Date") will be entitled to vote at the Annual Meeting. On
the Voting Record Date, there were 9,255,430 shares of Common Stock outstanding
and the Company had no other class of equity securities outstanding. Each share
of Common Stock is entitled to one vote at the Annual Meeting on all matters
properly presented at the meeting.
Stockholders are requested to vote by completing the enclosed proxy and
returning it signed and dated in the enclosed postage-paid envelope. The proxy
solicited hereby, if properly signed and returned to the Company and not revoked
prior to its use, will be voted in accordance with the instructions contained
therein. Where no instructions are indicated, each proxy received will be voted
FOR the election of each of the nominees for director described herein and FOR
the ratification of the appointment of Ernst & Young LLP as independent auditors
of the Company for the fiscal year ending December 31, 1998 and, upon the
transaction of such other business as may properly come before the Annual
Meeting, in accordance with the best judgment of the persons appointed as
proxies. Any stockholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Company written
notice thereof (Bradford R. Price, Executive Vice President and Secretary, First
Federal Capital Corp., 605 State Street, La Crosse, Wisconsin 54601); (ii)
submitting a duly-executed proxy bearing a later date; or (iii) appearing at the
Annual Meeting and giving the Secretary notice of his or her intention to vote
in person. Returning your completed proxy will not prevent you from voting in
person at the Annual Meeting should you be present and wish to do so. Proxies
solicited hereby may be exercised only at the Annual Meeting and any adjournment
or postponement thereof and will not be used for any other meeting.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote is
necessary to constitute a quorum at the Annual Meeting. Directors will be
elected by a plurality of the votes cast at the Annual Meeting. The affirmative
vote of at least a majority of the shares of Common Stock represented in person
or by proxy at the Annual Meeting is necessary to ratify the appointment of
Ernst & Young LLP as independent auditors of the Company for the fiscal year
ending December 31, 1998.
<PAGE> 5
Abstentions will be counted for purposes of determining whether a
quorum exists at the Annual Meeting. Because of the required votes, abstentions
will have the same effect as a vote against the proposal to ratify the
appointment of the Company's independent auditors, but will not be counted as
votes cast for the election of directors and thus, will have no effect on the
voting for the election of directors. Under rules of the New York Stock
Exchange, all of the proposals for consideration at the Annual Meeting are
considered "discretionary" items upon which brokerage firms may vote in their
discretion on behalf of their client if such clients have not furnished voting
instructions. Therefore, there are no proposals to be considered at the Annual
Meeting which are considered "non-discretionary" and for which there will be
"broker non-votes."
In the event there are not sufficient votes for a quorum or to approve
or ratify any proposal at the time of the Annual Meeting, the Annual Meeting may
be adjourned or postponed in order to permit the further solicitation of
proxies. Proxies solicited hereby will be returned to the Board of Directors,
and will be tabulated by inspectors of election designated by the Board of
Directors, who will not be employed by, or a director of, the Company or any of
its affiliates.
MATTERS TO BE VOTED ON AT THE ANNUAL MEETING
MATTER 1.
ELECTION OF DIRECTORS
The Articles of Incorporation of the Company provide that the Board of
Directors of the Company shall be divided into three classes which are as equal
in number as possible, and that the members of each class are to be elected for
a term of three years and until their successors are elected and qualified. One
class of directors is to be elected annually. A resolution of the Board of
Directors of the Company adopted pursuant to the Company's Bylaws has
established the number of directors at ten.
The agreement pursuant to which First Federal Savings Bank of La Crosse
("FFLX") and First Federal Savings Bank of Madison, F.S.B. ("FFMD") combined to
form the Bank in June 1989 provides that as long as the Bank retains an office
presence in the Madison, Wisconsin market, nominations to the Board of Directors
of the Company are required to be made in a manner which ensures that at least
four members of the Boards of Directors of the Company and the Bank are from
such market. The Company has nominated Mr. Patrick J. Luby for election as
director at the Annual Meeting pursuant to such agreement. Therefore, with the
exception of the foregoing agreement relating to the nomination of Mr. Luby, no
person being nominated as a director is being proposed for election pursuant to
any agreement or understanding between any person and the Company. There are no
family relationships among any of the directors and/or executive officers of the
Company.
Unless otherwise directed, each proxy executed and returned by a
stockholder will be voted FOR the election of the nominees for director listed
below. If any person named as nominee should be unable or unwilling to stand for
election at the time of the Annual Meeting, the proxies will nominate and vote
for any replacement nominee or nominees recommended by the Board of Directors.
At this time, the Board of Directors knows of no reason why any of the nominees
listed below may not be able to serve as a director if elected.
-4-
<PAGE> 6
The following tables present information concerning the nominees for
director and each director whose term continues, including his or her tenure as
a director of the Company.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
AND PRINCIPAL OCCUPATION DIRECTOR
NAME AGE DURING THE PAST FIVE YEARS SINCE(1)
---- --- -------------------------- --------
<S> <C> <C> <C>
NOMINEES FOR DIRECTOR FOR
THREE-YEAR TERM EXPIRING IN 2001
Henry C. Funk 72 Director; President and Treasurer of Mills Investment 1976
Corporation, an investment management company,
located in La Crosse, Wisconsin.
Patrick J. Luby 67 Director; Retired; Until February 1992, Vice President 1979
and Economist for Oscar Mayer Foods Corp., a food
processing and manufacturing firm (which is an indirect
subsidiary of Philip Morris Cos. Inc.), located in
Madison, Wisconsin.
Don P. Rundle 65 Director; Retired; Until December 1991, Executive Vice 1984
President of Inland Printing Co., Inc., a printing
company, located in La Crosse, Wisconsin.
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTORS WHOSE TERMS EXPIRE IN 1999
John F. Leinfelder 66 Director; President of Joseph J. Leinfelder and Sons, 1978
Inc., a steel fabricating business, located in La Crosse,
Wisconsin.
David C. Mebane 64 Director; Chairman, President, Chief Executive and 1978
Operating Officer and director of Madison Gas and
Electric Co., a publicly held utility company, located in
Madison, Wisconsin.
Dale A. Nordeen 70 Vice Chairman of the Board of Directors of the 1961
Company and the Bank since June 1989; Chairman and
President of FFMD from 1962 to June 1989.
Thomas W. Schini 62 Chairman of the Board of Directors of the Company and 1983
the Bank since April 1993; Director, President and Chief
Executive Officer of the Company and the Bank since
June 1989; President and Chief Executive Officer of
FFLX from September 1983 to June 1989.
</TABLE>
-5-
<PAGE> 7
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
AND PRINCIPAL OCCUPATION DIRECTOR
NAME AGE DURING THE PAST FIVE YEARS SINCE(1)
<S> <C> <C> <C>
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Marjorie A. Davenport 69 Director; President of Gordon & Marjorie Davenport, 1976
Inc., a company which appraises and sells antique
American furniture, located in Madison, Wisconsin.
Richard T. Lommen 53 Director; President of Courtesy Corporation, a 1978
McDonald's licensee, located in La Crosse, Wisconsin
Phillip J. Quillin 61 Director; President of Quillin's Inc., which owns and 1984
operates supermarkets and drugstores in the La Crosse,
Wisconsin area.
</TABLE>
- ----------------
(1) Includes service as director of the Bank and predecessor institutions.
THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES CAST IS REQUIRED FOR
THE ELECTION OF DIRECTORS. UNLESS OTHERWISE SPECIFIED, THE SHARES OF COMMON
STOCK REPRESENTED BY THE PROXIES SOLICITED HEREBY WILL BE VOTED IN FAVOR OF THE
ELECTION OF THE ABOVE-DESCRIBED NOMINEES. THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR ELECTION OF THE NOMINEES FOR DIRECTOR.
STOCKHOLDER NOMINATIONS
Article IV, Section 4.14 of the Company's Bylaws governs nominations
for election to the Board of Directors and requires all such nominations, other
than those made by the Board, to be made at a meeting of stockholders called for
the election of directors, and only by a stockholder who has complied with the
notice provisions outlined in the Company's Bylaws. Stockholder nominations must
be made pursuant to timely notice in writing to the Secretary of the Company. To
be timely, a stockholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the Company not later than (i) with
respect to an election to be held at an annual meeting of stockholders, 60 days
prior to the anniversary date of the mailing of proxy materials in connection
with the immediately preceding annual meeting, and (ii) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to stockholders. The Company did not
receive any director nominations from stockholders in connection with the Annual
Meeting.
Each written notice of a stockholder nomination shall set forth: (a)
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission (the "SEC"); and (e) the consent of
each nominee to serve as a director of the Company if so elected. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedures.
-6-
<PAGE> 8
MATTER 2.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors of the Company has appointed Ernst & Young LLP,
independent certified public accountants, to perform the audit of the Company's
financial statements for the fiscal year ending December 31, 1998, and further
directed that the selection of auditors be submitted for ratification by the
stockholders at the Annual Meeting.
The Company has been advised by Ernst & Young LLP that neither that
firm nor any of its associates has any relationship with the Company or its
subsidiaries other than the usual relationship that exists between independent
certified public accountants and clients. Ernst & Young LLP will have one or
more representatives at the Annual Meeting who will have an opportunity to make
a statement, if they so desire, and will be available to respond to appropriate
questions.
UNLESS MARKED TO THE CONTRARY, SHARES OF COMMON STOCK REPRESENTED BY
THE ENCLOSED PROXY WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG LLP AS INDEPENDENT AUDITORS OF THE COMPANY. THE BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG LLP AS INDEPENDENT AUDITORS FOR FISCAL 1998.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Regular meetings of the Board of Directors of the Company are held on a
quarterly basis. The Board of Directors of the Company held a total of four
regular meetings and two special meetings during the fiscal year ended December
31, 1997. With the exception of Mr. Mebane, no incumbent director attended fewer
than 75% of the aggregate total number of meetings of the Board of Directors and
the total number of committee meetings on which such director served during the
fiscal year ended December 31, 1997; Mr. Mebane attended four of the six
meetings of the Board of Directors held in fiscal 1997.
The Audit Committee of the Board of Directors reviews the records and
affairs of the Company to determine its financial condition, reviews with
management and the independent auditors the systems of internal control, and
monitors the Company's adherence in accounting and financial reporting to
generally accepted accounting principles. In fiscal 1997, the members of the
Audit Committee, which met two times during the fiscal year ended December 31,
1997, were Messrs. Leinfelder (Chairman), Funk, Nordeen and Quillin.
The Stock Option Committee of the Board reviews and approves the
granting of options and restricted stock under the Company's stock incentive
plans and administers such plans. In fiscal 1997, the Stock Option Committee
consisted of Messrs. Luby (Chairman), Lommen and Rundle and Ms. Davenport. The
Stock Option Committee met two times during the fiscal year ended December 31,
1997.
The entire Board of Directors of the Company acted as a Nominating
Committee for the selection of nominees for director to stand for election at
the Annual Meeting. The Board, acting as a Nominating Committee, met once during
the fiscal year ended December 31, 1997 to consider director nominees for the
Annual Meeting of Shareholders of the Company held in April 1997. In January
1998, the Board of Directors of the Company, acting as the Nominating Committee,
considered nominations for directors to be elected at the Annual Meeting to be
held in April 1998. The Company's Bylaws allow for stockholder nominations of
directors and require such nominations to be made in accordance with specific
procedures. See "--Stockholder Nominations."
-7-
<PAGE> 9
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information with respect to the
executive officers of the Company and the Bank who are not directors.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
- ---- --- --------------------------------------------------------------------------------------
<S> <C> <C>
Bradford R. Price.......... 44 Executive Vice President and Secretary of the Company and the Bank
(Residential Lending Division Manager) since March 1992; Senior Vice
President and Secretary of the Company and the Bank from June 1989 until
March 1992; Senior Vice President and Secretary of FFLX from 1986 until June
1989 and prior thereto Secretary and Vice President-Lending of FFLX.
Jack C. Rusch.............. 51 Executive Vice President, Treasurer and Chief Financial Officer of the Company
and the Bank (Finance and Administration Division Manager) since March 1992;
Senior Vice President, Treasurer and Chief Financial Officer of the Company
and the Bank from June 1989 until March 1992; Senior Vice President of FFLX
from 1986 until June 1989 and prior thereto Vice President-Finance of FFLX.
Robert P. Abell............ 49 Senior Vice President of the Bank (Commercial Real Estate Lending Division
Manager) since March 1992; Vice President of the Bank from June 1989 until March 1992;
Vice President-Commercial Real Estate Lending of FFLX from December 1987 until
June 1989 and prior thereto manager of the Commercial Real Estate Lending Department of
American Charter Federal Savings and Loan Association, Lincoln, Nebraska.
Milne J. Duncan............ 49 Senior Vice President of the Bank (Human Resources Division Manager) since
March 1992; Vice President of the Bank from June 1989 until March 1992; Vice
President of FFLX from 1986 until June 1989 and prior thereto Vice President-
Human Resources of Norwest Bank, Aberdeen, South Dakota.
Joseph M. Konradt.......... 41 Senior Vice President of the Bank (Retail Banking Division Manager) since
March 1992; Vice President of the Bank from June 1989 until March 1992; Vice
President of FFLX from 1986 until June 1989 and prior thereto Director of
Marketing of FFLX.
</TABLE>
-8-
<PAGE> 10
BENEFICIAL OWNERSHIP OF COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of
Common Stock as of February 28, 1998 (except as otherwise noted below) by (i)
each shareholder known to the Company to beneficially own more than 5% of the
shares of Common Stock outstanding, as disclosed in certain reports regarding
such ownership filed with the SEC in accordance with Sections 13(d) or 13(g) of
the Exchange Act, (ii) each director and director nominee of the Company, (iii)
each of the executive officers of the Company appearing in the Summary
Compensation Table below, and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------------
PERCENT OF
NAME NUMBER CLASS
---- ------ ----------
<S> <C> <C>
Gail K. Cleary, Estate of Russell G. Cleary and related persons and entities........ 731,037(2) 7.9%
c/o Cleary Management Corporation
301 Sky Harbour Drive
La Crosse, Wisconsin 54603
Dimensional Fund Advisors Inc....................................................... 464,823(7) 5.0
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Directors:
Marjorie A. Davenport(3)....................................................... 27,373 *
Henry C. Funk (3).............................................................. 93,513 1.0
John F. Leinfelder (3)........................................................ 57,273 *
Richard T. Lommen (3).......................................................... 133,950 1.4
Patrick J. Luby (3)............................................................ 55,878 *
David C. Mebane (3)............................................................ 24,350 *
Dale A. Nordeen (3)............................................................ 75,959 *
Phillip J. Quillin (3)......................................................... 94,119 1.0
Don P. Rundle (3).............................................................. 54,180 *
Thomas W. Schini (3) (4) (6)................................................... 403,150 4.3
Executive Officers who are not Directors:
Jack C. Rusch (3) (4) (6)...................................................... 190,562 2.0
Bradford R. Price (3) (4) (6).................................................. 197,682 2.1
Robert P. Abell (3) (4) (5) (6)................................................ 76,223 *
Joseph M. Konradt (3) (4) (5) (6).............................................. 95,372 1.0
All directors and executive officers of the Company and the Bank as a group
(17 persons) (3) (4) (5) (6)................................................... 1,802,882 18.2%
</TABLE>
- --------------
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
-9-
<PAGE> 11
* Represents less than 1% of the total number of shares of Common Stock
outstanding on the Voting Record Date.
(1) For purposes of this table, pursuant to rules promulgated under the
Exchange Act, an individual is considered to beneficially own shares of
Common Stock if he or she, directly or indirectly, has or shares (1) voting
power, which includes the power to vote or to direct the voting of the
shares; or (2) investment power, which includes the power to dispose or
direct the disposition of the shares. Unless otherwise indicated, includes
shares of Common Stock held directly by the individuals as well as by
members of such individuals' immediate family who share the same household,
shares held in trust and other indirect forms of ownership over which
shares the individuals effectively exercise sole or shared voting and/or
investment power. Fractional shares of Common Stock held by certain
executive officers under the First Federal Capital Corp. Employee Stock
Ownership Plan (the "ESOP") and the First Federal Savings Bank La
Crosse-Madison Savings Investment Plan (the "401(k) Plan") have been
rounded to the nearest whole share.
(2) Gail K. Cleary possesses sole voting and dispositive power with respect to
422,097 of the indicated shares and the Estate of Russell G. Cleary and the
Russell G. Cleary Individual Retirement Account hold 41,250 and 41,249 of
the indicated shares, respectively. Persons and entities related to Gail K.
Cleary who or which beneficially own shares of Common Stock include: Sandra
G. Cleary and Kristine H. Cleary, adult children of Mr. and Mrs. Cleary,
who possess sole voting and dispositive power individually or by trust with
respect to 20,841 shares and 17,359 shares, respectively; L. Hope Kumm,
Gail K. Cleary's mother, who possesses sole voting and dispositive power
with respect to 63,800 shares; Megan Coffey, Sara Coffey and William
Coffey, grandchildren of Mr. and Mrs. Cleary, who beneficially own 5,449,
5,449 and 1,150 shares, respectively; The Cleary Foundation, Inc. and The
Kumm Foundation, Inc., charitable corporations for which various members of
the Cleary and Kumm families serve as executive officers and directors,
which possess sole voting and dispositive power with respect to 56,947
shares and 29,047 shares, respectively; and the Roy E. Kumm Family Trust,
La Crosse Trust Company, Trustee, of which L. Hope Kumm and Gail K. Cleary,
Sandra G. Cleary and Kristine H. Cleary are beneficiaries, which possesses
sole voting and dispositive power with respect to 26,400 shares.
(3) Includes shares of Common Stock which the named individuals and certain
executive officers have the right to acquire within 60 days of the Voting
Record Date pursuant to the exercise of stock options as follows: Ms.
Davenport - 13,200; Mr. Leinfelder - 17,600; Mr. Lommen - 22,000; Mr. Luby
- 0; Mr. Mebane - 0; Mr. Nordeen - 8,800; Mr. Quillin - 21,998; Mr. Rundle
- 0; Mr. Schini - 168,096; Mr. Rusch - 87,561; Mr. Price - 88,561; Mr.
Abell - 40,332 and Mr. Konradt - 55,459. Does not include options for
shares of Common Stock which do not vest within 60 days of the Voting
Record Date which have been awarded to executive officers and directors
under the Company's stock option plans.
(4) Includes shares of Common Stock awarded under the Company's stock incentive
plans which are subject to vesting requirements. Recipients of restricted
stock awards may direct voting prior to vesting.
(5) Includes shares of Common Stock allocated to the accounts of executive
officers pursuant to the 401(k) Plan, for which such individuals possess
shared investment power and shared voting power over the shares of Common
Stock allocated to their own account, of which approximately 938 shares are
allocated to accounts of the executive officers named in the Summary
Compensation Table as follows: Mr. Schini - 0; Mr. Rusch - 0; Mr. Price -
0; Mr. Abell - 544; and Mr. Konradt - 394.
(6) Includes shares of Common Stock allocated to certain executive officers
under the ESOP, for which such individuals possess shared voting power, of
which approximately 54,506 shares were allocated to executive officers
named in the Summary Compensation Table as follows: Mr. Schini - 18,029;
Mr. Rusch - 10,660; Mr. Price - 10,452; Mr. Abell - 7,608; and Mr. Konradt
- 7,757.
(7) Based upon a Schedule 13G, dated February 9, 1997, filed with the Company
pursuant to the Exchange Act by Dimensional Fund Advisors Inc.
("Dimensional"). Dimensional, a registered investment advisor, is deemed to
have beneficial ownership of 464,823 shares of Common Stock as of December
31, 1997, all of which shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Participation Group Trust, investment vehicles
for qualified employee benefit plans, for all of which Dimensional serves
as investment manager. Dimensional disclaims beneficial ownership of all
such shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of the shares of Common
Stock outstanding, to file reports of ownership and changes in ownership with
the SEC and the NASD by certain dates. Officers, directors and greater than ten
percent shareholders are required by regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based upon review of the
information provided to the Company, the Company believes that during the fiscal
year ended December 31, 1997, officers, directors and greater than ten percent
shareholders complied with all Section 16(a) filing requirements.
-10-
<PAGE> 12
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation paid by the Bank
to its Chief Executive Officer and the next four highest paid executive officers
of the Company and its subsidiaries whose compensation, based on salary and
bonus, exceeded $100,000 during the Company's fiscal years ended December 31,
1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(3) COMPENSATION AWARDS
---------------------- -------------------------
VALUE OF NUMBER
RESTRICTED OF SHARES
STOCK SUBJECT TO ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) AWARDS(4)(5) OPTIONS(6) COMPENSATION(7)
- --------------------------- ----- --------- -------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Schini................. 1997 $ 317,417 $ 135,768 -- -- $ 19,457
Chairman, President and 1996 302,083 70,796 -- -- 18,057
and Chief Executive 1995 287,214 37,900 $ 390,096 39,000 20,455
Officer
Jack C. Rusch.................... 1997 $ 150,667 $ 51,542 -- -- $ 7,328
Executive Vice President, 1996 141,917 25,277 -- -- 6,890
Treasurer and 1995 132,667 14,420 $ 146,520 14,700 11,606
Chief Financial Officer
Bradford R. Price................ 1997 $ 150,667 $ 51,542 -- -- $ 6,434
Executive Vice President 1996 141,917 25,277 -- -- 6,034
and Secretary 1995 132,667 14,420 $ 146,520 14,700 10,770
Joseph M. Konradt................ 1997 $ 136,458 $ 46,900 -- -- $ 6,237
Senior Vice President 1996 121,668 21,914 -- -- 5,601
1995 111,667 12,110 $ 108,198 12,600 8,604
Robert P. Abell.................. 1997 $ 112,467 $ 28,899 -- -- $ 5,758
Senior Vice President 1996 104,317 13,937 -- -- 4,921
1995 96,067 7,844 $ 82,998 8,400 7,872
</TABLE>
- -----------------
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
-11-
<PAGE> 13
(1) Includes compensation earned and deferred by the named executive
officers pursuant to the 401(k) Plan.
(2) Executive officers of the Company receive cash bonus compensation under
the First Federal Savings Bank La Crosse-Madison Annual Incentive Bonus
Plan (the "Annual Bonus Plan") which is based upon the Bank's
performance. See "Compensation Committee Report." For the fiscal years
ended December 31, 1995, 1996 and 1997, all bonus compensation paid to
the named executive officers was made pursuant to the Annual Bonus Plan.
(3) Perquisites provided to the named executive officers by the Company did
not exceed the lesser of $50,000 or 10% of each named executive officer's
total annual salary and bonus during the fiscal years indicated, and
accordingly, are not included.
(4) Amounts shown in this column represent the value of shares of Common
Stock contingently awarded pursuant to the terms of the Company's
long-term stock incentive plans in effect for the fiscal year ended
December 31, 1995 based upon the closing market price of the Company's
Common Stock on the date of grant. No shares of restricted stock were
awarded during the fiscal years ended December 31, 1996 and 1997. Vesting
of the shares awarded in fiscal 1995 is contingent upon the Company's
financial performance relative to peer group performance measured using
return on equity ("ROE") for the applicable plan periods. The amounts
indicated for fiscal 1995 represent the aggregate value of additional
shares of restricted stock at December 31, 1995 awarded pursuant to the
1992-1994 long-term incentive plan in fiscal 1995 based upon the Company
exceeding plan performance targets for the 1992-1994 period as follows:
(i) Mr. Schini - 8,672 shares; (ii) Mr. Rusch - 3,240 shares; (iii) Mr.
Price -3,240 shares; (iv) Mr. Abell - 1,811; and (v) Mr. Konradt - 1,811
shares. In addition, the amounts indicated for fiscal 1995 represent the
aggregate value of restricted stock at December 31, 1995 contingently
awarded pursuant to the 1995-1997 long-term incentive plan assuming the
Company achieves the average ROE target for 1995-1997 as follows: (i) Mr.
Schini -13,000 shares; (ii) Mr. Rusch - 4,900 shares; (iii) Mr. Price -
4,900 shares; (iv) Mr. Abell - 2,800; and (v) Mr. Konradt - 4,200 shares.
Restricted stock awarded for the 1992-1994 period vests at the rate of
50% on January 1, 1996 and 1997. Restricted stock awarded for the
1995-1997 period will vest at the rate of 50% on January 1, 1999 and
2,000, provided the applicable plan performance criteria are satisfied
for the 1995-1997 period. Pursuant to the terms of the plans under which
the foregoing shares were awarded, the number of shares subject to such
awards were adjusted in fiscal 1997 to reflect the Company's 3-for-2
stock split in June 1997; however, the value of the restricted stock
awards noted in the table for fiscal 1995 is based upon the number of
shares awarded in fiscal 1995 and the value on the grant date, and does
not reflect the stock split.
(5) At December 31, 1997, the aggregate value of restricted (unvested) stock
holdings by Messrs. Schini, Rusch, Price, Abell and Konradt was $660,660,
$249,018, $249,018, $142,296 and $213,444, respectively, based on a total
of 19,500, 7,350, 7,350, 4,200 and 6,300 shares awarded in fiscal 1995,
respectively (adjusted for the 3-for-2 stock split in June 1997), and the
closing market price of the Company's Common Stock on that date ($33.88
per share). Recipients of restricted stock awards are entitled to vote
and receive payment of any dividends on unvested shares of Common Stock.
For a further discussion of the Company's long-term incentive plans, see
"Compensation Committee Report."
(6) Amounts shown in this column represent the total number of shares of
Common Stock subject to options granted to the named executive officers
under the Company's long-term stock incentive plans during the fiscal
year ended December 31, 1995. Pursuant to the terms of the plans under
which the options were granted, the number of shares subject to
outstanding option grants were adjusted in fiscal 1997 to reflect the
Company's 3-for-2 stock split in June 1997; however, the number of shares
subject to option grants indicated in the table for fiscal 1995 is based
upon the number of shares subject to option grants in fiscal 1995 and
does not reflect the stock split. No options were granted to the named
individuals in fiscal 1996 or 1997.
(7) Amounts shown in this column represent the Bank's contributions on behalf
of the named executive officers under the 401(k) Plan, the ESOP, the
Executive Life Bonus Plan ("Life Bonus Plan"), and disability insurance
premiums paid by the Bank for the fiscal years ended December 31, 1995,
1996 and 1997. The amounts shown for each individual for the fiscal year
ended December 31, 1997 are derived from the following figures: (i) Mr.
Schini - $2,400 matching contribution under the 401(k) Plan; $2,400 -
ESOP contribution; $11,747 Life Bonus Plan payment; and $2,910 -
disability premium; (ii) Mr. Rusch - $2,400 - matching contribution under
the 401(k) Plan; $2,400 - ESOP contribution; $1,763 - Life Bonus Plan
payment; and $765 - disability premium; (iii) Mr. Price - $2,400 matching
contribution under the 401(k) Plan; $2,400 - ESOP contribution; $1,091 -
Life Bonus Plan payment; and $543 - disability premium; (iv) Mr. Abell -
$2,121 - matching contribution under the 401(k) Plan; $2,121 - ESOP
contribution; $956 - Life Bonus Plan payment; and $560 disability
premium; and (v) Mr. Konradt -$2,400 - matching contribution under the
401(k) Plan; $2,400 - ESOP contribution; $1,100 -
Life Bonus Plan payment; and $337 - disability premium.
-12-
<PAGE> 14
STOCK OPTIONS
As of December 31, 1997, the Company and its subsidiaries had 798
officers and employees eligible to participate in the Company's current stock
option and incentive plans, which include the First Federal Capital Corp. 1989
Stock Incentive Plan, the First Federal Capital Corp. 1992 Stock Incentive Plan,
the First Federal Capital Corp. 1992 Stock Option and Incentive Plan (f/k/a the
Rock Financial Corp. 1992 Stock Option and Incentive Plan) and the First Federal
Capital Corp. 1997 Stock Option and Incentive Plan (collectively, the "Stock
Option and Incentive Plans"). As of December 31, 1997, 1,363,591 shares of
Common Stock had been granted under the Stock Option and Incentive Plans (either
in the form of option grants or restricted stock awards) and a total of 878,067
shares of Common Stock were available for granting. Pursuant to the terms of the
Stock Option and Incentive Plans, the number of shares subject to outstanding
option grants and the remaining plan share reserve under each of such plans were
adjusted in fiscal 1997 to reflect the Company's 3-for-2 stock split in June
1997. Accordingly, the table below reflects such adjustments.
The executive officers listed in the Summary Compensation Table did not
receive individual option grants under the Stock Option and Incentive Plans
during the fiscal year ended December 31, 1997. The following table sets forth
certain information concerning the exercise of stock options granted under the
Company's Stock Option and Incentive Plans by the executive officers named in
the Summary Compensation Table during the fiscal year ended December 31, 1997,
and the value of their unexercised stock options at December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END (2)
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- ----------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Schini........... 30,000 $ 679,089 183,096 19,304 $ 5,115,851 $ 454,416
Jack C. Rusch.............. 16,000 $ 362,181 87,561 7,276 2,512,524 171,277
Bradford R. Price.......... 15,000 $ 339,545 88,561 7,276 2,543,784 171,277
Joseph M. Konradt.......... 6,000 $ 142,568 60,459 6,237 1,729,165 146,819
Robert P. Abell ........... 6,100 $ 131,981 48,332 4,158 1,382,162 97,879
</TABLE>
- ----------------
(1) The value realized was calculated based upon the difference between the
fair market value of the shares of Common Stock subject to the exercised
options on the exercise date and the exercise price of the options.
(2) The value of Unexercised In-the-Money Options is based upon the difference
between the fair market value of the stock options ($33.875) (which was the
closing price on December 31, 1997) and the exercise price of the options
at December 31, 1997.
-13-
<PAGE> 15
PENSION PLAN
The Bank maintains the First Federal Savings Bank La Crosse-Madison
Pension Plan (the "Pension Plan") for the benefit of employees of the Company
and its subsidiaries. The Pension Plan is a non-contributory defined benefit
pension plan. All employees who are at least age 20 and who have completed
twelve months of at least 1,000 hours of service with the Company or its
subsidiaries are eligible to participate in the Pension Plan.
Benefits are generally payable under the Pension Plan upon retirement
at age 65 based upon an average of an employee's five highest consecutive annual
amounts of compensation during the last ten years of employment. Compensation is
defined to include salary, bonuses, overtime, commissions, vacation and 401(k)
plan deferrals, and does not include expense reimbursement, non-cash or stock
compensation. Benefits are calculated based on a formula that is coordinated
with Social Security covered compensation. Such amounts are within 10% of the
total compensation and bonus reported for the named individuals in the Summary
Compensation Table above.
The maximum annual compensation which may be taken into account under
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") (as
adjusted from time to time by the Internal Revenue Service) for calculating
contributions under qualified defined benefit plans currently is $160,000 and
the maximum annual benefit permitted under such plans currently is $125,000. At
December 31, 1997, Messrs. Schini, Rusch, Price, Konradt and Abell had 38.5,
13.7, 17.8, 16.6 and 10.1 years of credited service, respectively, under the
Pension Plan.
The Board of Directors of the Bank also has authorized a supplemental
non-qualified retirement plan ("Supplemental Plan") to provide certain
additional retirement benefits to Messrs. Schini, Rusch and Price. The
Supplemental Plan provides that Messrs. Schini, Rusch and Price shall receive a
supplemental pension benefit commencing on the first day of the calendar month
following their retirement equal to the dollar amount of the retirement benefit
that would have been paid under the Pension Plan, 401(k) Plan and ESOP without
regard to the maximum annual benefit limitation of Section 415 of the Internal
Revenue Code (which was $160,000 for 1997) and the maximum annual compensation
limitation in Section 401(a)(17) of the Internal Revenue Code ($160,000 for
1997). The Supplemental Plan provides that the Bank shall establish a
supplemental defined contribution account which shall include the amount of
contributions which were not allocated to their accounts under the 401(k) Plan
and ESOP because of the limitations imposed by the Internal Revenue Code. In
addition to the amounts payable in the table below, the additional projected
benefits under the Supplemental Plan payable to Messrs. Schini, Rusch and Price
amounted to an annual benefit at age 65 of $111,451, $19,522 and $19,522,
respectively, with respect to the Pension Plan and a lump sum benefit of
$209,576, $2,341 and $2,355, respectively, with respect to the 401(k) Plan and
the ESOP at December 31, 1997.
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 in fiscal 1997 to the named executive officers under
the Company's Pension Plan, expressed in the form of a ten year "single life"
annuity benefit, based on average annual compensation and years of service
classifications specified. The table does not set forth the amount of minimum
annual benefits accrued by certain Pension Plan participants under the benefit
plan formula previously in effect before the Pension Plan was amended.
-14-
<PAGE> 16
<TABLE>
<CAPTION>
PENSION PLAN TABLE
AVERAGE CREDITABLE YEARS OF SERVICE AT AGE 65
ANNUAL --------------------------------------------------------------
COMPENSATION 10 15 20 25
- ------------ --------- --------- --------- --------
<S> <C> <C> <C> <C>
$ 60,000...................................... $ 9,000 $14,000 $19,000 $24,000
80,000...................................... 13,000 20,000 26,000 33,000
100,000...................................... 17,000 25,000 34,000 42,000
120,000...................................... 21,000 31,000 41,000 51,000
140,000...................................... 24,000 36,000 48,000 61,000
160,000...................................... 28,000 42,000 56,000 70,000
180,000...................................... 28,000 42,000 56,000 70,000
200,000...................................... 28,000 42,000 56,000 70,000
220,000...................................... 28,000 42,000 56,000 70,000
240,000...................................... 28,000 42,000 56,000 70,000
260,000...................................... 28,000 42,000 56,000 70,000
280,000...................................... 28,000 42,000 56,000 70,000
300,000...................................... 28,000 42,000 56,000 70,000
320,000...................................... 28,000 42,000 56,000 70,000
340,000...................................... 28,000 42,000 56,000 70,000
360,000...................................... 28,000 42,000 56,000 70,000
380,000...................................... 28,000 42,000 56,000 70,000
400,000...................................... 28,000 42,000 56,000 70,000
</TABLE>
EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with Messrs. Thomas W.
Schini, Bradford R. Price, Jack C. Rusch, Robert P. Abell and Joseph M. Konradt
(collectively, the "Employment Agreements"). The Employment Agreements provide
for the continued employment of each executive in his present position. The
Employment Agreements provide Messrs. Schini, Price, Rusch, Abell and Konradt
with annual base salaries which currently amount to $320,000, $152,100,
$152,100, $113,800 and $138,750, respectively. Messrs. Schini, Price and Rusch's
employment agreements initially extended for three years, and Messrs. Abell and
Konradt's employment agreements initially extended for two years, and each
agreement may be extended on an annual basis for successive additional one-year
periods upon the expiration of each year of the term upon review and approval by
the Board of Directors of the Bank. In April 1997, the Board of Directors of the
Bank extended the term of each of the employment agreements with Messrs. Schini,
Price, Rusch, Abell and Konradt for an additional year.
-15-
<PAGE> 17
Under the Employment Agreements, the Bank may, without further
liability, terminate such employment for "cause," which includes, generally,
conviction of a felony or any crime involving falsehood, fraud or moral
turpitude, willful failure to perform his duties and responsibilities in
accordance with written instructions approved by at least two-thirds of the
Board, a willful act of misconduct or violation of any law, regulation or cease
and desist order which is injurious to the Bank, a willful breach of fiduciary
duty involving personal profit and incompetence, personal dishonesty or material
breach of the Employment Agreement by the executive. The Employment Agreements
also provide for termination or suspension of rights granted if the executives
are terminated, suspended or permanently removed for certain violations of
federal laws, or if regulatory authorities were to determine that the Bank is
operating in an unsafe financial condition.
In the event of a termination for cause, the Bank's obligations under
the Employment Agreements to Messrs. Schini, Price, Rusch, Abell and Konradt
cease. In the event of termination of employment under certain circumstances,
including termination without cause or other breach of the Employment Agreements
by the Bank, the executive would be entitled to receive, for the remainder of
the employment term, compensation at substantially the same rate paid to him
prior to such termination in accordance with the Employment Agreement. If the
termination follows a "Change in Control," as defined therein, the executive may
elect to receive the severance payment in a lump sum, calculated on the basis of
his average annual compensation for the three years prior to the date of
termination multiplied by the remaining term of the agreement. The payments are
limited, however, not to exceed such amounts that would be deemed to constitute
"excess parachute payments" within the meaning of Section 280G of the Internal
Revenue Code, and by any amounts paid by a subsequent employer. In addition, the
executives would receive additional benefits under the Pension Plan in an amount
determined as if the executive were fully vested under the Pension Plan and had
accumulated the additional years of credited service under the Pension Plan that
he would have received had he continued employment with the Bank for the entire
employment term at the highest annual rate of base salary in effect during the
twelve months immediately preceding the termination date. Assuming that average
annual compensation was at each executive's existing salary level for fiscal
1997, severance pay in the event of a Change in Control would amount to
$960,000, $456,300, $456,300, $227,600 and $277,500 for Messrs.
Schini, Price, Rusch, Abell and Konradt respectively.
The Employment Agreements define a "Change in Control" to include a
change in control under certain federal laws regardless of whether approval of
the Change in Control is required under such laws and whether resulting from
merger, consolidation, reorganization, acquisition of the Bank or its assets, or
any other event. The following other circumstances involving a Change in Control
of the Bank which, if they occur, also provide the executives with termination
benefits under the Employment Agreements: (i) termination of an executive
officer's employment other than for cause after a Change in Control; (ii)
resignation by an executive officer following a significant change in the nature
or scope of his authorities or duties; (iii) a reassignment to duties in a
location more than 35 miles from the location of the executive officer's
principal office immediately before such Change in Control; and (iv) a
determination by an executive officer that, as a result of such Change in
Control and subsequent changes in the circumstances of his employment, he is
unable to exercise effectively his prior authority or responsibility.
-16-
<PAGE> 18
COMPENSATION OF DIRECTORS
BOARD FEES
Each member of the Board of Directors of the Company who is not a
full-time employee is paid an annual retainer of $10,000. In addition, each
non-employee director of the Company who also is a member of the Board of
Directors of the Bank is paid an annual retainer of $10,000 for services
rendered to the Bank. The Bank also contributes towards health insurance
premiums on behalf of certain directors who previously have so elected, which
are taxable to the directors. Participation in the Bank's health insurance plans
is no longer offered to existing or new directors.
DIRECTORS' DEFERRED COMPENSATION PROGRAM
The Company and the Bank maintain plans under which members of their
Boards of Directors may elect to defer receipt of all or a portion of their
directors' fees. Under the plans, the Company and the Bank are obligated to
repay the deferred fees, in the manner elected by the participating director,
together with interest at a stated rate. The repayments generally will commence
upon the participating director's resignation from the Board of Directors,
although the participating director may elect to receive repayments at an
earlier time. During the fiscal year ended December 31, 1997, no director
deferred funds pursuant to these deferred compensation plans.
DIRECTORS' STOCK OPTION PLAN
The Company adopted the 1989 Directors' Stock Option Plan and the 1992
Directors' Stock Option Plan (collectively, the "Directors' Plans") which
provide for the grant of compensatory stock options to non-employee directors of
the Company and the Bank. Pursuant to the Directors' Plans, each director of the
Company or the Bank who is not also an employee of the Company or any subsidiary
is granted a compensatory stock option to purchase 4,400 shares of Common Stock
upon election or reelection to the Boards of Directors of the Company and the
Bank. The Directors' Plans also authorize discretionary grants of options to
purchase shares of Common Stock.
COMPENSATION COMMITTEE REPORT
I. COMPENSATION COMMITTEE
The Personnel and Compensation Committee of the Bank (the "Committee")
is responsible for recommending to the Board of Directors of the Bank the levels
of compensation and benefits (excluding stock option grants and restricted stock
awards) for executive officers of the Bank. The Stock Option Committee of the
Company reviews and approves the grant of options and restricted stock awards
pursuant to the Company's stock incentive plans.
Under rules established by the SEC, the Company is required to provide
certain data and information regarding the compensation and benefits provided to
the Company's Chief Executive Officer ("CEO") and certain other executive
officers of the Company. The rules require compensation disclosure in the form
of tables and a report by the Compensation Committee of the Company which
explains the rationale and considerations that led to fundamental decisions
affecting such individuals. The Committee has prepared the following report, at
the direction and approval of the Board of Directors of the Company, for
inclusion in this Proxy Statement.
-17-
<PAGE> 19
II. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Committee consists of the same independent directors who are
neither officers nor employees of the Company or the Bank ("Outside Directors"),
Directors Davenport, Lommen, Luby and Rundle, who serve on the Company's Stock
Option Committee. Mr. Rundle serves as Chairman of the Committee and Mr. Luby
serves as Chairman of the Company's Stock Option Committee. There are no
interlocks, as defined under the rules and regulations of the SEC, between the
Committee, the Company's Stock Option Committee and corporate affiliates of
members of such committees.
III. EXECUTIVE COMPENSATION POLICIES AND PLANS
The Committee uses the concept of total compensation in structuring a
combination of base salary, incentive bonus, long-term compensation and
perquisites for executive officers. It is the intent of the Committee to
recommend a base salary for executive officers that is comparable to the median
pay level of executives of similarly sized financial institutions based upon
available competitive market data. The Committee uses outside consultants and
published compensation survey data to review competitive rates of pay, to
establish salary ranges, and to recommend base salary and bonus pay levels.
Based upon such review, for fiscal 1997, the average increase in base salary for
the four highest paid executive officers (other than the CEO) was 7.5%. The
Company's executives, in general, will receive a level of compensation (base
salary plus cash incentive bonus) at or above the median annual compensation
paid by financial competitors of the Company only when the Company meets or
exceeds the median return on assets ("ROA") and return on equity ("ROE") levels
of its peer group.
The Committee also recognizes that "compensation" (as that term is
defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code")) in excess of $1,000,000 per year to an executive
officer is not deductible by the Company unless such compensation is
performance-based compensation approved by the shareholders of the Company and
thus, is not "compensation" for purposes of complying with the limit on
deductibility. The Committee has been advised that no executive officer of the
Company received compensation in fiscal 1997 that will result in the loss of a
corporate federal income tax deduction under Section 162(m) of the Internal
Revenue Code.
Both short-term and long-term incentive plans are used to reward
executive officers for the Company's performance relative to identified peer
groups. Short-term incentive compensation, paid in the form of annual cash
bonuses, is determined pursuant to factors outlined in the First Federal Savings
Bank La Crosse-Madison Annual Incentive Bonus Plan (the "Annual Bonus Plan") and
long-term incentive compensation, paid in the form of restricted stock awards
and stock option grants, is determined pursuant to factors outlined in the
Company's long-term performance award plans which are reviewed and approved by
the Board of Directors of the Company every three years.
ANNUAL BONUS PLAN
The factors used in measuring the Company's performance under the
Annual Bonus Plan are a weighted combination of ROA and ROE. In general, a
payment pursuant to the terms of the Annual Bonus Plan is made only after the
Company's financial performance equals or exceeds median peer group financial
performance. The peer group includes a group of similarly sized publicly traded
thrifts. The Board of Directors reviews the terms of the Annual Bonus Plan each
year and establishes the threshold, target and maximum ROA and ROE levels, and
percentage of incentive award to be based upon ROA and ROE, respectively, after
evaluation of the Company's strategic business plan and other factors the Board
deems appropriate. For fiscal 1997, ROA accounted for 25% and ROE accounted for
75% of the total cash incentive award opportunity. Executive officers earned
incentive compensation based on the Company achieving threshold, target and
maximum ROA and ROE performance at the 50th percentile, 65th percentile and 80th
percentile, respectively, of the peer group. Based upon review of peer group
-18-
<PAGE> 20
compensation data, the Committee adjusted the performance benchmarks and
percentage of base salary amounts under the Annual Bonus Plan for fiscal 1997 to
ensure incentive compensation was competitive with that paid by comparably
performing peer group institutions. In general, if financial performance is
below the threshold level, no incentive compensation will be earned. Individual
award targets vary by executive group (CEO, Executive Vice Presidents, Senior
Vice Presidents and Department Managers) and are established as a percentage of
base salary. However, even if the Company's performance exceeds the target
ratios of the peer group, the Board of Directors of the Company and the Bank can
elect to reduce or cancel incentive payments if the Company's ROE does not equal
or exceed a "risk-free rate of return" defined to be 110% of the average
one-year treasury bill rate for the plan year. In addition, the performance
measures may be adjusted in any fiscal year if the Board of Directors approves
management proposals or directs management to implement proposals designed to
enhance the long-term performance of the Company but which would materially
impact payments under the Annual Bonus Plan.
For fiscal 1997, the Company is projected to achieve financial
performance objectives that exceed the 70th percentile for ROA and the 90th
percentile for ROE relative to the Annual Bonus Plan peer group. Based on the
Company's projected financial performance, cash bonuses were paid to Annual
Bonus Plan participants in fiscal 1997 representing part of the ROA and ROE
components of their 1997 bonus award. The balance of the 1997 incentive cash
bonus will be paid in fiscal 1998 when final peer data is available. The average
bonus earned under the Annual Bonus Plan in fiscal 1997 by the four highest paid
executive officers at year-end (other than the CEO) was 32.0% of their base
salaries compared to 17.1% in fiscal 1996.
LONG-TERM AWARD PLAN
In fiscal 1995, the Board of Directors of the Company reviewed and
approved the terms of the First Federal Capital Corporation Long-Term
Performance Award Plan (1995-1997) (the "Long-Term Award Plan") which provides
for the grant of stock options and awards of restricted stock. The purpose of
the Long-Term Award Plan is to strengthen the link between executive
compensation and long-term organization performance. In determining appropriate
stock option grants and stock awards, the Stock Option Committee considers the
executives' contribution toward institutional performance and the executives'
expected contribution toward meeting the organization's long-term strategic
goals as well as industry practice. Any value received by the executive from an
option grant and any increase in the value of a stock award is a function of any
increase in the price of the Common Stock. As a result, the value of the
long-term compensation is directly aligned with increased stockholder value. The
total of targeted or projected values of long-term awards at the date of the
grant is set considering observed market practices for similar institutions in
the financial industry.
Pursuant to the Long-Term Award Plan, the Company's financial
performance is measured by comparing the Company's average ROE over a three-year
performance period to the average ROE of all publicly traded thrifts (as defined
by the SNL Securities database of publicly traded thrifts) over the same period.
Executive officers are granted stock options and awarded restricted stock based
upon the Company achieving threshold, target and maximum ROE performance at the
50th percentile, 75th percentile and 90th percentile, respectively, of all
publicly traded thrifts. Individual award targets vary by executive group (CEO,
Executive Vice Presidents and Senior Vice Presidents) and are established as a
percentage of base salary. Department Managers also are eligible to participate
and may be awarded stock options and restricted stock at the discretion of the
Stock Option Committee. Under the Long-Term Award Plan, stock options are
granted and restricted stock is awarded at the beginning of the performance
period based upon the Company achieving the target 75th percentile performance.
The options vest at the rate of 331/3% over a three-year period from the date of
grant, with no adjustment at the end of the plan period. The exercise price of
the options is established at the fair market value of the Company's Common
Stock on the date of grant. Restricted stock is awarded at the beginning of the
plan period, subject to adjustments and vesting schedules as described herein.
-19-
<PAGE> 21
In fiscal 1995, options to acquire 134,100 shares of Common Stock
(adjusted for the June 1997 3-for-2 stock split) were granted to executive
officers of the Company (including the CEO), and 44,700 shares of restricted
stock (adjusted for the June 1997 3-for-2 stock split) were contingently awarded
to such executive officers, subject to the Company achieving ROE performance
during the 1995-1997 plan period that equals or exceeds the 75th percentile of
all publicly traded thrifts. At the end of the 1995-1997 performance period, all
of the contingently issued restricted shares must be forfeited by participants
if the Company has not achieved the threshold 50th percentile performance and a
portion of the restricted shares must be forfeited by participants if the
Company has not achieved the target 75th percentile performance. If the
Company's performance has exceeded the target 75th percentile, additional shares
of restricted stock will be awarded as provided for under the Long-Term Award
Plan. The balance of such additional awards, if any, will be made in fiscal 1998
when final peer data is received. The restricted stock awards, when finalized
for the 1995 - 1997 plan period, will be subject to a two-year vesting period
with 50% of the award vesting on January 1 of each year in 1999 and 2000.
However, the Stock Option Committee may elect to cancel or reduce restricted
stock awards if the Company's average three-year ROE is below a "risk-free rate
of return" defined to be 110% of the average three-year treasury bill over the
performance period.
In fiscal 1997, no options to purchase shares of Common Stock were
granted and no restricted stock awards were made to executive officers under the
Long-Term Award Plan as fiscal 1997 falls at the end of the 1995-1997 plan
period, and no such awards were made to executive officers of the Company
outside of the Long-Term Award Plan.
Shares of restricted stock and stock options granted pursuant to the
Long-Term Award Plan are made from shares of Common Stock reserved for issuance
under the First Federal Capital Corp. 1989 Stock Incentive Plan, the First
Federal Capital Corp. 1992 Stock Incentive Plan, the Rock Financial Corp. 1992
Stock Option and Incentive Plan (which was assumed by the Company in connection
with the Rock Merger) and the First Federal Capital Corp. 1997 Stock Option and
Incentive Plan (collectively, the "Stock Option and Incentive Plans"). Under the
Stock Option and Incentive Plans, the Stock Option Committee also may authorize
discretionary awards irrespective of whether the performance criteria set forth
in the Long-Term Award Plan are met.
IV. CEO COMPENSATION
Mr. Schini's cash compensation (salary and bonus) for fiscal 1997
consisted of a competitively determined base salary as well as the payment of a
cash incentive bonus based upon the Company's 1996 and 1997 financial
performance. Mr. Schini's base salary was increased 5% over 1996 which, in part,
reflected the Committee's recommendation to pay him a base salary that was
representative of comparable financial institutions of similar asset size and
performance. Mr. Schini receives no additional payment for serving as a member
of the Board of Directors of the Company or the Bank. During fiscal 1997, a cash
incentive bonus of $135,768 was paid to Mr. Schini which represented a portion
of his 1997 bonus as well as the balance of his 1996 bonus under the Company's
Annual Bonus Plan. The 1996 cash bonus reflected the Company's financial
performance relative to its peer group which data was at the 63rd percentile for
ROA and the 69th percentile for ROE. The Company achieved a ROA of 1.13% and a
ROE of 17.20% for fiscal 1997 which resulted in a partial payment to Mr. Schini
in fiscal 1997 representing a portion of the ROA and ROE components of his
bonus. For fiscal 1997, the Company is projected to achieve financial
performance objectives that exceed the 70th percentile for ROA and the 90th
percentile for ROE. The balance of Mr. Schini's 1997 incentive cash bonus will
be paid to him in 1998 when final peer data is received. Incentive cash
compensation paid in 1997 was 42.0% of base compensation compared to 23.3% of
base compensation in 1996. During fiscal 1997, no options to purchase shares of
Common Stock were granted and no restricted stock awards were made to any
executive officer of the Company.
MARJORIE A. DAVENPORT
RICHARD T. LOMMEN
PATRICK J. LUBY
DON P. RUNDLE
-20-
<PAGE> 22
STOCK PERFORMANCE GRAPH
The following graph compares the yearly cumulative total return on the
Common Stock over a five-year measurement period with (i) the yearly cumulative
total return on the stocks included in the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") Stock Market Index (for United
States companies) and (ii) the yearly cumulative total return on the stocks
included in the NASDAQ Bank Stock Index. The cumulative returns set forth in
each graph assume the reinvestment of dividends into additional shares of the
same class of equity securities at the frequency with which dividends were paid
on such securities during the applicable comparison period.
Comparison of Five Year-Cumulative Total Returns
Performance Graph for
First Federal Capital Corp.
Prepared by the Center for Research in Security Prices
Produced on 01/20/98 including data to 12/31/97
[GRAPH]
<TABLE>
<CAPTION>
CRSP Total Returns index for: 12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Federal Capital Corp. 100.0 127.8 144.9 166.0 223.1 492.6
Nasdaq Stock Market (US Companies) 100.0 114.8 112.2 158.7 195.3 239.5
Nasdaq Bank Stocks 100.0 114.0 113.6 169.2 223.4 377.4
SIC 6020-6029, 6710-6719 US & Foreign
</TABLE>
Notes:
A. The lines represent monthly index derived from compounded daily returns
that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the proceeding trading day is used.
D. The index level for all series was set to $100.0 on 12/31/92.
-21-
<PAGE> 23
INDEBTEDNESS OF MANAGEMENT AND CERTAIN TRANSACTIONS
Prior to the enactment of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, as amended ("FIRREA"), FFLX and FFMD followed the
policy of making loans to their directors, officers and employees at preferred
interest rates and fees. In accordance with FIRREA, all loans to officers and
directors are now made on the same terms, including interest rates, loan fees,
and collateral as those prevailing at the time for comparable transactions with
the general public and must not involve more than the normal risk of repayment
or present other unfavorable features. During 1997, no director or executive
officer of the Company or the Bank had loans outstanding at preferred interest
rates from the Company or the Bank which aggregated $60,000 or more. At December
31, 1997, the Bank had eleven loans to directors and executive officers of the
Company and the Bank and their affiliates which amounted to $997,253 or less
than .01% of the Company's stockholders' equity at such date.
The Company and the Bank intend that all transactions in the future
between the Company and the Bank and executive officers, directors, holders of
10% or more of the shares of any class of Common Stock of the Company and
affiliates thereof, will contain terms no less favorable to the Company or the
Bank than could have been obtained by them in arms' length negotiations with
unaffiliated persons and will be approved by a majority of outside directors of
the Company or the Bank, as applicable, not having any interest in the
transaction.
STOCKHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
Any proposal which a stockholder wishes to have included in the proxy
materials of the Company relating to the next annual meeting of stockholders of
the Company, which is scheduled to be held in April 1999, must be received at
the principal executive offices of the Company, 605 State Street, La Crosse,
Wisconsin 54601, Attention: Bradford R. Price, Executive Vice President and
Secretary, no later than November 21, 1998. If such proposal is in compliance
with all of the requirements of Rule 14a-8 under the Exchange Act, it will be
included in the proxy statement and set forth on the form of proxy issued for
such annual meeting of stockholders. It is urged that any such proposals be sent
certified mail, return receipt requested.
Stockholder proposals which are not submitted for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article II, Section 2.17 of the
Company's Bylaws, which provides that business at an annual meeting of
stockholders must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Company. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 60 days prior to the anniversary date of the mailing of
the proxy materials by the Company for the immediately preceding annual meeting.
A stockholder's notice must set forth as to each matter the stockholder proposes
to bring before an annual meeting (a) a brief description of the business
desired to be brought before the annual meeting, (b) the name and address, as
they appear on the Company's books, of the stockholder proposing such business,
(c) the class and number of shares of Common Stock of the Company which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business.
-22-
<PAGE> 24
OTHER MATTERS
Management is not aware of any business to come before the Annual
Meeting other than the matters described above in this Proxy Statement. However,
if any other matters should properly come before the Annual Meeting or any
adjournments or postponements thereof, it is intended that the proxies solicited
hereby will be voted with respect to those other matters in accordance with the
judgment of the persons voting the proxies.
The cost of the solicitation of proxies will be borne by the Company.
The Company has made arrangements with brokerage firms, banks, nominees and
other fiduciaries to forward proxy solicitation materials to the beneficial
owners of shares of Common Stock and will reimburse such holders for reasonable
expenses incurred by them in connection therewith. In addition to solicitations
by mail, directors, officers and employees of the Company may solicit proxies
personally or by telephone without additional compensation therefor.
BY ORDER OF THE BOARD OF DIRECTORS
Bradford R. Price
Executive Vice President and Secretary
La Crosse, Wisconsin
March 20, 1998
-23-
<PAGE> 25
<TABLE>
<S><C>
REVOCABLE PROXY FIRST FEDERAL CAPITAL CORP.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FIRST FEDERAL CAPITAL CORP. (THE "COMPANY") FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 22, 1998, AND AT ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
The undersigned hereby appoints Bradford R. Price and Jake C. Rusch as proxies, each with power to appoint his substitute,
and hereby authorizes each of them to represent and to vote, as designated below, all the shares of common stock, $0.10 par value
per share ("Common Stock") of the Company held of record by the undersigned on March 4, 1998 at the Annual Meeting of Stockholders
to be held at the Radisson Hotel, 200 Harborview Plaza, La Crosse, Wisconsin, on Wednesday, April 22, 1998, at 10:30 a.m., Central
Time, or any adjournments or postponements thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
Nominees for three-year term expiring in 2001: HENRY C. FUNK, PATRICK J. LUBY, DON P. RUNDLE
(Instruction: To withhold authority to vote for any individual nominees, write that nominee's name in the space provided below.)
- ---------------------------------------------------------------------------------------------------------------------------------
2. PROPOSAL TO RATIFY the appointment of Ernst & Young LLP as the Company's independent auditors for the year
ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be signed and dated, on the reverse side)
</TABLE>
<PAGE> 26
(Continued from the other side)
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.
SHARES OF THE COMPANY'S COMMON STOCK WILL BE VOTED AS SPECIFIED. IF NOT
OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE BOARD OF
DIRECTORS, NOMINEES TO THE BOARD OF DIRECTORS, FOR THE PROPOSAL SPECIFIED IN
ITEM 2 AND OTHERWISE AT THE DISCRETION OF THE PROXIES. YOU MAY REVOKE THIS
PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED AT THE ANNUAL MEETING OR ANY
ADJOURNMENTS OR POSTPONEMENTS THEREOF.
Dated:_____________________, 1998
_________________________________
_________________________________
Signatures
Please sign this exactly as your name(s)
appear(s) on this proxy. When signing
in a representative capacity, please
give title. When shares are held jointly,
only one holder need sign.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE> 27
REVOCABLE PROXY
FIRST FEDERAL CAPITAL CORP.
ANNUAL MEETING OF STOCKHOLDERS
<TABLE>
<S><C>
The undersigned hereby instructs Firstar Trust Company, the Trustee of the Trust created pursuant to the Savings Investment
Plan ("SIP") or First Federal Savings Bank La Crosse-Madison, to vote the shares of common stock, $0.10 per value per share
("Common Stock") of First Federal Capital Corp. (the "Company") which were allocated to my account as of March 4, 1998 under the SIP
upon the following proposals to be presented at the Annual Meeting of Stockholders of the Company on April 22, 1998, at 10:30 a.m.,
Central Time, or any adjournments or postponements thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
Nominees for three-year term expiring in 2001: HENRY C. FUNK, PATRICK J. LUBY, DON P. RUNDLE
(Instruction: To withhold authority to vote for any individual nominee, write that nominee's name in the space provided below.)
- ------------------------------------------------------------------------------------------------------------------------------------
2. PROPOSAL TO RATIFY the appointment of Ernst & Young LLP as the Company's independent auditors for the year ending December 31,
1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be signed and dated, on the reverse side)
</TABLE>
<PAGE> 28
(Continued from the other side)
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE
NOMINEES FOR DIRECTOR LISTED ABOVE AND FOR THE PROPOSAL SPECIFIED IN ITEM 2.
SUCH VOTES ARE HEREBY SOLICITED BY THE BOARD OF DIRECTORS.
Dated: 1998
--------------------------
------------------------------------
Signature
------------------------------------
Signature
If you return this card properly signed
but do not otherwise specify, shares
will be voted FOR each of the nominees
for director and FOR Proposal 2.
<PAGE> 29
REVOCABLE PROXY
FIRST FEDERAL CAPITAL CORP.
ANNUAL MEETING OF STOCKHOLDERS
<TABLE>
<S><C>
The undersigned hereby instructs Firstar Trust Company, the Trustee of the Trust created pursuant to the Employee Stock
Ownership Plan ("ESOP") of First Federal Capital Corp. (the "Company"), to vote the shares of common stock, $0.10 par value
per share ("Common Stock") of the Company which were allocated to my account as of March 4, 1998 under the ESOP upon the following
proposals to be presented at the Annual Meeting of Stockholders of the Company on April 22, 1998, at 10:30 a.m., Central Time, or
any adjournments or postponements thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
Nominees for three-year term expiring in 2001: HENRY C. FUNK, PATRICK J. LUBY, DON P. RUNDLE
(Instruction: To withhold authority to vote for any individual nominee, write that nominee's name in the space provided below.)
- ------------------------------------------------------------------------------------------------------------------------------------
2. PROPOSAL TO RATIFY the appointment of Ernst & Young LLP as the Company's independent auditors for the year ending December 31,
1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be signed and dated, on the reverse side)
</TABLE>
<PAGE> 30
(Continued from the other side)
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE
NOMINEES FOR DIRECTOR LISTED ABOVE AND FOR THE PROPOSAL SPECIFIED IN ITEM 2.
SUCH VOTES ARE HEREBY SOLICITED BY THE BOARD OF DIRECTORS.
Dated: 1998
--------------------------
------------------------------------
Signature
------------------------------------
Signature
If you return this card properly signed
but do not otherwise specify, shares
will be voted FOR each of the nominees
for director and FOR Proposal 2. If
you do not return this card, shares will
be voted by the Trustee.
