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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from........................to........................
Commission file number...................................................0-18046
FIRST FEDERAL CAPITAL CORP
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1651288
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
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]
The aggregate value of the common stock of the Registrant that was held by
non-affiliates as of February 28, 1999, was approximately $215.3 million. This
amount was based on the closing price of $13.75 per share of the Registrant's
common stock as of the same date.
The number of shares of common stock of the Registrant outstanding as of
February 28, 1999, was 18,098,472 (net of 1,843,158 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
<TABLE>
<CAPTION>
PART I Page
<S> <C>
Item 1--Business.............................................................................2
Item 2--Properties..........................................................................12
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...............13
Item 6--Selected Financial Data.............................................................14
Item 7--Management's Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................15
Item 7A--Quantitative and Qualitative Disclosures about Market Risk.........................29
Item 8--Financial Statements and Supplementary Data.........................................32
Item 9--Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..........................................................................59
PART III
Item 10--Directors and Executive Officers of the Registrant.................................60
Item 11--Executive Compensation.............................................................60
Item 12--Security Ownership of Certain Beneficial Owners and Management.....................60
Item 13--Certain Relationships and Related Transactions.....................................60
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................60
SIGNATURES........................................................................................62
EXHIBITS..........................................................................................64
</TABLE>
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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. Information regarding the reporting group's current
financial condition and results of operations is included in 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". This section should be read in conjunction with those sections.
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, which
are principally used to originate single-family residential loans, as well as
commercial real estate, consumer, and education loans. The Bank also purchases
single-family residential and commercial real estate loans from time-to-time
from third-party financial institutions. The Bank is also an active seller of
residential loans in the secondary market.
The Bank's primary market areas for conducting its activities consist
of communities located in the western, south-central, and eastern portions of
Wisconsin (not including the Milwaukee metropolitan area) and the northern
portion of Illinois, as well as contiguous counties in Iowa and Minnesota. The
Bank maintains a total of 61 banking offices in its market areas. Seventeen of
these offices are located in the Madison metropolitan area, six in the La Crosse
metropolitan area, five in the city of Eau Claire, four in the city of Appleton,
and two each in the cities of Beloit, Green Bay, Hudson, and Neenah, Wisconsin.
The Bank also maintains one retail banking facility in sixteen other cities
located throughout Wisconsin, as well as three offices in Rockford, Illinois.
The Bank also has separate residential loan production offices in Janesville and
Wausau, Wisconsin, as well as commercial real estate loan production offices in
Milwaukee and Appleton, Wisconsin.
In addition to deposits, the Bank also obtains a substantial portion of
its funding through borrowings from the Federal Home Loan Bank of Chicago
("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
collateralized mortgage obligations ("CMOs"), mortgage-backed securities
("MBSs"), mutual funds, and corporate bonds and notes, as permitted by
applicable federal laws and regulations.
The Bank is subject to 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
conventional residential real estate loans secured by single-family residences,
commercial real estate loans secured by multi-family residential and commercial
real estate, consumer loans, secured primarily by second mortgages on
single-family residences, and government-guaranteed education loans. The Bank
has very few mortgage loans that are insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans Administration
("VA"). As of December 31, 1998, approximately 66% of the Bank's total assets
consisted of loans held for investment purposes.
In general, the Bank's origination activities have concentrated on real
estate loans secured by properties located within its primary market areas and
within a 300-mile radius of the Bank's headquarters in La Crosse. However,
single-family loans purchased by the Bank are generally secured by properties
located outside of the Bank's primary market areas.
SINGLE-FAMILY RESIDENTIAL AND CONSTRUCTION LOANS Single-family
residential loans accounted for approximately 36% of the Bank's gross loans as
of December 31, 1998. Applications for single-family residential and
construction loans are accepted by commission-based employees of the Bank at
twelve loan production offices (ten of which are located with deposit-taking
offices) and at eight deposit-taking offices of the Bank which are able to
handle such applications.
In general, the Bank retains in its portfolio only single-family
residential mortgage loans that provide for periodic adjustments of 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 borrowers a fixed rate of interest 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%. It is the Bank's normal practice to
discount the interest rate it charges 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. In addition, most 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 fee. Upon conversion, the Bank generally sells such loans 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.
Although the Bank generally retains only 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 the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA"), the FHLB, 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
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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. In the
case of sales to the FHLB, however, the Bank retains a small share of the credit
risk on the underlying loans in exchange for a credit enhancement fee.
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
property's value. The Bank evaluates the collateral of its residential real
estate loans using documentation that complies with applicable regulations.
The Bank also originates loans to individuals to construct
single-family residences. Such loans accounted for approximately 2% of the
Bank's gross loans as of December 31, 1998. 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. This is because the risk of loss 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 Multi-family residential loans and commercial real estate
loans accounted for approximately 13% and 12%, respectively, of the Bank's gross
loans as of December 31, 1998. 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, which includes all or a portion of the states of
Nebraska, Illinois, Iowa, and Minnesota.
The Bank's emphasis in multi-family residential and commercial real
estate lending (together "commercial real estate lending") is 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 loan 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. 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 and 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.
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From time-to-time the Bank originates loans to construct multi-family
residential and commercial real estate properties. Such loans accounted for
approximately 1% and 2%, respectively, of the Bank's gross loans as of December
31, 1998. Construction loans are generally considered to involve a higher degree
of risk than mortgage loans on completed properties. The Bank'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. The Bank's
construction lending activities are generally limited to an area within a
150-mile radius of each 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 immediate market area. For additional discussion, refer
to Note 3 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 requiring personal guarantees
where appropriate, 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.
SERVICING MORTGAGE LOANS In addition to servicing the mortgage loans in
its own portfolio, the Bank continues to service most of the single-family
mortgage loans that it sells to third-party investors. Servicing mortgage loans
includes such functions as collecting monthly principal and interest payments
from borrowers, passing such payments through to investors, maintaining escrow
accounts for real estate taxes and insurance, and making such payments on behalf
of borrowers when they are due. 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
borrowers. 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, net of
amortization of capitalized servicing rights. The Bank also receives fees and
interest income from ancillary sources such as delinquency charges and float on
escrow and other funds. 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.
Management believes that servicing mortgage loans for third parties
provides a natural hedge against other risks inherent in the Bank's mortgage
banking operations. That is, fluctuations in gains on sales of mortgage loans
caused by changes in market interest rates will generally be offset in part by
an opposite change in loan servicing fee income. The latter is generally caused
by fluctuations in the value of servicing rights. These fluctuations are usually
the result of actual loan prepayment activity that is different from that which
was anticipated when the related servicing rights were originally recorded.
However, fluctuations in the value of mortgage servicing rights may also be
caused by mark-to-market adjustments under generally accepted accounting
principles ("GAAP"). That is, the value of servicing rights may fluctuate
because of changes in the discount rates or prepayment assumptions used to
periodically value servicing rights. For additional discussion 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", as
well as 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. Such loans accounted
for approximately 19% of the Bank's gross loans as of December 31, 1998.
Applications for consumer loans may be taken at all of the Bank's retail banking
offices. The majority of
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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, 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.
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 home-equity
lines of credit. These types of loans 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. Second mortgage loans are generally fixed-rate and have terms of up to
ten years.
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 the Bank's efforts to increase the interest rate
sensitivity and shorten the average maturity of its loan portfolio. Furthermore,
the Bank's net charge-offs on consumer loans as a percentage of gross loans has
been minimal in recent years, despite the risks inherent in consumer lending.
EDUCATION LOANS The Bank offers education loans through programs
sponsored by the federal government. As such, the federal government guarantees
most of the principal and interest on such loans. Education loans accounted for
approximately 15% of the Bank's gross loans as of December 31, 1998.
The origination of education loans is highly dependent on relationships
with the financial aid departments of post-secondary schools, rather than direct
contact with students. Furthermore, a third-party institution services the loans
for the Bank after they are originated. Education loans generally carry a
floating-rate of interest and have terms of up to fifteen years. The interest
rate received on education loans is based on a spread above the average
quarterly yield of the three-month U.S. Treasury bill.
Legislation enacted in 1998 lowered the rate paid by borrowers on
education loans originated after July 1, 1998, from the three-month U.S.
Treasury bill plus 310 basis points to the three-month U.S. Treasury bill plus
230 basis points. Management is not certain at this time what long-term impact
this legislation may have on the Bank's willingness to originate education
loans, although no changes are contemplated at this time. During the twelve
months ended December 31, 1998, 1997, and 1996, the Bank originated $37.7
million, $38.4 million, and $36.2 million in education loans, respectively.
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 3 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
When a loan is placed on non-accrual and/or non-performing status, the
Bank generally institutes foreclosure or other proceedings at that time. Real
estate property 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. Other property acquired through adverse judgement, such as
automobiles, is generally classified as an "other asset". Foreclosed real estate
and other repossessed property has not been material to the Bank in recent
years.
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
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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.
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 3 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 current 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.
MORTGAGE-BACKED AND RELATED SECURITIES
The Bank periodically invests in CMOs and MBSs (collectively
"mortgage-backed and related securities"). As of December 31, 1998, such
investments accounted for approximately 26% of the Bank's total assets.
Management believes CMOs represent attractive investment alternatives
relative to other investment vehicles, due to the variety of maturity and
repayment options available through such investments and due to the limited
credit risk associated with such securities. 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 generally invests
only in sequential-pay, planned amortization class ("PAC"), and targeted
amortization class ("TAC") tranches that, at the time of their purchase, are not
considered to be high-risk derivative securities, as defined in OTS 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 securities.
The Bank also invests in MBSs that are guaranteed by FHLMC, FNMA, or
the Government National Mortgage Association ("GNMA"). In addition, the Bank
periodically securitizes or "swaps" mortgage loans in its own portfolio into
FHLMC or FNMA MBSs and continues to hold such securities. MBSs enhance the
quality of the Bank's assets by virtue of the guarantees that back them,
although the Bank generally foregoes the guarantee on mortgage loans that it has
swapped into MBSs (for additional discussion, refer to Note 2 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data"). In addition,
MBSs are more liquid than individual mortgage loans and receive treatment that
is more favorable when used to collateralize certain borrowings 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".
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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. Excluding U.S. government and
federal agency securities and mutual funds that invest exclusively in such
securities, the Bank does not invest in individual securities that exceed 10% of
its stockholder's equity.
As of December 31, 1998, the Bank held no investment securities. When
it does hold such securities, the Bank generally classifies them 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 offices 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, from amortization, maturity,
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 terms from three
months to five years. Substantially all of the Bank's deposits are obtained from
individuals and businesses located in Wisconsin and the northern portion of
Illinois. As of December 31, 1998, deposit liabilities accounted for
approximately 82% of the Bank's total liabilities and equity.
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, automated teller machine ("ATM") and debit card
fees, 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 25 of the
Bank's retail banking facilities are located in supermarkets. The Bank also owns
79 ATM machines, all of which are located in Wisconsin and the northern portion
of Illinois. Depositors may also obtain a VISA "debit card" from the Bank, which
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 used 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. At December 31,
1998, 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. As of December 31,
1998, FHLB advances accounted for approximately 11% of total liabilities and
equity.
OTHER BORROWINGS The Bank 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. The Corporation also has a
8
<PAGE> 10
$10.0 million line of credit with a third financial institution. The interest
rate on borrowings under this line is determined on a daily basis at 125 basis
points above the one-month London Inter-Bank Offered Rate ("LIBOR"). The Bank
has not had material amounts of other borrowings outstanding in recent years.
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 CAPITAL HOLDINGS, INC. In 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 the Bank's investment securities portfolio and
certain other holdings. In addition, the formation of FCHI has resulted in a
lower effective income tax rate for the Bank because the State of Nevada does
not currently impose a corporate income tax. As of December 31, 1998, FCHI was
managing $305.0 million in mortgage-backed and related securities and $150.6
million in purchased single-family residential loans for the Bank. FCHI's net
income was $15.8 million, $9.8 million, and $9.5 million during the years ended
December 31, 1998, 1997, and 1996, respectively. The Bank's investment in FCHI
as of December 31, 1998, was $525.6 million, which was eliminated in
consolidation in accordance with GAAP. Refer to "Taxation" for a discussion of
proposed legislation that may affect the taxation of FCHI in the State of
Wisconsin.
FIRST REINSURANCE, INC. In December 1998 the Bank completed the
formation of a wholly-owned subsidiary in the State of Arizona. The subsidiary,
First Reinsurance, Inc. ("FRI"), was formed to reinsure or "underwrite" credit
life and disability insurance policies sold to the Bank's consumer loan
customers since October 1995. FRI assumes the first level of risk on these
policies and a third-party insurer assumes the remaining risk. The third-party
insurer is also responsible for performing most of the administrative functions
of the subsidiary on a contract basis. As a result of its assumption of risk on
policies sold since October 1995, FRI recorded an underwriting gain of $416,000
in December 1998, net of appropriate insurance reserves in accordance with GAAP.
Of this amount, all but $149,000 was eliminated in consolidation. At December
31, 1998, the Bank's investment in FRI was $509,000, which was eliminated in
consolidation in accordance with GAAP. Refer to "Taxation" for a discussion of
recent proposed legislation that may affect the taxation of FRI in the State of
Wisconsin.
FIRST ENTERPRISES, INC. The Bank's wholly-owned subsidiary, First
Enterprises, Inc. ("FEI"), was incorporated in 1971 in the State of Wisconsin.
During the period from the late-1970s to the mid-1980s, FEI was primarily
involved in the acquisition and development of hotels. Except for the
maintenance of its two remaining hotel investments, however, FEI is no longer
involved in these types of activities. FEI's investment in its remaining hotels
was $217,000 as of December 31, 1998. FEI had net income of $636,000, $49,000,
and $56,000 during the years ended December 31, 1998, 1997, and 1996,
respectively (for an explanation of the significant increase in net income in
1998, refer to Part II, Item 7, "Management Discussion and Analysis of Financial
Condition and Results of Operations"). At December 31, 1998, the Bank's
investment in FEI was $844,000, which was eliminated in consolidation in
accordance with GAAP.
TURTLE CREEK CORPORATION In 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, a
Wisconsin corporation, 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 $109,000 at
December 31, 1998. Turtle Creek had a net loss of $25,000, $21,000, and $26,000
during the years ended December 31, 1998, 1997, and 1996, respectively. The
Bank's investment in Turtle Creek as of December 31, 1998, was $366,000, which
was 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, the Bank faces significant competition from mutual fund and insurance
companies, as well as primary financial markets such as the stock and bond
markets. The Bank competes for deposits principally by offering
9
<PAGE> 11
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, 1998.
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.
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
Bank's 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 0.061% 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 0.0122% 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
10
<PAGE> 12
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, 1998, 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, 1998, the Bank exceeded all minimum
regulatory capital requirements as specified by the FDIC. For additional
discussion refer to Note 11 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data".
LIQUIDITY REQUIREMENTS The Bank is required to maintain liquid assets
(generally defined as cash and investment-grade short-term securities, as well
as certain mortgage-related securities and obligations of the United States)
equal to at least 4% of its "liquidity base" (generally defined as short-term
deposit liabilities and other borrowings). The OTS may change this requirement
from time-to-time to any amount within the range of 4% to 10% of the liquidity
base. As of December 31, 1998, 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, 1998, 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, 1998, the Bank had a $12.5
million investment in the stock of the FHLB of Chicago and was in compliance
with this requirement.
The Bank's investment in FHLB stock, 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 certain
transaction deposit accounts and other liabilities. At December 31, 1998, the
Bank's required reserves were approximately $19.9 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 11 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data".
11
<PAGE> 13
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 1998, was "outstanding".
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
(excluding FRI) 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. The consolidated entity pays taxes at the federal statutory rate of 35%
of its taxable income, as defined in the IRC. Refer to Notes 1 and 8 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data" for additional
discussion. As of December 31, 1998, there were no material disputes outstanding
with Internal Revenue Service ("IRS").
STATE TAXATION The states of Wisconsin, Illinois, and Minnesota impose
a tax on their apportioned shares of the Corporation's taxable income at the
rate of 7.9%, 7.3%, and 9.8%, respectively (all state income taxes are
deductible on the Corporation's federal income tax return). These states'
definitions of taxable income are generally similar to the federal definition,
except that interest from state and municipal obligations is taxable, no
deduction is allowed for state income taxes (except for Illinois, which allows a
deduction for taxes paid to other states), and, in Wisconsin and Minnesota, net
operating losses may be carried forward but not back. Minnesota and Illinois
require the filing of consolidated state income tax returns, whereas Wisconsin
currently requires separate returns for each entity in the consolidated group.
However, refer to the next paragraph for an important legislative development
with respect to taxation in the State of Wisconsin.
FCHI and FRI, wholly-owned subsidiaries of the Bank, are subject to
taxation in the states of Nevada and Arizona, respectively. The State of Nevada
does not currently impose a corporate income tax and the State of Arizona
imposes a tax on the gross premium revenues of insurance companies rather than
taxable income. Although the taxable income of these subsidiaries is not
currently subject to taxation in the State of Wisconsin, legislation was
recently introduced in that state which would require consolidated state income
tax returns for taxable years beginning after December 31, 1999. This
legislation would result in the taxable income of FCHI, and possibly FRI, being
subject to taxation in the State of Wisconsin. If the Corporation had been
required to file a consolidated state income tax return in Wisconsin for the
year ended December 31, 1998, the Corporation's consolidated income tax expense
would have been higher by approximately $1.3 million, which would have reduced
diluted and basic earnings per share by $0.07 per share. At this time,
management of the Corporation is unable to estimate whether this legislation, as
proposed, will become law.
ITEM 2--PROPERTIES
As of December 31, 1998, the Bank conducted its business from its
corporate offices in La Crosse, Wisconsin, 58 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 20 of its offices and leased the building and/or the land
for its remaining 41 properties, including 25 located in supermarkets. The Bank
also owns or leases certain other properties to meet various business needs. For
additional information, refer to Note 5 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
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<PAGE> 14
ITEM 3--LEGAL PROCEEDINGS
The information required herein is included in Note 10 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
No matters were submitted to security holders for vote during the
fourth quarter of 1998.
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 18, 1999, the Corporation had 18,093,375 common
shares outstanding (net of 1,848,255 shares of treasury stock), 1,554
stockholders of record, 3,400 estimated beneficial stockholders, and 4,954
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 11--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> 15
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 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $1,786,504 $1,544,294 $1,515,413 $1,402,479 $1,172,886
Investment securities available for sale, at fair - 21,377 74,029 80,325 89,476
value
Mortgage-backed and related securities:
Available for sale, at fair value 204,109 47,895 61,875 84,173 -
Held for investment, at cost 102,500 124,336 147,835 171,493 269,443
Loans held for investment, net 1,177,526 1,193,893 1,106,040 932,084 723,826
Allowance for loan losses 7,624 7,638 7,888 8,186 8,074
Intangible assets 13,485 5,921 5,221 5,643 97
Deposit liabilities 1,460,136 1,146,534 1,024,093 969,423 778,641
FHLB advances and other borrowings 189,778 275,779 383,593 322,296 308,476
Stockholders' equity 122,685 109,361 95,414 98,939 77,181
- ---------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA FOR YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Interest income $118,668 $114,976 $103,977 $88,858 $73,208
Interest expense 71,457 70,265 63,684 54,954 40,938
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 47,211 44,711 40,293 33,904 32,270
Provision for loan losses 293 539 - - -
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 46,918 44,172 40,293 33,904 32,270
- ---------------------------------------------------------------------------------------------------------------------
Gains from sales of loans 16,929 6,374 4,331 3,545 2,945
Gains (losses) from sales of other investments 343 (725) (311) (29) 100
Other non-interest income 14,088 18,645 15,811 13,597 11,262
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 31,360 24,294 19,831 17,113 14,307
- ---------------------------------------------------------------------------------------------------------------------
FDIC special assessment - - 5,941 - -
Other non-interest expense 47,597 40,197 38,304 34,372 30,889
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 47,597 40,197 44,245 34,372 30,889
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 30,681 28,269 15,880 16,646 15,687
Income tax expense 11,257 10,879 5,806 6,001 5,707
- ---------------------------------------------------------------------------------------------------------------------
Net income before extraordinary charge 19,424 17,390 10,074 10,645 9,980
Extraordinary charge (1) - - - - (203)
- ---------------------------------------------------------------------------------------------------------------------
Net income $19,424 $17,390 $10,074 $10,645 $9,777
- ---------------------------------------------------------------------------------------------------------------------
SELECTED OTHER DATA AT OR FOR THE YEAR ENDED
DECEMBER 31 (2) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Return on average assets 1.19% 1.13% 0.97% 0.87% 0.93%
Return on average equity 16.59 17.20 14.21 12.86 13.32
Average equity to average assets 7.16 6.57 6.80 6.75 6.96
Average interest rate spread 2.51 2.63 2.61 2.54 2.82
Average net interest margin 3.07 3.07 3.02 2.92 3.15
Ratio of allowance for loan losses to total loans held
for investment at end of period 0.65 0.64 0.71 0.88 1.12
Ratio of non-interest expense to average assets (3) 2.90 2.62 2.71 2.83 2.89
Earnings per share: (4)
Diluted earnings per share $0.98 $0.88 $0.68 $0.57 $0.55
Basic earnings per share 1.05 0.95 0.73 0.61 0.58
Dividends paid per share (4) 0.270 0.233 0.207 0.183 0.160
Stock price at end of period (4) 16.38 16.94 7.84 6.00 5.42
Book value per share at end of period (4) 6.68 5.95 5.19 5.02 4.47
Banking facilities at end of period 61 50 48 44 35
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The extraordinary charge in 1994 consisted of a prepayment penalty on
certain FHLB advances, net of income tax benefit.
(2) Selected other data excludes the after-tax impact of the FDIC special
assessment as well as the impact of the extraordinary charge.
(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
3-for-2 stock split on June 12, 1997, and a 2-for-1 stock split on June
11, 1998.
14
<PAGE> 16
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,
1998, 1997, and 1996, were $ 19.4 million, $17.4 million, and $13.6 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 1.19%, 1.13%, and 0.97%, respectively, and returns on average
equity of 16.59%, 17.20%, and 14.21%, respectively. Diluted earnings per share
during these periods were $0.98, $0.88, and $0.68, respectively, excluding the
after-tax effect of the FDIC special assessment in 1996 ($0.18 per share).
The improvement in earnings from 1997 to 1998 was due primarily to
increases in net interest income, retail banking fees, gain (loss) on sales of
investment securities, and other non-interest income. The latter included income
from a legal settlement, as well as an increase in fee income from certain loan
originations and conversions. Also contributing to the improvement in earnings
was a significant increase in gain on sales of loans, although this development
was offset in large part by a substantial decrease in loan servicing fees. These
favorable developments were partially offset by increases in compensation and
employee benefits, occupancy and equipment expenses, supplies, postage, and
communication expenses, and ATM and debit card transaction costs. Other
non-interest expense also increased, primarily because of increased expenses
related to the servicing of mortgage loans and the operation and disposition of
foreclosed real estate.
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 ATM and debit card transaction costs. Finally,
loss on sales of investment securities increased in 1997 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, 1998, 1997, and 1996.
NET INTEREST INCOME Net interest income increased by $2.5 million or
5.6% and $4.4 million or 11.0% during the years ended December 31, 1998 and
1997, respectively. The improvement in both of these periods was primarily
volume related as the Corporation's average interest-earning assets grew by
$82.2 million or 5.6% in 1998 and by $123.7 million or 9.3% in 1997. The
principal source of growth in both periods occurred in the Corporation's
mortgage and consumer loan portfolios. Although mortgage-backed and related
securities and overnight investments also increased substantially in 1998, these
increases were caused by the securitization of adjustable-rate residential
mortgage loans into MBSs and the temporary investment of proceeds from loan
sales, respectively. Asset growth in both periods was principally funded by
increases in deposit liabilities, and to a lesser extent, by FHLB advances in
1997. Refer to "Financial Condition" for additional discussion.
Also contributing to the increase in net interest income in 1998 was an
increase in average non-interest bearing deposit liabilities, which was the
principal reason the Corporation's ratio of average interest-earning assets to
average interest-bearing liabilities improved from 109.14% in 1997 to 112.03% in
1998. The increase in non-interest-bearing liabilities was due in part to an
increase in custodial deposit accounts. The Corporation maintains borrowers'
principal and interest payments in these accounts on a temporary basis pending
their remittance to the third-party owners of the loans. Balances in these
accounts increased significantly in 1998 because of increased loan prepayment
activity, which was brought about by a declining interest rate environment.
Also contributing to the increase in net interest income in 1997 was a
slight increase in the Corporation's average interest rate spread. This increase
was caused by the investment of a higher percentage of interest-earning assets
in mortgage and consumer loans, which generally earn higher yields than the
Corporation's other earning assets, such as CMOs, MBSs, and investment
securities. This development was partially offset by an increase in 1997 in the
average cost of the Corporation's interest-bearing liabilities, due to more
competitive rate offerings on
15
<PAGE> 17
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.
The Corporation's interest rate spread decreased from 2.63% in 1997 to
2.51% in 1998, offsetting slightly the increase in net interest income in that
year caused by growth in interest-earning assets. Management attributes this
decrease to a declining interest rate environment during most of 1998, which
resulted in a relatively flat yield curve during much of the period. This type
of interest rate environment has an unfavorable impact on the Corporation's
interest rate spread because of the tendency of the Corporation's assets to
price off a longer end of the yield curve than its liabilities. If this interest
rate environment persists in the future, the Corporation may experience further
declines in its interest rate spread.
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, 1998,
1997, and 1996.
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
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:
Single-family mortgage loans $500,772 $38,404 7.67% $603,662 $47,927 7.94% $522,735 $41,701 7.98%
Commercial real estate loans 295,533 25,079 8.49 250,760 21,764 8.68 213,854 18,269 8.54
Consumer loans 379,686 31,986 8.42 331,226 28,251 8.53 269,951 23,816 8.82
- --------------------------------------------------------------------------------------------------------------------
Total loans 1,175,991 95,469 8.12 1,185,648 97,942 8.26 1,006,540 83,786 8.32
Mortgage-backed and
related securities 279,767 18,542 6.63 193,135 12,126 6.28 234,430 14,495 6.18
Investment securities 6,657 407 6.11 49,747 3,079 6.19 72,149 4,347 6.03
Interest-bearing deposits
with banks 63,596 3,336 5.25 10,594 576 5.44 4,756 256 5.39
Other earning assets 13,814 913 6.61 18,540 1,254 6.77 16,126 1,093 6.77
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,539,825 118,668 7.71 1,457,664 114,976 7.89 1,334,001 103,977 7.79
Non-interest-earning assets:
Office properties and
equipment 24,745 25,201 26,670
Real estate 1,710 735 199
Other assets 67,754 55,838 50,909
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,634,034 $1,539,438 $1,411,779
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Regular savings accounts $94,981 $1,843 1.94% $88,797 $1,800 2.03% $89,202 $1,775 1.99%
Checking accounts 58,126 544 0.94 52,579 524 1.00 52,297 521 1.00
Money market accounts 150,209 6,381 4.25 142,438 6,322 4.44 118,916 5,103 4.29
Certificates of deposit 843,066 50,653 6.01 710,591 42,504 5.98 654,299 39,091 5.97
- --------------------------------------------------------------------------------------------------------------------
Total deposits 1,146,382 59,422 5.18 994,405 51,150 5.14 914,714 46,490 5.08
FHLB advances 220,223 11,851 5.38 325,481 18,569 5.71 297,892 16,642 5.59
Other borrowings 7,901 185 2.34 15,650 546 3.49 15,274 552 3.61
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,374,506 71,457 5.20 1,335,536 70,265 5.26 1,227,880 63,684 5.19
Non-interest-bearing
liabilities:
Non-interest-bearing 126,480 92,439 78,890
deposits
Other liabilities 15,997 10,343 8,943
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,516,983 1,438,318 1,315,713
Stockholders' equity 117,052 101,120 96,066
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,634,034 $1,539,438 $1,411,779
- --------------------------------------------------------------------------------------------------------------------
Net interest income $47,211 $44,711 $40,293
- --------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.51% 2.63% 2.61%
- --------------------------------------------------------------------------------------------------------------------
Net interest income as a percent
of average earning assets 3.07% 3.07% 3.02%
- --------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average interest-
bearing liabilities 112.03% 109.14% 108.64%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
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 in interest income.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
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:
Single-family mortgage loans ($1,632) ($8,169) $278 ($9,523) ($199) $ 6,457 ($31) $6,227
Commercial real estate loans (484) 3,886 (86) 3,316 292 3,153 50 3,495
Consumer loans (347) 4,133 (51) 3,734 (792) 5,406 (180) 4,434
- --------------------------------------------------------------------------------------------------------------------
Total loans (2,463) (150) 141 (2,473) (699) 15,016 (161) 14,156
Mortgage-backed and related
securities 675 5,439 302 6,416 223 (2,553) (39) (2,369)
Investment securities (37) (2,667) 33 (2,671) 119 (1,350) (37) (1,268)
Interest-bearing deposits with
banks (20) 2,882 (101) 2,761 2 315 3 320
Other earning assets (28) (320) 7 (341) (2) 163 0 161
- --------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (1,873) 5,184 381 3,692 (357) 11,591 (235) 10,999
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits (190) 8,449 13 8,272 254 4,367 39 4,660
FHLB advances (1,054) (6,005) 341 (6,718) 353 1,541 33 1,927
Other borrowings (180) (270) 89 (361) (19) 14 (1) (6)
- --------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (1,424) 2,174 442 1,192 588 5,922 71 6,581
- --------------------------------------------------------------------------------------------------------------------
Net change in net interest income ($449) $ 3,010 ($61) $ 2,500 ($945) $5,669 ($306) $4,418
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The current interest rate environment has had a significant impact on
the ability of the Corporation to internally grow its interest-earning assets. A
low interest rate or flat yield curve environment tends to increase customer
preference for fixed-rate mortgage loans, as opposed to adjustable-rate loans.
In addition, such environment encourages borrowers to refinance their existing
adjustable-rate loans into fixed-rate loans to "lock-in" a lower long-term rate.
Given the Corporation's policy of selling these types of loans in the secondary
market, its internally originated portfolio of adjustable-rate residential
mortgage loans has declined substantially since December 31, 1997. Although some
of this decline was offset by internal growth in consumer and commercial real
estate loans, in the third and fourth quarters of 1998 the Corporation purchased
adjustable-rate residential mortgage loans from third-party originators to
maintain growth in its interest-earning assets (refer to "Financial Condition"
for additional discussion). If the current interest rate environment persists,
management believes it will continue to be a challenge for the Corporation to
internally grow its interest-earning assets.
The Corporation will continue to explore alternatives to maintain
growth in its interest-earning assets in the near term. These alternatives
include, but are not limited to, the purchase of additional adjustable-rate
residential mortgage loans from third-party originators, the purchase of
mortgage-backed and related securities, and the retention of certain fixed-rate
loans that are currently sold by the Corporation in the secondary market. It is
anticipated that such assets would be funded by growth in deposit liabilities or
increased borrowings from the FHLB. However, there are many considerations
involved in such decisions and there can be no assurances that the Corporation
will elect to adopt any of these strategies to increase its interest-earnings
assets.
PROVISION FOR LOAN LOSSES In general, provisions for loan losses
recorded during the years ended 1998, 1997, and 1996, approximated the
Corporation's actual charge-off activity during such periods, except for a
$272,000 charge-off related to education loans in 1997, as described in a
subsequent paragraph. Management of the Corporation expects the provision for
1999 to also approximate actual charge-off activity, although there can be no
assurances.
As of December 31, 1998 and December 31, 1997, the Corporation's
allowance for loan losses was $7.6 million or 0.65% and 0.64% of loans held for
investment, respectively. Although management believes that the Corporation's
present level of allowance for loan losses is adequate, there can be no
assurance that future
17
<PAGE> 19
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".
The following table summarizes the activity in the Corporation's
allowance for loan losses during each of years indicated.
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,638 $7,888 $8,186 $8,074 $7,828
Provision for losses 293 539 - - -
- ---------------------------------------------------------------------------------------------------------------------
Charge-offs:
Mortgage loans - 13 - - 27
Consumer loans 365 802 337 334 146
Commercial business loans - - - 135 108
- ---------------------------------------------------------------------------------------------------------------------
Total loans charged-off 365 815 337 469 281
Recoveries 58 26 39 44 49
- ---------------------------------------------------------------------------------------------------------------------
Charge-offs net of recoveries 307 789 298 425 232
Transfers - - - - 478
Purchased allowances - - - 537 -
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,624 $7,638 $7,888 $8,186 $8,074
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of average loans outstanding 0.03% 0.07% 0.03% 0.05% 0.04%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of allowance to total loans held for investment at end of period 0.65% 0.64% 0.71% 0.88% 1.12%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Consumer loan charge-offs in 1997 and 1995 included $272,000 and
$125,000, respectively, related to accrued interest on education loans that was
deemed uncollectible from the United States Government. Similar charge-offs on
education loans are not anticipated in the future; however, there can be no
assurances. The purchased allowances shown for 1995 were from the acquisition of
another financial institution. The transfer shown for 1994 resulted from the
transfer of excess general loss allowances from real estate to mortgage loans.
Management considered this transfer appropriate given the significant decline in
the Corporation's problem real estate during that period.
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 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans $156 0.04% $148 0.03% $183 0.03% $177 0.04% $179 0.05%
Multi-family and commercial
real estate loans 7,017 2.43 7,200 2.90 7,326 3.30 7,710 3.93 7,409 4.38
Consumer loans 414 0.10 253 0.07 302 0.10 222 0.09 275 0.15
Commercial business loans 37 9.97 37 6.65 77 6.33 77 3.49 211 11.77
- --------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $7,624 0.65% $7,638 0.64% $7,888 0.71% $8,186 0.88% $8,074 1.12%
- --------------------------------------------------------------------------------------------------------------------
</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.
NON-INTEREST INCOME Non-interest income for the years ended December
31, 1998, 1997, and 1996, was $31.4 million, $24.3 million, and $19.8 million,
respectively. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their changes from 1997 to 1998
and 1996 to 1997.
Retail banking fees and service charges increased by $2.4 million or
19.4% in 1998 and by $2.3 million or 22.9% in 1997. The increase in both years
was due in part to 31% growth in the number of checking accounts serviced by the
Corporation since December 31, 1996. Approximately 20% of this growth was the
result of retail banking offices opened in 1997 and 1998 (refer to "Results of
Operations--Non-Interest Expense" for additional discussion) and another 34% was
due to the acquisition of deposits from another financial institution during the
fourth quarter of 1998 (refer to "Financial Condition--Deposit Liabilities" for
additional discussion). Also contributing to the growth in retail banking fees
was a $587,000 and $332,000 or 27.1% and 18.1% increase in fees from customers'
use of ATMs in 1998 and 1997, respectively. In addition, fee income from
customers' use of debit
18
<PAGE> 20
cards increased by $411,000 and $850,000 or approximately 40% and 525% in the
same periods, respectively. The Corporation introduced debit cards to its
checking account customers in 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 and 1998 as a
result of changes in the rules governing ATM surcharges, which permitted the
Corporation to increase fee revenue from ATMs. The Corporation intends to
increase the number of ATMs it operates by approximately 13% in 1999, although
there can be no assurances.
Commissions on annuity and insurance sales decreased by $31,000 or 1.7%
in 1998 and by $253,000 or 12.3% in 1997. The Corporation's principal sources of
commission revenues are from sales of tax-deferred annuity contracts, credit
life and disability insurance policies, and mortgage loan insurance policies.
The decrease in 1998 was principally due to decreases in revenue from sales of
credit life and disability insurance policies and mortgage loan insurance
policies. The decrease in 1997 was primarily due to lower sales of tax deferred
annuities. Included in commission revenue for 1998 was a $149,000 underwriting
gain related to the Corporation's formation of FRI, a wholly-owned reinsurance
subsidiary, and its assumption of the first level of risk on credit life and
disability insurance policies sold to the Bank's consumer loan customers since
October 1995 (refer to Part I, Item 1, "Business--Subsidiaries", for additional
discussion).
Loan servicing fees were $(6.7) million, $2.4 million, and $2.2 million
in 1998, 1997, and 1996, respectively. Interest rates reached historically low
levels in 1998. As a result, actual loan prepayment activity was much higher
than that which had originally been estimated for the related mortgage servicing
rights. Because of such prepayment activity, the Corporation recorded $10.2
million in losses on its mortgage servicing rights in 1998 over-and-above that
which management considered to be "normal" periodic amortization. This compared
to only $650,000 and $624,000 in such losses in 1997 and 1996, respectively.
Excluding the effects of the aforementioned losses, but net of "normal"
periodic amortization of MSRs, loan servicing fees would have increased by
$542,000 or 18.0% and $172,000 or 6.1% in 1998 and 1997. These increases were
attributable to a $450.9 million or 32.1% increase and a $216.8 million or 18.3%
increase in mortgage loans serviced for others during such periods,
respectively. The significant growth in 1998 was due in part to the
securitization of $222.3 million of the Corporation's adjustable-rate
residential mortgage loans into MBSs. The principal balance related to these
securities was included in the amount reported as loans serviced for others even
though the securities were retained by the Corporation (refer to "Financial
Condition--Mortgage-Backed and Related Securities" for additional discussion).
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. The
Corporation also purchased mortgage servicing rights related to $50.0 million in
mortgage loans in 1998. Such loans consisted principally of fixed-rate,
residential mortgage loans on properties located in Iowa. Also contributing to
the growth in loans serviced for others in both periods 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.
Subsequent to December 31, 1998, interest rates have remained at
historically low levels. If this interest rate environment persists, or if
interest rates decline further, the Corporation will most likely continue to
record large losses on its mortgage servicing rights related to faster than
anticipated prepayment activity. Such losses, however, would most likely
continue to be offset by high levels of gains on sales of mortgage loans, as
described in the following paragraph. It should be noted, however, that further
declines in interest rates may also expose the Corporation to unfavorable
mark-to-market adjustments against its portfolio of mortgage servicing
rights--primarily because of the potential for increases in market expectations
for future prepayments. Although management believes that most of the
Corporation's loans that prepay are replaced by a new loan to the same customer
or even a different customer (thus preserving the future servicing cash flow),
GAAP requires mark-to-market losses resulting from increases in market
expectations for future prepayments to be recorded in the current period.
However, the offsetting gain on the sale of the new loan, if any, cannot be
recorded until the customer actually prepays the old loan and the new loan is
sold in the secondary market. Management will continue to closely monitor the
carrying value of its mortgage servicing rights and will record mark-to-market
adjustments as appropriate. For additional discussion, 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".
19
<PAGE> 21
Gains on sales of mortgage loans for the years ended December 31, 1998,
1997, and 1996, were $16.9 million, $6.4 million, and $4.3 million,
respectively. The increases in 1998 and 1997 were primarily attributable to a
$565.9 million or approximately 175% increase and a $69.8 million or
approximately 30% 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 into fixed-rate, both of
which were generally sold in the secondary market. Interest rates have remained
at historically low levels in early 1999. If this situation persists, or if
interest rates decline further, the Corporation is likely to continue to
experience high levels of 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 high levels of gains on sales of mortgage loans,
although there can be no assurances. Such gains will most likely be offset by
additional declines in the carrying value of the Corporation's mortgage
servicing rights, as described in previous paragraphs (refer also to "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.
Gain (loss) on sales of investment securities for the years ended
December 31, 1998, 1997, and 1996, were $343,000, $(725,000), and $(311,000),
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. The gain in 1998 was caused by the sale of
FNMA stock that had been acquired in the early 1980s.
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 $4.0 million, $1.9 million, and $1.3 million for the
years ended December 31, 1998, 1997, and 1996, respectively. The increase in
1998 was due in part to a $965,000 gain that was recorded on the books of FEI in
the fourth quarter (FEI is a wholly-owned subsidiary of the Bank; refer to Part
I, Item 1, "Business--Subsidiaries"). The gain related to FEI's settlement of a
lawsuit that it had brought against another financial institution. The increase
in other income in 1997 was due in part to a change in the manner in which the
Corporation accounted for certain fees and costs related to its origination of
consumer loans. Prior to 1997, such fees and costs were netted and were recorded
in other income. However, due to the increased materiality of these fees and
costs, the Corporation elected to conform its accounting for such with that
which was being done for mortgage loans. That is, loan origination fees and
certain direct costs of origination are deferred and amortized over the life of
the related loans as an adjustment of yield. Also contributing to the increases
in other income in both 1998 and 1997 were increases in fees from customers that
converted their adjustable-rate mortgage loans to fixed rate loans, as
previously described, as well as increases 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, 1998, 1997, and 1996, was $47.6 million, $40.2 million, and $38.3 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
2.90%, 2.62%, and 2.71% (excluding the special assessment discussed below). The
following paragraphs discuss the principal components of non-interest expense
and the primary reasons for their changes from 1997 to 1998 and 1996 to 1997.
20
<PAGE> 22
Compensation and employee benefits increased by $4.8 million or 22.1%
in 1998 and $1.9 million or 9.6% in 1997. In general, the increase in both
periods was due to general growth in the number of banking facilities operated
by the Corporation, as well as normal annual merit increases. Since December 31,
1996, the Corporation has opened or acquired fourteen retail banking facilities,
eleven of which were opened or acquired in the most recent year. The Corporation
also closed one retail banking facility in 1997. In 1999 the Corporation intends
to open or acquire up to seven 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, 1998, the Corporation had 808 full-time equivalent
employees. This compared to 690 and 641 as of December 31, 1997 and 1996,
respectively.
Occupancy and equipment expense increased by $274,000 or 4.1% in 1998
and $263,000 or 4.1% in 1997. In addition, supplies, postage, and communications
expense increased by $530,000 or 16.8% in 1998 and $319,000 or 11.3% in 1997.
These increases were primarily attributable to general growth in the number of
banking facilities operated by the Corporation, as previously described, as well
as increases in the number of full-time equivalent employees and in the number
of customers served by the Corporation.
ATM and debit card transaction costs increased by $314,000 or 15.5% in
1998 and $502,000 or 33.1% in 1997. The increase in both years was attributable
to increased use by the Corporation's customers of ATM and debit card networks,
as well as an increase the number of ATMs operated by the Corporation, as
previously described.
Federal insurance premiums increased by $94,000 or 14.8% and decreased
by $1.5 million or approximately 70% in 1997. The increase in 1998 was caused by
growth in deposit liabilities. The significant decrease in 1997 was due to the
recapitalization of the SAIF in 1996, which resulted in a substantial reduction
in the Bank's deposit insurance premiums. As a result of the recapitalization of
the SAIF, the Bank incurred a $5.9 million charge in 1996 from the FDIC which
represented its share of the recapitalization (substantially all SAIF-insured
institutions participated in the recapitalization).
Amortization of intangible assets, which consist primarily of
deposit-based intangibles and purchase accounting goodwill, increased by $86,000
or 17.3% in 1998 and $65,000 or 15.1% in 1997. The increase in 1998 was caused
by the Corporation's purchase of deposits from another financial institution in
the fourth quarter (refer to "Financial Condition--Deposit Liabilities" for
additional discussion). As a result of this purchase, as well as other possible
purchases of deposit liabilities, management expects amortization of intangible
assets to exceed $1.0 million in 1999 compared to only $582,000 and $496,000 in
1998 and 1997, respectively.
Other non-interest expenses increased by $1.3 million or approximately
40% in 1998 and decreased by $146,000 or 4.3% in 1997. The increase in 1998 was
caused by a variety of factors, the most significant of which were increased
costs related to the operation and disposition of foreclosed real estate,
increased losses on customers' deposit accounts, and increased costs related to
servicing of loans for FNMA. Under the terms of its servicing agreement with
FNMA, the Corporation is required to pay a full month's interest to FNMA when
certain loans are repaid, regardless of the actual date of the loan payoff. A
declining interest rate environment and increased prepayment activity in 1998
resulted in increased payment of "loan pay-off interest" to FNMA.
INCOME TAX EXPENSE Income tax expense for the years ended December 31,
1998, 1997, and 1996, was $11.3 million, $10.9 million, and $5.8 million,
respectively, or 36.7%, 38.5%, and 36.6% of pretax income, respectively. In 1997
the Corporation's effective tax rate was higher because a greater share of its
taxable earnings were in the State of Wisconsin as opposed to the State of
Nevada, which imposes no corporate income tax (refer to Part I, Item 1,
"Business--Subsidiaries" and "Business--Taxation", for additional discussion).
During 1998 the Corporation substantially increased its investment in FCHI, its
Nevada subsidiary, which lowered the Corporation's effective income tax rate
closer to the 1996 rate (refer to "Financial Condition--Loans Held for
Investment" and "Financial Condition--Mortgage-Backed and Related Securities"
for additional discussion).
21
<PAGE> 23
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $242.2 million or
15.7% during the twelve months ended December 31, 1998. This increase was
principally funded by a $313.6 million or approximately 25% growth in deposit
liabilities, although a portion of this growth was also used to reduce FHLB
advances and other borrowings by $86.0 million or approximately 30%. The
increase in the Corporation's total assets was ostensibly caused by a $134.7
million increase in mortgage-backed and related securities, as well as an $88.4
million increase in overnight investments. However, the increase in
mortgage-backed and related securities was due mostly to the transfer of $222.3
million in adjustable-rate residential mortgage loans from loans held for
investment to mortgage-backed and related securities, as more fully described in
a subsequent paragraph. Likewise, the increase in overnight investments was
caused by the temporary investment of proceeds from loan sales. The actual
increase in total assets is more appropriately attributed to the Corporation's
purchase of $165.1 million in adjustable-rate residential mortgage loans, as
well as continued growth in the Corporation's portfolios of commercial real
estate, consumer, and education loans.
INTEREST-BEARING DEPOSITS WITH BANKS The Corporation's interest-bearing
deposits with banks, which consist principally of overnight deposits at the
FHLB, increased substantially during the twelve months ended December 31, 1998.
This increase was caused by the temporary investment of proceeds from loan
sales, as previously described.
INVESTMENT SECURITIES The Corporation's investment securities available
for sale decreased by $21.4 million or 100% during the twelve months ended
December 31, 1998. This decrease was due to the maturity of the Corporation's
remaining investment securities during the period. Historically, the primary
purpose of this portfolio was to meet liquidity requirements imposed on the Bank
by the OTS. In 1997, however, the OTS modified its regulatory liquidity
requirements for thrift institutions. As a result of such modifications, the
Bank does not need to hold investment securities to meet the minimum regulatory
liquidity requirements. Accordingly, the Bank anticipates that it will not need
to maintain a significant portfolio of investment securities in the future,
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.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
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
- -
Asset-backed securities 294 294 1,076 1,076
- -
U.S. Treasury securities 262 262
- - - -
Adjustable-rate mortgage and short-term
government mutual funds 32,436 31,613
- - - -
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total $ 21,339 $ 21,377 $ 74,857 $ 74,029
- -
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Weighted-average yield 6.34% 6.24%
-
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios increased by
$134.4 million or approximately 80% during the twelve months ended December 31,
1998. This increase was caused by the securitization of $222.3 million of the
Corporation's adjustable-rate residential loans into MBSs during the second
quarter. These securities were classified as "available for sale" and were
transferred to FCHI, the Corporation's wholly-owned investment subsidiary in
Nevada.
The securitization of the Corporation's adjustable-rate residential
mortgage loans into MBSs improves the liquidity of the asset and increases the
Corporation's borrowing capacity by making such loans acceptable as collateral
for reverse-repurchase agreements. MBSs also receive better treatment under the
FHLB's current collateralization guidelines. The Corporation has retained the
credit risk associated with the underlying loans, which has the effect of
reducing the guarantee fee that is normally paid to the FHLMC, the issuer of the
MBSs. This fact is not expected to have any impact on the marketability of the
securities, although there can be no assurances. Furthermore, this action does
not change the credit risk profile of the Corporation's assets, as it was
exposed to the credit risk on the loans before their securitization.
22
<PAGE> 24
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 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Collateralized mortgage obligations $ 33,871 $ 33,787 $ 48,953 $ 47,895 $64,890 $ 61,875
Mortgage-backed securities 165,872 170,322 - - - -
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total available for sale 199,743 204,109 48,953 47,895 64,890 61,875
- --------------------------------------------------------------------------------------------------------------------
Held for investment:
Collateralized mortgage obligations 97,251 97,608 115,847 115,057 136,184 133,584
Mortgage-backed securities 5,249 5,300 8,489 8,557 11,651 11,633
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total held for investment: 102,500 102,908 124,336 123,614 147,835 145,217
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and related
securities $302,243 $ 307,017 $ 173,289 $ 171,509 $212,725 $207,092
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Weighted-average yield 6.95% 6.29% 6.30%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS HELD FOR SALE The Corporation's loans held for sale increased by
$26.4 million or approximately 60% during the year ended December 31, 1998. This
increase was due to a declining interest rate environment during most of 1998
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.
LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
decreased by $16.4 million or 1.4% during the twelve months ended December 31,
1998. This decrease was caused by the aforementioned securitization of
adjustable-rate residential mortgage loans into MBSs, although the impact of
this transaction was offset somewhat by the Corporation's purchase in 1998 of
$165.1 million in adjustable-rate mortgage loans originated by third-party
financial institutions. These loans were purchased to maintain growth in the
Corporation's level of earning assets. A low interest rate environment in 1998
had a significant impact on the ability of the Corporation to maintain its
internally originated portfolio of loans held for investment. This situation
developed because a low interest rate environment tends to increase customer
preference for fixed-rate mortgage loans, as opposed to adjustable-rate loans.
In addition, a low interest rate environment encourages borrowers to refinance
their existing adjustable-rate residential mortgage loans into fixed-rate loans
to "lock-in" a lower long-term rate. Given the Corporation's policy of selling
these types of loans in the secondary market, its internally originated
portfolio of adjustable-rate residential loans declined significantly in 1998.
Although some of this decline was offset by internal growth in commercial real
estate, consumer, and education loans, the Corporation purchased adjustable-rate
mortgage loans from two third-party financial institutions in an effort to
maintain growth in its level of earning assets during 1998. These loans were
subjected to substantially the same underwriting process as the Corporation's
own loans. The loans are located throughout the U.S., with no single state
making up a significant portion of the overall principal. The loans have
adjustable-rates that reset annually at an average margin of approximately 250
basis points above the one-year U.S. Treasury bill. Most of the loans have fixed
interest rates for terms of three to seven years before their first adjustment
date. The loans were purchased by FCHI, the Corporation's wholly-owned
investment subsidiary in Nevada.
The Corporation will continue to explore alternatives to maintain
growth in its interest-earning assets in the near term. These alternatives
include, but are not limited to, the purchase of additional adjustable-rate
residential mortgage loans from third-party financial institutions, the purchase
of mortgage-backed and related securities, and the retention of certain
fixed-rate loans that are currently sold by the Corporation in the secondary
market. It is anticipated that such assets would be funded by growth in deposit
liabilities or increased borrowings from the FHLB. However, there are many
considerations involved in such decisions and there can be no assurances that
the Corporation will elect to adopt any of these strategies to increase its
interest-earnings assets.
23
<PAGE> 25
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
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 426,603 36% $ 537,722 45% $ 543,109 49% $ 462,760 49% $ 343,904 47%
Multi-family residential 148,060 13 140,589 12 127,334 11 119,955 13 102,356 14
Commercial real estate
loans 141,046 12 107,315 9 94,401 8 76,242 8 66,848 9
Construction (1) 63,035 5 51,319 4 46,641 4 31,364 3 29,847 4
- --------------------------------------------------------------------------------------------------------------------
Total real estate loans 778,744 66 836,945 70 811,485 73 690,321 73 542,955 74
- --------------------------------------------------------------------------------------------------------------------
Consumer loans:
Second mortgage and home
equity loans 175,541 15 163,231 14 119,645 11 83,993 9 53,931 7
Education loans 182,380 15 159,893 13 134,094 12 108,003 11 84,604 12
Automobile loans 37,558 3 31,182 3 36,831 3 39,653 4 39,822 5
Other consumer loans (2) 9,006 1 9,149 1 10,724 1 16,238 2 10,613 1
- --------------------------------------------------------------------------------------------------------------------
Total consumer loans 404,485 34 363,455 30 301,294 27 247,887 26 188,970 26
- --------------------------------------------------------------------------------------------------------------------
Other loans:
Small Business
Administration loans 345 - 377 - 1,006 - 1,237 - 1,381 -
Commercial business loans 26 - 179 - 211 - 968 - 411 -
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total other loans 371 - 556 - 1,217 - 2,205 - 1,792 -
- --------------------------------------------------------------------------------------------------------------------
Subtotal 1,183,600 100% 1,200,957 100% 1,113,996 100% 940,413 100% 733,717 100%
Unearned discounts,
premiums, and net
deferred loan fees/costs 1,549 574 (68) (143) (1,817)
Allowance for loan losses (7,624) (7,638) (7,888) (8,186) (8,074)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total loans held for
investment $ 1,177,526 $ 1,193,893 $ 1,106,040 $ 932,084 $ 723,826
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Weighted-average 7.75% 8.20% 8.16% 8.24% 7.83%
contractual rate
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1998, construction loans consisted of $31.0 million in
single-family residences, $13.8 million in multi-family residences, and
$18.2 million in commercial real estate.
(2) At December 31, 1998, other consumer loans included $0.5 million of mobile
home loans, $1.5 million of recreational and household good loans, $5.4
million of unsecured loans, and $1.6 million of deposit account-secured
loans.
24
<PAGE> 26
The following table sets forth the activity in the Corporation's
portfolio of loans held for investment during each of the years ended December
31:
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $1,193,893 $1,106,040 $ 932,084 $ 723,826 $ 572,066
- ---------------------------------------------------------------------------------------------------------------------
Single-family residential (1) 212,964 243,694 247,362 147,827 175,493
Multi-family and commercial real estate 106,146 71,554 65,384 21,477 28,207
- ---------------------------------------------------------------------------------------------------------------------
Total real estate loans originated 319,110 315,248 312,746 169,304 203,700
- ---------------------------------------------------------------------------------------------------------------------
Consumer loan originations:
Second mortgage and home equity loans 136,659 120,809 89,115 65,397 47,256
Education loans 37,692 38,422 36,176 31,347 30,135
Automobile loans 33,729 23,923 29,377 23,489 36,861
Other consumer loans 6,461 7,004 8,675 9,701 7,775
- ---------------------------------------------------------------------------------------------------------------------
Total consumer loans originated 214,541 190,158 163,343 129,934 122,027
- ---------------------------------------------------------------------------------------------------------------------
Decrease (increase) in loans in process (2) 1,654 (13,081) (3,277) (1,836) (6,123)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total loans originated for investment 535,305 492,325 472,812 297,402 319,604
- ---------------------------------------------------------------------------------------------------------------------
Loans purchased for investment:
Single-family residential loans 165,140 - - - -
Consumer loans 377 - - 22 -
Multi-family and commercial real estate
loans - 6,373 9,692 1,946 233
- ---------------------------------------------------------------------------------------------------------------------
Total loans purchased for investment 165,517 6,373 9,692 1,968 233
- ---------------------------------------------------------------------------------------------------------------------
Loans swapped into mortgage-backed securities (222,260) - - - -
Loans acquired through merger - - - 107,788 -
Loans transferred to held for sale portfolio
(3) (98,718) (92,573) (15,659) (12,448) (6,265)
Loan principal repayments (389,935) (317,291) (292,199) (186,024) (161,385)
Other changes in loans held for investment
(4) (6,276) (981) (690) (428) (427)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $1,177,526 $1,193,893 $1,106,040 $ 932,084 $ 723,826
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes loans originated for sale of $818.3 million, $258.8 million, $237.6
million, $180.3 million, and $132.4 million in 1998, 1997, 1996, 1995, and
1994, respectively. Also excludes loans originated on an agency basis for
WHEDA and State VA of $38.8 million, $23.1 million, $20.9 million, $27.9
million, and $22.8 million in 1998, 1997, 1996, 1995, and 1994,
respectively.
(2) Consists principally of changes in loans in process on single-family,
multi-family, and commercial real estate construction loans.
(3) Consists of single-family adjustable-rate mortgage loans that converted to
fixed-rate and were sold by the Corporation in the secondary market.
(4) Consists principally of real estate foreclosures and changes in allowance
for loan losses, discounts, premiums, and deferred fees.
DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$313.6 million or approximately 25% during the twelve months ended December 31,
1998. This growth was due in part to a number of popular CD products offered to
customers during the year, as well as a $51.4 million increase in non-interest
bearing checking accounts. In addition to the Corporation's competitive CD
products, management attributes the growth in its deposit liabilities to the
combined effects of its expansion efforts in recent years, its convenient
banking locations, and the strong local economies in its market areas.
In the fourth quarter of 1998, the Corporation completed the purchase
of three retail banking offices in Rockford, Illinois, from another financial
institution. In connection with this purchase, the Corporation acquired $76.9
million in deposits and paid a premium of $8.0 million. The intangible assets
created by this transaction will be amortized straight-line over fifteen years.
25
<PAGE> 27
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 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regular savings accounts $ 103,467 1.98% $ 87,605 1.98% $ 85,675 1.98%
Interest-bearing checking accounts 83,260 0.86 54,994 0.99 53,907 1.00
Non-interest bearing checking accounts 144,731 - 93,323 - 75,341 -
Money market accounts 166,801 4.03 143,116 4.36 134,977 4.35
Variable-rate IRA accounts 3,215 4.11 2,956 4.41 3,345 4.43
Certificates of deposit 958,662 5.83 764,540 6.04 670,848 6.01
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total $1,460,136 4.49% $1,146,534 4.79% $1,024,093 4.74%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, certificates of deposit in denominations of
$100,000 or more amounted to $90.7 million and mature as follows: $37.8 million
within three months, $6.5 million over three through six months, $28.9 million
over six through 12 months, $15.7 million over 12 through 24 months, and $1.8
million over 24 months. At December 31, 1998, the Bank had no brokered deposits
outstanding.
FHLB ADVANCES AND OTHER BORROWINGS The Corporation's FHLB advances and
other borrowings decreased by $86.0 million or approximately 30% during the year
ended December 31, 1998. This decrease was funded by 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, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
Dollars in thousands
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding (1) $ 89,832 $ 244,609 $ 90,016
Maximum amount outstanding at any month-end during the period 211,300 300,985 181,602
Balance outstanding at end of period 3,000 211,300 181,602
Average interest rate during the period (2) 5.65% 5.39% 5.55%
Weighted-average interest rate at the end of period 5.76% 5.73% 5.53%
Other borrowings: (3)
Average balance outstanding (1) $769 $ 3,846 $ 2,308
Maximum amount outstanding at any month-end during the period 10,000 10,000 5,000
Balance outstanding at end of period - 10,000 5,000
Average interest rate during the period (2) 4.81% 5.95% 5.98%
Weighted-average interest rate at the end of period - 4.81% 5.64%
Total short-term borrowings:
Average balance outstanding (1) $ 90,601 $248,455 $ 92,324
Maximum amount outstanding at any month-end during the period 221,300 305,985 186,602
Balance outstanding at end of period 3,000 221,300 186,602
Average interest rate during the period (2) 5.64% 5.40% 5.56%
Weighted-average interest rate at the end of period 5.76% 5.69% 5.53%
- --------------------------------------------------------------------------------------------------------------------
</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 $2.4 million or
0.13% of total assets at December 31, 1998, compared to $4.9 million or 0.32% at
December 31, 1997.
26
<PAGE> 28
The following table contains information regarding the Corporation's
non-performing assets during the five year period ended December 31, 1998.
<TABLE>
<CAPTION>
Dollars in thousands 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $ 770 $ 738 $1,003 $ 547 $ 428
Multi-family and commercial real estate - 3,000 - 104 -
- --------------------------------------------------------------------------------------------------------------------
Total real estate loans 770 3,738 1,003 651 428
Consumer loans 341 672 973 605 313
Commercial business loans - - - - 129
- --------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 1,111 4,410 1,976 1,256 870
Real estate owned and in judgement 1,264 492 460 193 265
- --------------------------------------------------------------------------------------------------------------------
Total non-performing assets $2,375 $4,902 $2,436 $1,449 $1,135
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Ratio of non-accrual loans to total net loans receivable 0.09% 0.37% 0.18% 0.13% 0.12%
- --------------------------------------------------------------------------------------------------------------------
Ratio of total non-performing assets to total assets 0.13% 0.32% 0.16% 0.10% 0.10%
- --------------------------------------------------------------------------------------------------------------------
Ratio of total allowance for loan and real estate losses
to total non-performing assets 330% 159% 331% 577% 727%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The $2.5 million or approximately 50% decrease in non-performing assets
during the year ended December 31, 1998, was principally due to a change in the
status of a $3.0 million loan on an apartment complex located in Indiana. In
1998 the Corporation took a deed-in-lieu of foreclosure on the loan and sold the
property to another party. The Corporation financed the sale of the property at
normal rate and terms, except that the loan was 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 was also required to
contribute $1.1 million towards the refurbishing. The Corporation incurred a
$203,000 loss on the sale of the property, which was included in other
non-interest expense.
In addition to non-performing assets, at December 31, 1998, management
was closely monitoring $6.4 million in assets which it had classified as
doubtful, substandard, or special mention, but which were performing in
accordance with their terms. This compares to $7.2 million in such assets at
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The 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 1998, 1997, and 1996, the Corporation
used these sources of funds to fund loan commitments, purchase investment
mortgage-related securities, and cover maturing liabilities and deposit
withdrawals. At December 31, 1998, the Corporation had approved real estate loan
commitments of $24.0 million outstanding, undisbursed commitments on
construction loans of $34.7 million, and mortgage loan sale commitments of $92.3
million outstanding. In addition, the Corporation had $713.3 million in time
deposits and $10.7 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 FHLB lending and collateralization guidelines, the
Corporation had approximately $370 million in unused borrowing capacity at the
FHLB as of December 31, 1998.
The Corporation's stockholders' equity ratio as of December 31, 1998,
was 6.87% 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 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, 1998, the Bank's regulatory capital
exceeded all regulatory minimum requirements, as well as the amount required to
be classified as a "well capitalized" institution. For additional discussion,
refer to Note 11 of the Corporation's Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data".
27
<PAGE> 29
The Corporation paid cash dividends of $5.0 million, $4.3 million, and
$3.9 million during the years ended December 31, 1998, 1997, and 1996,
respectively. These amounts equated to dividend payout ratios of 25.7%, 24.6%,
and 38.5% 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 which include, but are not
limited to, 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 11 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 26, 1999, the Corporation's Board of Directors approved a
regular quarterly dividend of $0.07 per share payable on March 11, 1999, to
shareholders of record on February 18, 1999.
During 1998, the Corporation repurchased 447,000 shares of common stock
at a cost of $7.4 million under its 1996 and 1997 stock repurchase plans (the
"1996 Plan" and "1997 Plan", respectively). As of December 31, 1998, no shares
remained to be purchased under the 1996 Plan and 519,152 shares remained under
the 1997 Plan. On January 26, 1999, the Corporation's Board of Directors
extended the 1997 Plan for an additional twelve months. On February 11, 1999,
however, the Corporation completed the purchase of the remaining shares under
the 1997 Plan. For additional discussion, refer to Note 11 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
During 1998, the Corporation reissued 426,775 shares of common stock
out of its inventory of treasury stock with a cost basis of $5.5 million. In
general, these shares were issued upon the exercise of stock options by, or the
issuance of restricted stock to, employees and directors of the Corporation.
YEAR 2000 COMPLIANCE
Potential software and hardware failures arising from calculations that
use the year 2000 represent a significant risk exposure to the Corporation. If
not corrected, software and hardware failures caused by the year 2000 could
result in a major system failure and/or miscalculations, which could result in a
material loss to the Corporation--the probability or amount of which cannot be
estimated at this time. Accordingly, management has implemented an on-going
program designed to ensure that the Corporation's information systems will not
be adversely impacted by the year 2000.
The Corporation's program to resolve the year 2000 issue involves the
following four phases: assessment, remediation, testing, and implementation. The
Corporation has completed the assessment phase and has found that the year 2000
issue affects all of its significant information systems. With respect to
remediation, the Corporation estimates that it was 95% complete as of December
31, 1998, and expects to be substantially complete by March 31, 1999. For all
practical purposes, the testing and implementation of most software programs
occurs simultaneously. The Corporation estimates that these phases were 75%
complete as of December 31, 1998, and that it will be substantially complete by
March 31, 1999. These estimates include systems purchased from and maintained by
third-party software and hardware vendors.
The Corporation's information systems interface directly with those of
certain third-party transaction processors, to include the Federal Reserve Bank
of Minneapolis. With respect to the year 2000 issue, the Corporation's
information systems are highly dependent on the state of readiness of these
third-party transaction processors, as well as the communication systems over
which the data is exchanged. The Corporation expects to complete the testing and
implementation phases that relate to interface programs with third-party
transaction processors by March 31, 1999. The Corporation is unable, however, to
provide any assurances with respect to year 2000 readiness on the part of public
providers of communication services and other utilities.
The Corporation is in the process of developing contingency plans to
deal with communication and other utility failures that may occur as a result of
the year 2000 issue. It is also developing plans to temporarily accumulate data
related to customer transactions should its own information systems or those of
third parties fail. A
28
<PAGE> 30
portion of such contingency plans may include the manual processing of certain
types of customer transactions. In addition, it may include plans to temporarily
honor certain obligations of reputable third parties, such as recurring deposits
from the federal government, that could be disrupted by the year 2000 and which
could have a significant impact on the Corporation's customers if not honored.
However, there can be no assurances that the Corporation will honor the
obligations of third parties. The Corporation estimates that its contingency
plan will be completed by March 31, 1999.
The Corporation is using in-house personnel to identify and correct
year 2000 issues, as well as cooperation with third-party software and hardware
vendors. As of December 31, 1998, the Corporation estimates that it has spent
approximately $290,000 in direct, incremental costs related to the year 2000
issue. This amount includes additional compensation costs to retain essential
personnel, hire additional personnel, and purchase new software--it does not
include opportunity costs. The Corporation is unable to estimate additional
future costs of the year 2000 issue at this time, but does not believe such will
be material to its financial condition or results of operations.
Although management does not believe that the arrival of the year 2000
will pose significant operational problems to the Corporation, there can be no
assurances that it will be successful in preventing failures caused by this
issue. There can also be no assurances that such failures will not result in a
material loss to the Corporation. Such losses may include loss of customer
goodwill, waivers of customer transaction fees and interest, errors in honoring
obligations of third parties, fraudulent transactions, or other sources of loss
not know at this time. As previously mentioned, the Corporation is unable to
estimate the probability or the amount of future loss at this time, if any.
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 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.
29
<PAGE> 31
The following table summarizes the Corporation's funding gap as of
December 31, 1998.
<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 $114,874 $ 35,649 $ 35,396 $ 12,169 $ 15,205 $ 213,293
Adjustable 129,285 123,039 215,764 126,133 43,356 637,577
Consumer loans 77,637 225,457 81,464 15,308 3,756 403,622
Mortgage-backed and related securities 66,602 78,103 124,686 18,151 16,208 303,750
Investment securities and other
earning assets 96,450 - - - 12,586 109,036
- --------------------------------------------------------------------------------------------------------------------
Total $484,848 $462,248 $457,310 $171,761 $ 91,111 $1,667,278
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits liabilities:
Regular savings and checking accounts $186,467 - - - - $ 186,467
Money market deposit accounts 167,061 - - - - 167,061
Variable-rate IRA accounts 3,215 - - - - 3,215
Time deposits 480,912 $231,062 $241,387 $ 5,278 $ 23 958,662
FHLB advances and other borrowings 85,868 2,803 67,660 33,433 14 189,778
- --------------------------------------------------------------------------------------------------------------------
Total $923,523 $233,865 $309,047 $ 38,711 $ 37 $1,505,183
- --------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of earning assets
over interest-bearing liabilities ($438,675) $228,383 $148,263 $133,050 $ 91,074
- --------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
earning assets over interest-bearing
liabilities ($438,675) ($210,292) ($ 62,029) $ 71,021 $162,095
- --------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
earning assets over interest-bearing
liabilities as a percent of total
assets -24.55% -11.77% -3.47% 3.98% 9.07%
- --------------------------------------------------------------------------------------------------------------------
Cumulative earning assets as a
percentage of interest-bearing
liabilities 52.50% 81.83% 95.77% 104.72% 110.77%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: If redeemable FHLB advances, interest-bearing checking, and regular
savings deposits were deemed to reprice after one year, the Corporation's
one-year funding gap would have been 2.86% as of December 31, 1998, which
compares to -4.77% and -14.12% as of December 31, 1997 and 1996, respectively.
The Corporation's one-year funding gap was -11.77% at December 31,
1998, compared to -14.00% and -23.32% at December 31, 1997 and 1996,
respectively. The Corporation's one-year funding gap improved slightly in 1998
principally because an increase in liabilities expected to mature or reprice
within one year was matched by a similar increase in assets expected to mature
or reprice within the same time frame. This resulted in little change in the
Corporation's one-year cumulative deficiency of earning assets over
interest-bearing liabilities, in dollar terms. However, because the
Corporation's total assets grew by $242.2 million or 15.7%, as previously
described, the one-year cumulative deficiency as a percent of total assets
improved from -14.00% to -11.77%.
Certain shortcomings are inherent in using funding gap to quantify
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 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 interest rates change, the rates at which loans actually
prepay will differ from those rates 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
30
<PAGE> 32
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 that are held for
sale as of the balance sheet date as well as 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 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 rates, 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 12 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 rates, 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 of
value provided by the OTS. The same is true for certain other financial assets
such as mortgage servicing rights and deposit-based intangibles.
The following table summarizes as of December 31, 1998 and 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).
<TABLE>
<CAPTION>
Estimated MVPE
---------------------
Change in interest rates 12/31/98 12/31/97
------------------------ -------- --------
<S> <C> <C>
200 basis point increase $132.9 $137.5
Base scenario 142.7 137.3
200 basis point decline 159.5 133.6
</TABLE>
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 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, it should be noted that although the
estimated changes in the Bank's MVPE as shown above are within limits
established by the Bank's Board of Directors, management and the Board of
Directors do not place a significant amount of emphasis on MVPE when evaluating
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.
31
<PAGE> 33
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 43,642,705 $ 29,939,484
Interest-bearing deposits with banks 96,549,775 7,113,756
Investment securities available for sale, at fair value - 21,376,678
Mortgage-backed and related securities:
Available for sale, at fair value 204,108,879 47,895,297
Held for investment, at cost (fair value of $102,908,423 and $123,613,629,
respectively) 102,500,238 124,335,969
Loans held for sale 72,002,437 45,576,945
Loans held for investment, net 1,177,525,727 1,193,893,087
Federal Home Loan Bank stock 12,485,500 13,811,300
Accrued interest receivable, net 13,888,538 11,547,757
Office properties and equipment 25,082,582 24,243,132
Mortgage servicing rights, net 21,103,459 16,290,903
Intangible assets 13,485,366 5,921,443
Other assets 4,128,510 2,348,647
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,786,503,716 $1,544,294,398
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Deposit liabilities $1,460,135,660 $1,146,533,896
Federal Home Loan Bank advances and other borrowings 189,777,984 275,778,770
Advance payments by borrowers for taxes and insurance 1,762,190 3,872,764
Accrued interest payable 1,947,823 2,030,153
Other liabilities 10,195,412 6,717,469
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,663,819,069 1,434,933,052
- -------------------------------------------------------------------------------------------------------------------
Preferred stock, $.10 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares authorized, 19,941,630 shares
issued and outstanding, including 1,580,795 and 1,560,570 shares of treasury
stock, respectively 1,994,163 997,082
Additional paid-in capital 34,540,065 35,537,146
Retained earnings 97,291,806 84,548,291
Treasury stock, at cost (12,722,834) (10,845,168)
Unearned restricted stock (1,256,266) (211,006)
Non-owner adjustments to equity, net 2,837,713 (664,999)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 122,684,647 109,361,346
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,786,503,716 $1,544,294,398
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
32
<PAGE> 34
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on loans $ 95,469,420 $ 97,941,595 $ 83,786,180
Interest on mortgage-backed and related securities 18,542,233 12,125,868 14,494,999
Interest and dividends on investments 4,656,215 4,908,793 5,695,818
- -------------------------------------------------------------------------------------------------------------------
Total interest income 118,667,868 114,976,256 103,976,997
- -------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 59,421,641 51,149,724 46,490,086
Interest on FHLB advances and other borrowings 12,035,553 19,115,333 17,193,577
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 71,457,194 70,265,057 63,683,663
- -------------------------------------------------------------------------------------------------------------------
Net interest income 47,210,674 44,711,199 40,293,334
Provision for loan losses 293,112 538,957 -
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 46,917,562 44,172,242 40,293,334
- -------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 15,025,325 12,583,927 10,237,623
Commissions on annuity and insurance sales 1,780,045 1,810,667 2,063,520
Loan servicing fees, net (6,673,635) 2,367,828 2,221,690
Gain on sales of loans 16,928,546 6,373,747 4,330,550
Gain (loss) on sales of investment securities 342,803 (725,142) (311,151)
Other income 3,956,985 1,882,658 1,288,940
- -------------------------------------------------------------------------------------------------------------------
Total non-interest income 31,360,070 24,293,685 19,831,172
- -------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 26,659,541 21,827,232 19,913,513
Occupancy and equipment 6,949,198 6,675,597 6,412,307
Supplies, postage, and communications 3,675,696 3,145,803 2,826,979
ATM and debit card transaction costs 2,335,872 2,022,031 1,519,743
Advertising and marketing 2,157,076 2,173,031 1,710,140
Federal deposit insurance premiums 731,691 637,353 2,124,036
FDIC special assessment - - 5,941,000
Amortization of intangible assets 582,159 496,180 431,263
Other expenses 4,505,290 3,219,825 3,365,746
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 47,596,523 40,197,052 44,244,727
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 30,681,109 28,268,875 15,879,779
Income tax expense 11,256,975 10,878,512 5,805,862
- -------------------------------------------------------------------------------------------------------------------
Net income $ 19,424,134 $ 17,390,363 $ 10,073,917
- -------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.98 $ 0.88 $ 0.50
Basic earnings per share 1.05 0.95 0.54
Dividends paid per share 0.270 0.233 0.207
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
33
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,424,134 $ 17,390,363 $ 10,073,917
Adjustments to reconcile net income to net cash provided
(used) by operations:
Provision for loan and real estate losses 548,573 458,070 (10,240)
(recoveries), net
Net loan fees (costs) deferred (1,162,077) (835,277) 73,827
Depreciation and amortization 16,886,960 6,363,677 5,950,546
Gains on sales of loans, and other investments (17,271,349) (5,648,605) (4,019,400)
Increase in accrued interest receivable (2,340,781) (60,330) (1,354,216)
Decrease in accrued interest payable (82,330) (402,643) (199,862)
Increase in current and deferred income taxes 2,093,042 1,554,525 1,819,263
Other accruals and prepaids, net (407,797) (202,660) (414,056)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan 17,688,375 18,617,120 11,919,779
originations and sales
Loans originated for sale (818,292,296) (258,817,745) (237,592,344)
Sales of loans originated for sale 791,718,170 252,349,050 240,578,067
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations (8,885,751) 12,148,425 14,905,502
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with (89,436,019) (4,656,855) 1,594,387
banks
Purchases of investment securities - - (34,828,051)
Sales of investment securities 351,483 31,710,769 11,019,370
Maturities of investment securities 21,318,517 20,785,762 29,482,069
Purchases of mortgage-backed and related securities held
for
investment (20,355,825) - -
Principal repayments on mortgage-backed and related
securities
held for investment 42,177,481 23,369,489 23,315,115
Principal repayments on mortgage-backed and related
securities
available for sale 69,972,407 15,934,333 20,855,233
Loans originated for investment (535,305,071) (492,325,180) (472,812,233)
Loans purchased for investment (165,517,368) (6,372,996) (9,692,282)
Loan principal repayments 389,935,430 317,290,692 292,198,986
Sales of loans originated for investment 101,632,748 75,122,123 17,124,014
Sales of real estate 5,593,229 1,380,170 242,993
Purchases of office properties and equipment (3,671,180) (2,595,908) (1,954,572)
Purchases of mortgage servicing rights (454,774) (1,374,069) -
Other, net (6,982,877) 6,108,616 (330,466)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (190,741,819) (15,623,054) (123,785,437)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposit liabilities 236,668,976 122,441,009 54,670,368
Deposits purchased 76,932,788 - -
Long-term advances from Federal Home Loan Bank 150,660,000 25,000,000 132,000,000
Repayment of long-term Federal Home Loan Bank advances (18,305,000) (165,507,000) (114,905,000)
Net increase (decrease) in short-term Federal Home Loan
Bank
borrowings (208,300,000) 29,698,000 38,207,000
Increase (decrease) in other borrowings (10,055,786) 2,994,787 5,995,202
Increase (decrease) in advance payments by borrowers for
taxes
and insurance (2,110,574) (39,442) 171,688
Purchase of treasury stock (7,356,875) (2,868,938) (9,674,875)
Dividends paid (5,001,135) (4,283,617) (3,874,954)
Other, net 198,397 1,335,060 560,276
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 213,330,791 8,769,859 103,139,705
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 13,703,221 5,295,230 (5,740,230)
Cash and due from banks at beginning of period 29,939,484 24,644,254 30,384,484
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 43,642,705 $ 29,939,484 $ 24,644,254
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $ 116,327,087 $ 114,915,926 $ 102,622,781
Interest paid on deposits and borrowings 71,539,524 70,667,700 63,883,525
Income taxes paid 10,010,000 9,689,000 4,540,490
Income taxes refunded 1,273,063 339,171 543,978
Mortgage-backed securities swaps 222,259,814 - -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
34
<PAGE> 36
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Common
Stock and
Additional Unearned Non-Owner
Paid-In Retained Treasury Restricted Adjustments
Capital Earnings Stock Stock to Equity Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 35,854,026 $ 66,370,129 ($858,750) ($817,250) ($1,609,161) $ 98,938,994
-------------
Net income 10,073,917 10,073,917
Securities valuation
adjustment,
net of income taxes (1,026,613) (1,026,613)
Reclassification adjustment
for
loss on securities
included in
income, net of income taxes 185,010 185,010
-------------
Net income and non-owner
adjustments to equity 9,232,314
-------------
Exercise of stock options 390,021 390,021
Dividends paid (3,874,954) (3,874,954)
Purchase of treasury stock (9,674,875) (9,674,875)
Amortization of restricted 402,858 402,858
stock
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 36,244,047 72,569,092 (10,533,625) (414,392) (2,450,764) 95,414,358
-------------
Net income 17,390,363 17,390,363
Securities valuation
adjustment,
net of income taxes 1,354,595 1,354,595
Reclassification adjustment
for
loss on securities
included in
income, net of income taxes 431,169 431,169
-------------
Net income and non-owner
adjustments to equity 19,176,127
-------------
Exercise of stock options 290,181 (1,127,547) 2,557,395 1,720,029
Dividends paid (4,283,617) (4,283,617)
Purchase of treasury stock (2,868,938) (2,868,938)
Amortization of restricted 203,386 203,386
stock
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 36,534,228 84,548,291 (10,845,168) (211,006) (664,999) 109,361,346
-------------
Net income 19,424,134 19,424,134
Securities valuation
adjustment,
net of income taxes 3,706,543 3,706,543
Reclassification adjustment
for
gain on securities
included in
income, net of income taxes (203,831) (203,831)
-------------
Net income and non-owner
adjustments to equity 22,926,846
-------------
Exercise of stock options (2,443,580) 4,509,897 2,066,317
Dividends paid (5,001,135) (5,001,135)
Restricted stock award 764,096 969,312 (1,733,408)
-
Purchase of treasury stock (7,356,875) (7,356,875)
Amortization of restricted 688,148 688,148
stock
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 36,534,228 $ 97,291,806 ($12,722,834) ($1,256,266) $ 2,837,713 $ 122,684,647
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Audited Consolidated Financial Statements.
35
<PAGE> 37
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 and the northern portion of Illinois
through its wholly-owned subsidiary bank. The Corporation is subject to
competition from other financial institutions and markets. 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 non-owner adjustments to equity, 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 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 AND COSTS Discounts and
premiums on loans are amortized over the life of the related loans using a
method that approximates 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 and costs 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.
36
<PAGE> 38
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" or
"MSRs") 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 MSRs 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 MSRs in the
secondary market.
The Corporation purchases or originates MSRs on single-family
residential mortgage loans only. In valuing the MSRs recorded on such loans, the
Corporation stratifies the loans by type of loan (e.g., fixed-rate versus
adjustable-rate, non-government-guaranteed loans versus government-guaranteed
loans), year of original funding, contractual interest rate, and original term
to maturity.
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 Consolidated Statement of Financial Condition.
The securities underlying the agreements remain in the asset accounts.
INCOME TAXES The Corporation, the Bank, and all but one of the Bank's
subsidiaries file a consolidated federal income tax return and separate or
consolidated state income tax returns, depending on the state. 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
37
<PAGE> 39
benefit obligation, reduced by the earnings on assets held by the retirement
plan, by amortization of 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 12
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, 1998 and 1997, 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 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 6. 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.
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.
38
<PAGE> 40
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.
MORTGAGE SERVICING RIGHTS The fair value of MSRs is estimated
using a discounted cash flow calculation that applies discount rates considered
reasonable by management to a schedule of both contractual and estimated cash
flows. Such cash flows are adjusted for loan prepayment rates deemed appropriate
by management.
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.
Other than credit enhancements on loans sold to the FHLB, the
Corporation does not issue material amounts of financial guarantees or stand-by
letters of credit. Management believes that the Corporation's exposure to loss
on such instruments is insignificant, including its credit enhancements with the
FHLB. Accordingly, management believes the fair value of such financial
instruments approximates zero.
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 two-for-one stock split on June 11, 1998, and 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 splits.
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 9 for the appropriate disclosures.
EARNINGS PER SHARE Earnings per share data 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 9. All
stock
39
<PAGE> 41
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, 1998, 1997, and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $19,424,134 $19,424,134 $17,390,363 $17,390,363 $10,073,917 $10,073,917
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Average common shares issued,
net
of actual treasury shares 18,479,178 18,479,178 18,321,902 18,321,902 18,784,716 18,784,716
Common stock equivalents based
on
the treasury stock method - 1,384,968 - 1,368,810 - 1,340,451
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Average common shares and
common stock equivalents 18,479,178 19,864,146 18,321,902 19,690,712 18,784,716 20,125,167
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Earnings per share $ 1.05 $ 0.98 $ 0.95 $ 0.88 $ 0.54 $ 0.50
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PENDING ACCOUNTING CHANGE In 1998 the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and for Hedging Activities" ("SFAS 133").
This standard establishes new rules for the recognition and measurement of
derivatives and hedging activities. It requires all derivatives to be recorded
on the balance sheet at fair value, although the timing of recognition in
earnings will depend on the classification of the hedge according to criteria
established by SFAS 133. Changes in the fair value of derivatives that do not
meet these criteria are required to be included in earnings in the period of the
change. The new standard is effective for years beginning after June 15, 1999,
although earlier adoption is permitted. The Corporation does not intend to adopt
SFAS 133 until January 1, 2000.
The Corporation does not use derivative financial instruments such as
futures, swaps, caps, floors, options, interest- or principle-only strips, or
similar financial instruments to manage its operations. However, the Corporation
does use forward sales of mortgage-backed securities to manage exposure to
market risk in its "pipeline" of single-family residential loans intended for
sale. Forward sales are derivative securities and are subject to the rules
established by SFAS 133. The Corporation has not completed the complex analysis
necessary to determine the impact SFAS 133 will have on its statements of
financial condition or operations. However, such impact is not expected to be
material, although there can be no assurances.
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 $19.9
million at December 31, 1998.
RECLASSIFICATION Certain 1997 and 1996 balances have been
reclassified to conform with the 1998 presentation.
40
<PAGE> 42
NOTE 2--MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities at December 31, 1998 and 1997,
are summarized as follows:
<TABLE>
<CAPTION>
1998
- --------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
- --------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 33,870,813 $ 9,230 ($ 93,319) $ 33,786,724
Mortgage-backed securities 165,872,355 4,568,826 (119,026) 170,322,155
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total available for sale 199,743,168 4,578,056 (212,345) 204,108,879
- --------------------------------------------------------------------------------------------------------------------
Held for investment:
Collateralized mortgage obligations $ 97,250,994 422,662 (65,366) 97,608,290
Mortgage-backed securities 5,249,244 59,792 (8,903) 5,300,133
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total held for investment 102,500,238 482,454 (74,269) 102,908,423
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and related securities $ 302,243,406 $ 5,060,510 ($286,614) $ 307,017,302
- --------------------------------------------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Available for sale:
Collateralized mortgage obligations $ 48,953,197 $ 14,498 ($1,072,398) $ 47,895,297
- --------------------------------------------------------------------------------------------------------------------
Held for investment:
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 held for investment 124,335,969 189,251 (911,591) 123,613,629
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and related securities $ 173,289,166 $ 203,749 ($1,983,989) $ 171,508,926
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Accrued interest receivable on mortgage-backed and related
securities was $2,719,588 and $961,052 at December 31, 1998 and 1997,
respectively.
Mortgage-backed securities consist of FHLMC, FNMA, and GNMA securities.
The Corporation has retained the credit risk on $165.9 million in FHLMC MBSs as
of December 31, 1998.
Collateralized mortgage obligations consist of securities backed by the
aforementioned agency-backed securities or by whole-loans. As of December 31,
1998, approximately 79% of the Corporation's CMO portfolio consisted of
securities backed by whole loans--all of which were generally rated triple-A or
its equivalent by the major credit-rating agencies. Approximately 24% 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 1998, 1997, or 1996.
<PAGE> 43
NOTE 3--LOANS HELD FOR INVESTMENT
Loans held for investment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Single-family $426,602,634 $537,722,070
Multi-family 148,059,630 140,589,481
Commercial 141,046,301 107,315,226
Construction 63,035,445 51,318,856
Education loans 182,379,556 159,893,040
Second mortgage and home equity loans 175,541,150 163,231,165
Consumer loans 46,564,021 40,330,804
Commercial business loans 371,336 556,270
- --------------------------------------------------------------------------------------------------------------------
Subtotal 1,183,600,073 1,200,956,912
Unearned discount, premiums, and net deferred loan fees and costs 1,549,180 573,702
Allowance for loan losses (7,623,526) (7,637,527)
- -------------------------------------------------------------------------------------------------------------------
Total $1,177,525,727 $1,193,893,087
===================================================================================================================
</TABLE>
Accrued interest receivable on loans held for investment was
$11,134,804 and $10,232,335 at December 31, 1998 and 1997, respectively.
Loans serviced for investors were $1.9 billion, $1.4 billion, and $1.2
billion at December 31, 1998, 1997, and 1996, respectively. These loans are not
reflected in the Corporation's Consolidated Statements of Financial Condition.
At December 31, 1998, the Corporation had retained a small portion of the credit
risk related to $235.6 million in single-family residential loans sold to the
FHLB in exchange for a monthly credit enhancement fee.
At December 31, 1998 and 1997, loans on non-accrual status were $1.1
million and $4.4 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. Single-family mortgage loans purchased outside of the
Corporation's market area were $157.4 million at December 31, 1998, compared to
an insignificant amount at December 31, 1997.
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 were $22.3 million and $27.3 million,
at December 31, 1998 and 1997, 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.
42
<PAGE> 44
A summary of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $7,637,527 $7,888,323 $8,186,077
Provision charged to expense
293,112 538,957 -
- ------------------------------------------------------------------------------------------------------------------
Loans charged-off (365,511) (816,217) (336,989)
Recoveries 58,398 26,464 39,235
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Charge-offs, net (307,113) (789,753) (297,754)
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,623,526 $7,637,527 $7,888,323
==================================================================================================================
</TABLE>
NOTE 4--MORTGAGE SERVICING RIGHTS
A summary of the activity in mortgage servicing rights is as follows:
<TABLE>
<CAPTION>
PURCHASED ORIGINATED ALLOWANCE FOR
MSR MSR LOSS TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 1,374,069 1,374,069
Originated servicing 5,543,993 5,543,993
Amortization charged to earnings (503,540) (1,360,821) (1,864,361)
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
Purchased servicing 454,774 454,774
Originated servicing 17,587,381 17,587,381
Amortization charged to earnings (527,655) (2,468,568) (2,996,223)
Valuation adjustments charged to earnings (10,233,376) (10,233,376)
Charge-offs (864,565) (3,800,276) 4,664,841 -
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $3,319,073 $23,907,322 ($6,122,936) $21,103,459
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office buildings and improvements $18,594,097 $18,679,458
Furniture and equipment 17,402,874 15,407,247
Leasehold improvements 4,814,633 4,170,200
Land and improvements 4,245,353 4,265,028
Property acquired for expansion 358,470 358,470
Construction in progress 786,064 237,706
- ------------------------------------------------------------------------------------------------------------------
Subtotal 46,201,491 43,118,109
- ------------------------------------------------------------------------------------------------------------------
Less allowances for depreciation and amortization 21,118,909 18,874,977
- ------------------------------------------------------------------------------------------------------------------
Total $25,082,582 $24,243,132
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense was $2,472,324, $2,533,147, and $2,599,431 for the
years ended December 31, 1998, 1997, and 1996, respectively.
The Corporation rents office space and land under operating leases at
certain of its locations. These leases have terms expiring between 1999 and 2006
and provide for renewals subject to escalation clauses. Rental expense was
$1,455,439, $1,168,705, and $988,483 for the years ended December 31, 1998,
1997, and 1996, respectively.
43
<PAGE> 45
NOTE 6--DEPOSIT LIABILITIES
Deposit liabilities at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Checking accounts:
Non-interest-bearing $144,730,597 $93,322,644
Interest-bearing 83,260,201 54,993,534
Money market savings:
Great Rate accounts 111,245,052 98,457,235
Insured Market Fund accounts 21,732,447 17,238,632
Market Rate accounts 33,823,677 27,420,923
Regular savings accounts 103,466,501 87,605,203
Variable-rate IRA accounts 3,215,403 2,955,620
Time deposits maturing within...
Three months 394,201,833 102,853,066
Four to six months 85,907,182 45,787,447
Seven to twelve months 233,229,535 213,706,514
Thirteen to twenty-four months 213,708,882 367,717,799
Twenty-five to thirty-six months 26,026,189 27,576,115
Thirty-seven to forty-eight months 2,753,897 4,635,486
Forty-nine to sixty months 2,834,264 2,263,677
- ------------------------------------------------------------------------------------------------------------------
Total time deposits 958,661,783 764,540,105
- ------------------------------------------------------------------------------------------------------------------
Total $1,460,135,660 $1,146,533,896
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Time deposits include $90.7 million and $63.6 million of certificates
in denominations of $100,000 or more at December 31, 1998 and 1997,
respectively. Accrued interest payable on deposit liabilities was $1,107,214 and
$781,597 at December 31, 1998 and 1997, respectively.
Included in non-interest-bearing checking accounts at December 31, 1998
and 1997, were $35.2 million and $17.3 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>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Checking accounts $543,825 $524,432 $521,038
Money market savings accounts 6,381,467 6,321,899 5,103,182
Regular savings 1,842,854 1,799,864 1,774,934
Time deposits 50,653,495 42,503,529 39,090,932
- ------------------------------------------------------------------------------------------------------------------
Total $59,421,641 $51,149,724 $46,490,086
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
NOTE 7--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>
1998 1997
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank advances maturing in...
1998 $198,305,000 5.69%
- -
1999 $10,715,000 6.02% 6,715,000 6.16
2000 33,400,000 5.60 26,400,000 5.56
2001 34,245,000 5.09
2002 1,415,000 5.92
2003 32,000,000 5.19
2008 75,000,000 4.78
- -
Open line of credit 31,300,000 5.84
- -
- -----------------------------------------------------------------------------------------------------------------
Total FHLB advances 186,775,000 5.14 262,720,000 5.71
Other borrowings 3,002,984 6.41 13,058,770 5.94
- -----------------------------------------------------------------------------------------------------------------
Total $189,777,984 5.16% $275,778,770 5.72%
- -----------------------------------------------------------------------------------------------------------------
</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 investment deposit rate or approximately 25 basis points above the
federal funds rate. Advances that mature in the years 2000 and 2008 include
$25.0 million and $50.0 million, respectively, that are redeemable quarterly at
the option of the FHLB. Advances that mature in 2008 also include $25.0 million
that is redeemable quarterly at the option of the FHLB beginning in 2001.
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; there were no amounts outstanding
under these lines as of December 31, 1998. The Corporation also has a $10.0
million line of credit with a third financial institution under which $3.0
million was outstanding as of December 31, 1998. The interest rate on borrowings
under this line is determined on a daily basis at 125 basis points above the
one-month London Inter-Bank Offered Rate ("LIBOR"). 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
$841,012 and $1,248,781 at December 31, 1998 and 1997, respectively.
NOTE 8--INCOME TAXES
Federal and state income tax expense for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $10,920,797 $9,795,713 $5,007,142
State 720,178 979,799 77,720
- ------------------------------------------------------------------------------------------------------------------
Total current 11,640,975 10,775,512 5,084,862
- ------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (307,000) (104,000) 582,000
State (77,000) 207,000 139,000
- ------------------------------------------------------------------------------------------------------------------
Total deferred (384,000) 103,000 721,000
- ------------------------------------------------------------------------------------------------------------------
Total $11,256,975 $10,878,512 $5,805,862
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
The significant components of the Corporation's deferred tax expense
for the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing rights $1,003,793 $901,452 $818,705
Office properties and equipment depreciation 679,244 (828,725) (56,321)
Asset valuation allowances (249,578) (657,090) (311,288)
Deferred loan fees (189,160) 380,707 288,351
Provision for loan and real estate losses, net (150,979) 107,907 128,248
Deferred compensation (610,536) 2,473 (147,559)
FHLB stock dividends (362,877) - -
Other (503,907) 196,276 864
- ------------------------------------------------------------------------------------------------------------------
Total deferred ($384,000) $103,000 $721,000
==================================================================================================================
</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>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal statutory of 35% $10,738,388 $9,894,106 $5,557,922
State income taxes net of federal income tax benefit 418,066 771,420 140,868
Other 100,521 212,986 107,072
- ------------------------------------------------------------------------------------------------------------------
Income tax provision $11,256,975 $10,878,512 $5,805,862
==================================================================================================================
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan and real estate loss allowances $2,660,621 $2,509,642
Deferred compensation 1,612,207 1,001,671
Asset valuation allowances 913,753 664,175
State tax loss carryforwards 270,658 397,394
Office properties and equipment depreciation - 384,033
Securities valuation allowance - 354,870
Other 523,696 78,056
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 5,980,935 5,389,841
Valuation allowance (298,785) (326,959)
- ------------------------------------------------------------------------------------------------------------------
Adjusted deferred tax assets 5,682,150 5,062,882
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Mortgage servicing rights 3,485,422 2,481,629
Securities valuation allowance 1,527,999 -
Office properties and equipment depreciation 295,211 -
Deferred loan fees 361,674 550,833
FHLB stock dividends 262,937 625,814
Purchase acquisition adjustments 242,247 329,151
Federal tax effect of state deferred taxes, net 113,751 161,714
Investment in unconsolidated partnerships 81,182 82,234
Other 200,444 221,355
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 6,570,867 4,452,730
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) ($888,717) $610,152
==================================================================================================================
</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, 1998. 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.
46
<PAGE> 48
NOTE 9--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 following table summarizes the components of pension benefit
obligation and plan assets, the funded status of the plan, the amount recognized
in the Corporation's consolidated financial statements, and the weighted-average
assumptions for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of projected benefit obligation:
Benefit obligation at beginning of year 7,002,102 $5,692,032
Service costs 487,251 317,232
Interest costs 569,673 458,386
Actuarial loss 1,530,203 835,874
Benefit payments (227,608) (301,422)
- ------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $9,361,621 $7,002,102
- ------------------------------------------------------------------------------------------------------------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year: $7,125,080 $6,218,479
Actual return on plan assets 1,070,911 1,208,023
Benefit payments (227,608) (301,422)
- ------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $7,968,383 $7,125,080
- ------------------------------------------------------------------------------------------------------------------
Funded status:
Funding shortfall (excess) at end of year $1,393,238 ($122,978)
Unrecognized transition asset 110,927 206,379
Unrecognized prior service cost 145,526 921,055
Unrecognized net loss (1,231,807) (868,634)
- ------------------------------------------------------------------------------------------------------------------
Accrued pension expense $417,884 $135,822
- ------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service costs $487,251 $317,232
Interest costs 569,673 458,386
Expected return on plan assets (631,412) (551,400)
Amortization of transition asset (95,452) (95,452)
Amortization of prior service costs (59,608) (121,219)
Recognized actuarial loss 11,610 24,731
- ------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $282,062 $32,278
- ------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions:
Discount rate 6.50% 7.00%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.50% 5.50%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
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 obligation and funded
states, as well as the amounts recognized in the Corporation's consolidated
financial statements for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of projected benefit obligation:
Benefit obligation at beginning of year $1,610,192 $1,097,792
Service costs 61,949 53,899
Interest costs 127,047 108,130
Actuarial loss 260,418 413,315
Benefit payments (39,630) (62,944)
- ------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $2,019,976 $1,610,192
- ------------------------------------------------------------------------------------------------------------------
Funded status:
Funding shortfall at end of year $2,019,976 $1,610,192
Unrecognized transition asset (479,219) (513,449)
Unrecognized net loss (490,949) (242,843)
- ------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit expense $1,049,808 $853,900
- ------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service costs $61,949 $53,899
Interest costs 127,047 108,130
Amortization of transition obligation 34,230 34,230
Recognized actuarial loss 12,312 629
- ------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $235,538 $196,888
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits for 1998 is 10.1% 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
6.5%, 7.0%, and 7.5% for 1998 and 1996, 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, 1998, by approximately $564,000 and the aggregate
service and interest cost components of postretirement benefit expense for 1998
by approximately $71,000.
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 $286,000, $248,000, and $181,000 during the years ended December
31, 1998, 1997, and 1996, 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 $286,000, $246,000, and
$217,000 in ESOP-related compensation expense during the years ended December
31, 1998, 1997, and 1996, 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
$203,000, $197,000, and $146,000 during the years ended December 31, 1998, 1997,
and 1996, 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
48
<PAGE> 50
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 4.4 million shares in the aggregate, of
which 1.3 million shares were unallocated as of December 31, 1998. Activity in
these stock incentive plans for each of the three years ended December 31, 1998,
1997, and 1996, is summarized in the following paragraphs.
Stock options outstanding at the beginning of each of the three
preceding years were 1,674,056, 1,879,508, and 1,937,230, respectively. These
options had weighted-average exercise prices of $3.07, $2.86, and $2.81,
respectively. Stock options granted during these years were 309,000, 7,500, and
18,000, respectively, at weighted-average exercise prices of $14.77, $8.50, and
$6.80, respectively. Stock options exercised during these years were 297,521,
211,170, and 60,466, respectively, at weighted-average exercise prices of $1.92,
$1.34, and $2.04, respectively. Stock options outstanding at the end of each of
the three preceding years were 1,685,535, 1,674,056, and 1,879,508,
respectively. These options had weighted-average exercise prices of $5.42,
$3.07, and $2.86, respectively. Of these options, 1,430,234, 1,527,488, and
1,528,824, respectively, were fully-vested and exercisable at weighted-average
exercise prices of $3.81, $2.84, and $2.45, respectively. As of December 31,
1998, the exercise prices of options outstanding on that date ranged from $1.31
to $15.63 and had a weighted-average remaining life of 5.0 years. Within this
range, 952,335 options had a weighted-average exercise price of $2.40 and a
weighted-average remaining life of 3.0 years; 424,200 options had a
weighted-average exercise price of $5.38 and a weighted-average remaining life
of 6.5 years; and 309,000 shares had a weighted-average exercise price of $14.77
and a weighted average remaining life of 9.0 years. Expirations and forfeitures
of stock options during the three years ended December 31, 1998, 1997, and 1996,
were not material.
During the year ended December 31, 1998, 112,002 shares of restricted
stock were granted under the aforementioned plans at a weighted-average fair
value of $15.48. 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. Under both plans each director receives
options to purchase 8,800 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 672,942 shares in the
aggregate, of which 224,146 shares were unallocated as of December 31, 1998.
Activity in these stock incentive plans for each of the three years ended
December 31, 1998, 1997, and 1996 is summarized in the following paragraph.
Stock options outstanding at the beginning of each of the three
preceding years were 227,766, 254,565, and 240,058, respectively. These options
had weighted-average exercise prices of $3.89, $3.34, and $2.81, respectively.
Stock options granted during these years were 26,400, 26,400, and 35,196,
respectively at weighted-average exercise prices of $17.59, $8.96, and $7.05,
respectively. Stock options exercised during these years were 35,200, 53,290,
and 20,598, respectively, at weighted-average exercise prices of $1.31, $3.80,
and $3.47, respectively. Finally, stock options outstanding at the end of
December 31, 1998, were 218,966. These options had a weighted-average exercise
price of $5.95, a range of exercise prices from $1.31 to $17.59, and a
weighted-average remaining life of 5.0 years. Within this range, 122,166 had a
weighted-average exercise price of $2.67 and a weighted-average remaining life
of 2.8 years; 70,400 options had a weighted-average exercise price of $7.27 and
a weighted-average remaining life of 7.2 years; and 26,400 shares had a
weighted-average exercise price of $17.59 and a weighted average remaining life
of 9.3 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 $18,428,000, $17,195,000, and
$9,700,000 during the years ended December 31, 1998, 1997, and 1996,
respectively. Pro forma diluted earnings per share would have been $0.93, $0.88,
and $0.49 and pro forma basic earnings per share would have been $1.00, $0.94,
and $0.51 during the same periods, respectively.
The weighted-average fair value of the options granted in 1998, 1997,
and 1996, were $5.25, $2.66, and $2.09, respectively. The fair values of these
options were estimated as of the dates they were granted using a Black-
49
<PAGE> 51
Scholes option pricing model. Weighted-average assumptions for 1998 were as
follows: 5.0% risk-free interest rate, 2.0% dividend yield, 30% volatility, and
a seven-year expected life. Weighted-average assumptions for periods prior to
1998 were as follows: 6.5% risk-free interest rate, 2.6% dividend yield, 30%
volatility, and a seven-year expected life.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS The Corporation and its subsidiaries are 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, 1998, the
Corporation had commitments to originate mortgage loans at market terms
aggregating approximately $24.0 million which expire on various dates in 1998.
At December 31, 1998, the Corporation also had commitments to fund $34.7 million
in additional proceeds on construction loans. As of the same date the
Corporation had approximately $5.9 million in commitments outstanding under
standby letters of credit and financial guarantees, as well as $8.9 million in
commitments outstanding under unused home equity lines of credit. Furthermore,
the Corporation had commitments to sell approximately $92.3 million in mortgage
loans to FHLMC, FNMA, and the FHLB at various dates in 1999.
At December 31, 1998, the Corporation had retained a small portion of
the credit risk related to $235.6 million in single-family residential loans
sold to the FHLB in exchange for a monthly credit enhancement fee.
NOTE 11--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, 1998. 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 The Corporation's Board of Directors adopted
a shareholders' rights plan (the "Rights Plan") in 1995. 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 ten years for the adoption of the Rights
Plan.
STOCK REPURCHASE PLANS AND TREASURY STOCK In 1997 and 1996 the
Corporation's Board of Directors authorized the repurchase of up to 919,052 and
984,000 shares of the Corporation's outstanding common stock, respectively.
Under the plans, repurchases may be made from time-to-time in the open market
during the ensuing twelve months as conditions permit (both plans were extended
for an additional twelve months in January 1998 and the 1997 Plan was extended
for additional twelve months in January 1999). Repurchased shares are held as
treasury stock and are available for general corporate purposes.
50
<PAGE> 52
During 1998, 1997, and 1996, the Corporation repurchased 447,000,
264,000, and 1,394,400 shares under the 1997 and 1996 Plans, as well as a prior
plan, which is no longer active. These shares were repurchased at an average
cost of $16.46, $10.87, and $6.94 per share during 1998, 1997, and 1996,
respectively. As of December 31, 1998, 519,152 shares remained to be purchased
under the 1997 Plan and no shares remained under the 1996 Plan. On February 11,
1999, the Corporation completed the purchase of the remaining shares under the
1997 Plan.
During 1998 and 1997, the Corporation reissued 426,775 and 240,330
shares of common stock out of treasury stock, respectively. These shares had an
average cost basis of $12.84 and $10.64 per share, respectively. In general,
these shares were issued upon the exercise of stock options by, or the issuance
of restricted stock to, employees and directors of the Corporation. 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 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 severely
restrict the activities of the institution. During each of the years ended
December 31, 1998 and 1997, the Bank's regulatory capital was sufficient for it
to be classified as "adequately 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, 1998 and 1997. 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, 1998 CAPITALIZED CAPITALIZED ACTUAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 leverage ratio 4.0% 5.0% 5.58%
Tier 1 risk-based capital ratio 4.0% 6.0% 10.03%
Total risk-based capital ratio 8.0% 10.0% 10.76%
Tier 1 leverage ratio capital $70,797,000 $88,497,000 $98,745,000
Tier 1 risk-based capital 39,365,000 59,047,000 98,745,000
Total risk-based capital 78,730,000 98,412,000 105,928,000
- ------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 53
NOTE 12--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $43,642,705 $43,642,705 $29,939,484 $29,939,484
Interest-bearing deposits with banks 96,549,775 96,549,775 7,113,756 7,113,756
Investment securities available for sale 21,376,678 21,376,678
- -
Mortgage-backed and related securities:
Available for sale 204,108,879 204,108,879 47,895,297 47,895,297
Held for investment 102,500,238 102,908,423 124,335,969 123,613,629
Loans held for sale 72,002,437 73,600,000 45,576,945 46,600,000
Loans held for investment, gross 1,183,600,073 1,190,000,000 1,200,956,912 1,211,000,000
Federal Home Loan Bank stock 12,485,500 12,485,500 13,811,300 13,811,300
Accrued interest receivable 13,888,538 13,888,538 11,547,757 11,547,757
Mortgage servicing rights 21,103,459 21,103,459 16,290,903 16,290,903
Financial liabilities:
Deposit liabilities $1,460,135,660 $1,466,000,000 $1,146,533,896 $1,149,000,000
Federal Home Loan Bank advances and other borrowings 189,777,984 190,000,000 275,778,770 276,000,000
Advance payments by borrowers for taxes and insurance 1,762,190 1,762,190 3,872,764 3,872,764
Accrued interest payable 1,947,823 1,947,823 2,030,153 2,030,153
- --------------------------------------------------------------------------------------------------------------------
</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.
NOTE 13--SEGMENT INFORMATION
DIVISIONS AND PROFIT CENTERS The Bank has six operating divisions: (i)
executive, (ii) finance and administration, (iii) human resources, (iv)
residential lending, (v) commercial real estate lending, and (vi) retail
banking. Each division is headed by an executive officer that reports directly
to the president of the Bank. The last three divisions contain the Bank's profit
centers for segment reporting purposes. These divisions are primarily involved
in the delivery of financial products and services to the Bank's deposit and
loan customers. The remaining divisions consist principally of support
departments.
Residential lending is divided into two profit centers for segment
reporting purposes: (i) a mortgage banking profit center that is responsible for
loan origination, sales of loans in the secondary market, and servicing of
residential loans, and (ii) a residential loan portfolio that consists of loans
held by the Bank for investment purposes (loans held for sale are included in
the mortgage banking profit center). Commercial real estate lending is a single
profit center for segment reporting purposes. It consists of the Bank's
portfolio of multi-family and commercial mortgage loans, as well as functions
related to the origination and servicing of such loans. Retail banking is
divided into two profit centers for segment reporting purposes: (i) a consumer
lending portfolio, which consists of the Bank's second mortgage, automobile, and
other consumer installment loans, as well as functions related to the
origination and servicing of such loans and (ii) an education loan portfolio,
which also includes functions related to the origination and servicing of the
loans. The Bank's retail branch network, which delivers checking, savings, and
other deposit-related products and services to customers, is also part of retail
banking, but is considered a support department for segment reporting purposes,
as more fully described in a subsequent paragraph. Finally, the Bank's
investment and mortgage-related securities portfolio is considered a profit
center for segment reporting purposes. Personnel in finance and administration
manage this portfolio.
MEASUREMENT OF SEGMENT PROFIT (LOSS) Management evaluates the after-tax
performance of the Bank's profit centers as if each center were a separate
entity--each with its own earning assets, actual and/or allocated non-earning
assets, and allocated funding resources. Each profit center has its own interest
income, non-interest income, and non-interest expense as captured by the Bank's
accounting systems. Interest expense is allocated to each profit center
according to its use of the Bank's funding sources, which consist primarily of
deposit liabilities, FHLB
52
<PAGE> 54
advances, and equity. In general, all funding sources are allocated
proportionately to each profit center. However, in certain instances specific
liabilities may be matched against specific assets of profit centers.
The net cost of operating the Bank's support departments is allocated
to the Bank's profit centers and to the retail banking network using a variety
of methods deemed appropriate by management. In general, these net costs are
included in the non-interest expense of each profit center, to include the
retail banking network. In addition, certain allocations of revenues and
expenses are made between profit centers when they perform services for each
other.
The Bank's retail branch network is considered a support department
center for segment reporting purposes. Retail banking fees and revenues are
deducted from the non-interest expense of operating the network (to include an
allocation of net costs from the Bank's other support departments) to arrive at
net cost for the branch network. This net cost is then allocated to each profit
center based on its use of deposit liabilities to fund its operations. This
amount is reported as "net cost to acquire and maintain deposit liabilities" and
is included as an adjustment to the net interest income of each profit center.
For segment reporting purposes, management makes certain non-GAAP
adjustments and reclassifications to the earnings, assets, and equity of the
Bank that, in management's judgement, more fairly reflect the performance and/or
financial condition of certain of the Bank's profit centers. Following is a
description of the more significant adjustments:
INTEREST INCOME AND EXPENSE Interest income is credited to the
mortgage banking profit center for implied earnings on non-interest-bearing
liabilities such as custodial and escrow accounts. The offsetting interest
expense is charged to each profit center according to their use of these funding
sources, as previously described. Fee income from customers that make their
monthly loan payments late ("late charges") is reclassified from interest income
to non-interest income in the mortgage banking profit center.
LOAN ORIGINATION FEES AND COSTS In accordance with GAAP,
origination fees earned on residential loans held for investment are deferred
and amortized over the expected life of the loans, as are the direct costs to
originate the loans. In general, these deferrals and their subsequent
amortization are disregarded for segment reporting purposes. As a result, the
mortgage banking cost center receives revenue for loans that it originates for
the portfolio of residential loans held for investment, as well as a full charge
for the costs to originate the loans. These fees and costs are in addition to
the fees it receives and the costs it incurs on loans originated for sale in the
secondary market, which are included in current earnings under GAAP.
MORTGAGE SERVICING RIGHTS In accordance with GAAP, mortgage
servicing rights are not recorded on residential loans held for investment.
However, for segment reporting purposes, the mortgage banking profit center
receives an income allocation for the origination of such loans, which
represents the estimated value of the mortgage servicing rights. This allocation
is in addition to the gain from mortgage servicing rights that is recorded on
loans sold in the secondary market, as permitted under GAAP. The amortization of
the mortgage servicing rights created by this allocation is charged-back to the
mortgage banking profit center over the estimated life of the loans.
LOAN SERVICING FEES In accordance with GAAP, loan servicing
fee income is not recorded on loans held for investment. However, for segment
reporting purposes, the mortgage banking profit center receives an income
allocation for the services it performs for the Bank's residential, commercial
real estate, and consumer loan portfolios. This allocation is in addition to the
service fee income that the profit center receives on loans serviced for
third-parties, as recorded in the Bank's Consolidated Statement of Operations.
The aforementioned loan portfolios are charged with the offsetting servicing
cost.
PROVISION FOR LOAN AND REAL ESTATE LOSSES For segment
reporting purposes, the Bank disregards provisions for loan and real estate
losses recorded under GAAP. Rather, actual charge-off (recovery) activity is
charged (credited) to each profit center in the period it occurs.
INTANGIBLE ASSETS The amortization of goodwill and certain
other intangible assets is disregarded for segment reporting purposes.
53
<PAGE> 55
INCOME TAXES in general, a standard income tax rate of
approximately 41% is used for segment reporting purposes. However, the income
tax benefit associated with assets held in Nevada by FCHI, the Bank's
wholly-owned investment subsidiary, is allocated to the profit centers that own
such assets. This results in a lower effective income tax rate, or even a
negative rate, for such profit centers. During the years ended December 31, 1997
and 1996, the investment and mortgage-related securities profit center was the
only segment that held assets in Nevada. During the year ended December 31,
1998, this segment, as well as the residential loan portfolio, held assets in
Nevada.
NON-GAAP ADJUSTMENTS TO ASSETS AND EQUITY Allowances for
losses on loans and real estate and security valuation allowances are added to
and/or excluded from assets of the profit centers. In addition, an estimated
value for mortgage servicing rights not recorded under GAAP is estimated and
added to the assets of the mortgage banking profit center. For each of these
adjustments, a corresponding amount is added to or excluded from equity prior to
the proportionate allocation of equity to the profit centers, as previously
described. The amount added to or excluded from equity is net of the estimated
income tax effect.
SEGMENT PROFIT (LOSS) STATEMENTS AND OTHER INFORMATION The following
tables contain profit (loss) statements for each of the Bank's reportable
segments for the years ended December 31, 1998, 1997, and 1996 (1997 is
presented on both pages to facilitate its comparison with 1998 and 1996). In
addition to the after-tax performance of profit centers, management of the Bank
closely monitors the net cost to acquire and maintain deposit liabilities (as
defined elsewhere in this footnote). The net cost to acquire and maintain
deposit liabilities was 1.32%, 1.35%, and 1.52% of average deposit liabilities
outstanding during the years ended December 31, 1998, 1997, and 1996,
respectively.
54
<PAGE> 56
<TABLE>
<CAPTION>
LOANS HELD FOR INVESTMENT
--------------------------------------------------- INVESTMENT
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL & MORTGAGE
YEAR ENDED DECEMBER 31, 1998 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 4,503,290 $ 33,496,128 $ 25,066,823 $ 18,321,380 $ 13,501,027 $ 23,198,449
Interest expense 4,617,955 20,614,365 14,031,760 10,076,044 7,316,551 17,605,864
Net cost to acquire and
maintain deposit
liabilities 547,379 4,332,138 3,635,592 2,612,673 2,077,845 3,118,890
- -------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (662,044) 8,549,625 7,399,471 5,632,663 4,106,631 2,473,695
Net loan charge-offs
(recoveries) -- 17,082 203,379 274,597 32,515 --
- -------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) (662,044) 8,532,543 7,196,092 5,358,066 4,074,116 2,473,695
Non-interest income 22,060,254 -- 55,367 1,036,406 95,122 --
Non-interest expense 13,141,292 1,877,465 1,415,221 1,793,030 818,311 177,015
- -------------------------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 8,256,918 6,655,078 5,836,238 4,601,442 3,350,927 2,296,680
Income tax expense (benefit) 3,347,355 2,530,646 2,366,011 1,865,425 1,358,466 (45,191)
- -------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) $ 4,909,563 $ 4,124,432 $ 3,470,227 $ 2,736,017 $ 1,992,461 $ 2,341,871
=========================================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- -------------------------------------------------------------------------------------------------------------------------
Average assets $ 98,039 $ 460,016 $ 310,633 $ 223,066 $ 177,403 $ 374,527
=========================================================================================================================
Total assets at end of period $ 90,536 $ 499,930 $ 342,434 $ 238,889 $ 192,224 $ 426,793
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1998 SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income -- -- $ 580,771 (1) $ 118,667,868
Interest expense $ 75,070 -- (2,880,415)(1) 71,457,194
Net cost to acquire and
maintain deposit
liabilities 8,242 (16,332,759) -- --
- ----------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (83,312) 16,332,759 3,461,186 47,210,674
Net loan charge-offs
(recoveries) -- -- (234,461) 293,112
- ----------------------------------------------------------------------------------------------
Net interest income (expense) (83,312) 16,332,759 3,695,647 46,917,562
Non-interest income 1,432,728 15,254,216 (8,574,023) 31,360,070
Non-interest expense 326,783 31,586,975 (3,539,569) 47,596,523
- ----------------------------------------------------------------------------------------------
Profit (loss) before taxes 1,022,633 -- (1,338,807) 30,681,109
Income tax expense (benefit) 698,577 -- (864,314) 11,256,975
- ----------------------------------------------------------------------------------------------
Segment profit (loss) $ 324,056 ($474,493) $19,424,134
==============================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ----------------------------------------------------------------------------------------------
Average assets $ 704 -- ($10,354)(4) $ 1,634,034
==============================================================================================
Total assets at end of period $ 1,241 -- ($ 5,543)(4) $ 1,786,504
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
LOANS HELD FOR INVESTMENT
--------------------------------------------------- INVESTMENT
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL & MORTGAGE
YEAR ENDED DECEMBER 31, 1997 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 1,521,194 $ 46,009,725 $21,746,184 $16,552,232 $11,676,426 $17,034,661
Interest expense 2,393,024 28,685,579 11,808,145 8,905,641 6,430,163 13,631,493
Net cost to acquire and
maintain deposit
liabilities 398,387 4,703,759 3,152,711 2,381,416 1,831,784 1,856,314
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (1,270,217) 12,620,387 6,785,328 5,265,175 3,414,479 1,546,854
Net loan charge-offs (recoveries) -- (59,742) (15,303) 511,964 18,869 --
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) (1,270,217) 12,680,129 6,800,631 4,753,211 3,395,610 1,546,854
Non-interest income 16,393,361 452,243 52,531 1,037,696 12,765 (725,142)
Non-interest expense 9,471,294 2,671,899 982,650 1,513,641 782,369 156,692
- ---------------------------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 5,651,850 10,460,473 5,870,512 4,277,266 2,626,006 665,020
Income tax expense (benefit) 2,291,260 4,240,676 2,379,905 1,734,003 1,064,583 (337,107)
- ---------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) $ 3,360,590 $ 6,219,797 $ 3,490,607 $ 2,543,263 $ 1,561,423 $ 1,002,127
===========================================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------------
Average assets $ 51,239 $ 607,651 $ 261,025 $ 196,881 $ 151,441 $ 282,797
===========================================================================================================================
Total assets at end of period $ 68,541 $ 598,619 $ 280,604 $ 215,218 $ 167,507 $ 223,665
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1998 SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income -- -- 435,834(1) $ 114,976,256
Interest expense $ 270,017 -- (1,859,005) 70,265,057
Net cost to acquire and
maintain deposit
liabilities 9,250 (14,333,621) -- --
- ----------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (279,267) 14,333,621 2,294,839 44,711,199
Net loan charge-offs
(recoveries) -- -- 83,169 538,957
- ----------------------------------------------------------------------------------------------
Net interest income (expense) (279,267) 14,333,621 2,211,670 44,172,242
Non-interest income (8,835) 12,071,266 (4,992,200) 24,293,685
Non-interest expense 379,362 26,404,887 (2,165,742) 40,197,052
- ----------------------------------------------------------------------------------------------
Profit (loss) before taxes (667,464) -- (614,788) 28,268,875
Income tax expense (benefit) (214,727) -- (280,081) 10,878,512
- ----------------------------------------------------------------------------------------------
Segment profit (loss) ($452,737) -- ($ 334,707) $ 17,390,363
==============================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ----------------------------------------------------------------------------------------------
Average assets $ 612 -- ($ 12,208)(4) $ 1,539,438
==============================================================================================
Total assets at end of period $ 571 -- ($ 10,431)(4) $ 1,544,294
==============================================================================================
</TABLE>
(1) Consists principally of interest income and expense adjustments related to
late charges and implied earnings on custodial and escrow accounts.
(2) In general, the Corporation records actual loan and real estate charge-off
(recovery) activity against each profit center for segment reporting
purposes.
(3) Consists principally of non-GAAP adjustments related to loan origination
fees and costs, mortgage servicing rights, and loan servicing fees. The
offsets for the adjustments described in (1), above, are also include in
non-interest income.
(4) Consists of allowances for loss on loans and real estate and security
valuation allowances that are disregarded for segment reporting purposes.
Also includes mortgage servicing rights that are not recorded under GAAP,
but are recorded for segment reporting purposes.
55
<PAGE> 57
<TABLE>
<CAPTION>
LOANS HELD FOR INVESTMENT
--------------------------------------------------- INVESTMENT
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL & MORTGAGE
YEAR ENDED DECEMBER 31, 1997 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 1,521,194 $ 46,009,725 $21,746,184 $16,552,232 $11,676,426 $17,034,661
Interest expense 2,393,024 28,685,579 11,808,145 8,905,641 6,430,163 13,631,493
Net cost to acquire and
maintain deposit
liabilities 398,387 4,703,759 3,152,711 2,381,416 1,831,784 1,856,314
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (1,270,217) 12,620,387 6,785,328 5,265,175 3,414,479 1,546,854
Net loan charge-offs
(recoveries) -- (59,742) (15,303) 511,964 18,869 --
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) (1,270,217) 12,680,129 6,800,631 4,753,211 3,395,610 1,546,854
Non-interest income 16,393,361 452,243 52,531 1,037,696 12,765 (725,142)
Non-interest expense 9,471,294 2,671,899 982,650 1,513,641 782,369 156,692
- ---------------------------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 5,651,850 10,460,473 5,870,512 4,277,266 2,626,006 665,020
Income tax expense (benefit) 2,291,260 4,240,676 2,379,905 1,734,003 1,064,583 (337,107)
- ---------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) $ 3,360,590 $ 6,219,797 $ 3,490,607 $ 2,543,263 $ 1,561,423 $ 1,002,127
===========================================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------------
Average assets $ 51,239 $ 607,651 $ 261,025 $ 196,881 $ 151,441 $ 282,797
===========================================================================================================================
Total assets at end of period $ 68,541 $ 598,619 $ 280,604 $ 215,218 $ 167,507 $ 223,665
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1997 SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income -- -- $435,834(1) $114,976,256
Interest expense $270,017 -- (1,859,005)(1) 70,265,057
Net cost to acquire and
maintain deposit
liabilities 9,250 (14,333,621) -- --
- -------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (279,267) 14,333,621 2,294,839 44,711,199
Net loan charge-offs
(recoveries) -- -- 83,169(2) 538,957
- -------------------------------------------------------------------------------------------------------
Net interest income (expense) (279,267) 14,333,621 2,211,670 44,172,242
Non-interest income (8,835) 12,071,266 (4,992,200)(3) 24,293,685
Non-interest expense 379,362 26,404,887 (2,165,742)(3) 40,197,052
- -------------------------------------------------------------------------------------------------------
Profit (loss) before taxes (667,464) -- (614,788) 28,268,875
Income tax expense (benefit) (214,727) -- (280,081) 10,878,512
- -------------------------------------------------------------------------------------------------------
Segment profit (loss) ($452,737) -- ($334,707) $17,390,363
=======================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- -------------------------------------------------------------------------------------------------------
Average assets $612 -- ($12,208)(4) $1,539,438
=======================================================================================================
Total assets at end of period $571 -- ($10,431)(4) $1,544,294
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
LOANS HELD FOR INVESTMENT
--------------------------------------------------- INVESTMENT
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL & MORTGAGE
YEAR ENDED DECEMBER 31, 1996 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 1,352,606 $ 39,998,430 $18,252,099 $13,632,264 $ 9,631,434 $20,190,817
Interest expense 2,201,321 24,569,269 9,799,341 7,149,947 5,158,411 16,166,190
Net cost to acquire and
maintain deposit
liabilities 425,758 5,213,286 2,905,860 2,176,843 1,677,133 2,381,663
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (1,274,473) 10,215,875 5,546,898 4,305,474 2,795,890 1,642,964
Net loan charge-offs
(recoveries) -- (10,240) -- 289,061 8,693 --
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) (1,274,473) 10,226,115 5,546,898 4,016,413 2,787,197 1,642,964
Non-interest income 15,611,604 -- 73,386 672,597 13,172 (311,151)
Non-interest expense 9,206,267 2,389,900 876,791 1,775,187 898,857 180,534
- ---------------------------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 5,130,864 7,836,215 4,743,493 2,913,823 1,901,512 1,151,279
Income tax expense (benefit) 2,080,052 3,176,801 1,923,012 1,181,264 770,873 (228,627)
- ---------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) $ 3,050,812 $ 4,659,414 $ 2,820,481 $ 1,732,559 $ 1,130,639 $ 1,379,906
===========================================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------------
Average assets $ 47,689 $ 535,226 $ 218,295 $ 160,494 $ 123,652 $ 340,611
===========================================================================================================================
Total assets at end of period Segment information not available
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1997 SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income -- -- $919,347(1) $103,976,997
Interest expense $312,685 -- (1,673,501)(1) 63,683,663
Net cost to acquire and
maintain deposit
liabilities 26,204 (14,806,747) -- --
- -------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (338,889) 14,806,747 2,592,848 40,293,334
Net loan charge-offs
(recoveries) -- -- (287,514)(2) --
- -------------------------------------------------------------------------------------------------------
Net interest income (expense) (338,889) 14,806,747 2,880,362 40,293,334
Non-interest income 44,007 10,200,669 (6,473,112)(3) 19,831,172
Non-interest expense 286,790 25,007,416 3,622,985(3) 44,244,727
- -------------------------------------------------------------------------------------------------------
Profit (loss) before taxes (581,672) -- (7,215,735) 15,879,779
Income tax expense (benefit) (182,420) -- (2,915,093) 5,805,862
- -------------------------------------------------------------------------------------------------------
Segment profit (loss) ($399,252) -- ($4,300,642) $10,073,917
=======================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- -------------------------------------------------------------------------------------------------------
Average assets $1,932 -- ($16,120)(4) $1,411,779
=======================================================================================================
Total assets at end of period $1,515,413
=======================================================================================================
</TABLE>
(1) Consists principally of interest income and expense adjustments related to
late charges and implied earnings on custodial and escrow accounts.
(2) In general, the Corporation records actual loan and real estate charge-off
(recovery) activity against each profit center for segment reporting
purposes.
(3) Consists principally of non-GAAP adjustments related to loan origination
fees and costs, mortgage servicing rights, and loan servicing fees. 1996
also includes the FDIC special assessment ($5.9 million). The offsets for
the adjustments described in (1), above, are also include in non-interest
income.
(4) Consists of allowances for loss on loans and real estate and security
valuation allowances that are disregarded for segment reporting purposes.
Also includes mortgage servicing rights that are not recorded under GAAP,
but are recorded for segment reporting purposes.
56
<PAGE> 58
NOTE 14--PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION: 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash in bank $3,047,526 $405,267
Interest-bearing deposits with subsidiary bank -- 2,757,648
Investment in subsidiary 122,446,917 108,994,270
Other assets 155,314 236,485
- -------------------------------------------------------------------------------------------------------------------
Total assets $125,649,757 $112,393,670
===================================================================================================================
Other borrowings $2,950,000 $3,000,000
Other liabilities 15,110 32,324
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 2,965,110 3,032,324
- -------------------------------------------------------------------------------------------------------------------
Common stock 1,994,163 997,082
Additional paid-in capital 34,540,065 35,537,146
Retained earnings 97,291,806 84,548,291
Treasury stock, at cost (12,722,834) (10,845,168)
Unearned restricted stock (1,256,266) (211,006)
Non-owner adjustments to equity, net 2,837,713 (664,999)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 122,684,647 109,361,346
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $125,649,757 $112,393,670
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS: 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income $78,434 $67,605 $133,581
Other expense 522,190 743,276 693,068
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes and equity in earnings of subsidiary (443,756) (675,671) (559,487)
Income tax benefit 155,314 236,485 195,820
- -------------------------------------------------------------------------------------------------------------------
Loss before equity in earnings of subsidiary (288,442) (439,186) (363,667)
Equity in earnings of subsidiary 19,712,576 17,829,549 10,437,584
- -------------------------------------------------------------------------------------------------------------------
Net income $19,424,134 $17,390,363 $10,073,917
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS: 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $19,424,134 $17,390,363 $10,073,917
Equity in earnings of subsidiary (19,712,576) (17,829,549) (10,437,584)
Other accruals and prepaids (17,214) (70,781) (76,583)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by operations (305,656) (509,967) (440,250)
- -------------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest-bearing deposits with
subsidiary bank 2,757,648 (341,769) 4,449,181
Dividends received from subsidiary 11,500,000 9,500,000 8,000,000
Other, net 81,171 -- (3,200)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 14,338,819 9,158,231 12,445,981
- -------------------------------------------------------------------------------------------------------------------
Proceeds from sale of common stock 328,958 484,179 194,225
Increase (decrease) in other borrowings (50,000) (2,000,000) 1,000,000
Dividends paid to shareholders (5,001,135) (4,283,617) (3,874,954)
Purchase of treasury stock (7,356,875) (2,868,938) (9,674,875)
Other, net 688,148 203,386 238,637
- -------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (11,390,904) (8,464,990) (12,116,967)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash in bank 2,642,259 183,274 (111,236)
Cash at beginning of period 405,267 221,993 333,229
- -------------------------------------------------------------------------------------------------------------------
Cash in bank at end of period $3,047,526 $405,267 $221,993
===================================================================================================================
</TABLE>
57
<PAGE> 59
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,
1998, 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, 1998, its system of internal
control over the preparation of its published annual and interim financial
statements met those criteria.
<TABLE>
<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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Milwaukee, Wisconsin
January 22, 1999
58
<PAGE> 60
SUPPLEMENTARY DATA
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH
Dollars in thousands, except for per share 1998 1998 1998 1998 1997 1997 1997 1997
amounts
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest on loans $24,598 $21,837 $23,252 $25,783 $25,349 $25,138 $24,153 $23,302
Interest on mortgage-backed and related 5,745 6,334 3,846 2,617 2,817 2,965 3,128 3,215
securities
Interest and dividends on investments 1,018 819 1,587 1,232 889 1,245 1,335 1,440
- -------------------------------------------------------------------------------------------------------------------
Total interest income 31,361 28,990 28,685 29,632 29,055 29,347 28,617 27,956
- -------------------------------------------------------------------------------------------------------------------
Interest on deposits 15,965 15,215 14,473 13,769 13,718 13,076 12,377 11,978
Interest on borrowings 3,128 2,224 2,734 3,950 3,924 4,929 5,090 5,172
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 19,093 17,439 17,207 17,718 17,643 18,005 17,467 17,150
- -------------------------------------------------------------------------------------------------------------------
Net interest income 12,269 11,551 11,478 11,914 11,413 11,342 11,150 10,806
Provision for loan losses 88 63 89 53 164 123 132 121
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision 12,181 11,488 11,389 11,861 11,249 11,220 11,019 10,685
- -------------------------------------------------------------------------------------------------------------------
Gain on sale of loans 5,849 3,499 3,761 3,820 2,155 2,438 992 789
Gain (loss) on sale of investments 343 - - - - (628) (43) (55)
Other non-interest income 2,987 4,375 3,731 2,996 4,859 4,691 4,676 4,364
- -------------------------------------------------------------------------------------------------------------------
Total non-interest income 9,179 7,874 7,492 6,816 7,014 6,501 5,625 5,153
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 13,386 11,961 11,347 10,902 10,603 10,134 9,747 9,712
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,974 7,400 7,534 7,775 7,660 7,587 6,897 6,125
Income tax expense 2,818 2,628 2,836 2,976 2,927 2,896 2,688 2,367
- -------------------------------------------------------------------------------------------------------------------
Net Income $5,155 $4,772 $4,698 $4,799 $4,733 $4,691 $4,209 $3,758
===================================================================================================================
Diluted earnings per share $0.26 $0.24 $0.24 $0.24 $0.24 $0.24 $0.21 $0.19
===================================================================================================================
Dividends paid per share $0.070 $0.070 $0.070 $0.060 $0.060 $0.060 $0.060 $0.053
===================================================================================================================
Stock price at end of period $16.38 $14.50 $17.94 $16.50 $16.94 $14.50 $12.25 $9.34
===================================================================================================================
High stock price during period $16.50 $18.38 $18.25 $16.94 $17.00 $14.50 $12.25 $9.84
===================================================================================================================
Low stock price during period $12.00 $13.00 $15.72 $14.25 $12.50 $11.50 $8.42 $7.84
===================================================================================================================
</TABLE>
Note: per share data and historical stock prices have been adjusted for a
3-for-2 stock split on June 12, 1997, and a 2-for-1 stock split on June 11,
1998.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
59
<PAGE> 61
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
sections entitled "Matters to be Voted on at the Annual Meeting--Matter 1.
Election of Directors" and "Executive Officers Who Are Not Directors" in the
definitive proxy statement of the Corporation dated March 19, 1999.
ITEM 11--EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
section entitled "Compensation of Executive Officers and Directors" in the
definitive proxy statement of the Corporation dated March 19, 1999.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
section entitled "Beneficial Ownership of Common Stock by Certain Beneficial
Owners and Management" in the definitive proxy statement of the Corporation
dated March 19, 1999.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
section entitled "Indebtedness of Management and Certain Transactions" in the
definitive proxy statement of the Corporation dated March 19, 1999.
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, 1998 and 1997
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1998
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1998
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.
60
<PAGE> 62
(3) Exhibit Index.
No. Exhibit Description
3.1 Articles of Incorporation (1)
3.2 Bylaws, as amended (9)
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 (9)
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 (7)
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 1998 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 1998 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.
(9) Incorporated herein by reference to the exhibits filed with the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1997, filed with the SEC on March 20, 1998.
(b) The Corporation filed no reports on Form 8-K during the fourth quarter of
1998.
(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.
61
<PAGE> 63
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, 1999 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, 1999
Thomas W. Schini
President, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ Dale A. Nordeen February 28, 1999
Dale A. Nordeen
Vice Chairman of the Board
/s/ Marjorie A. Davenport February 28, 1999
Marjorie A. Davenport
Director
/s/ Henry C. Funk February 28, 1999
Henry C. Funk
Director
/s/ John F. Leinfelder February 28, 1999
John F. Leinfelder
Director
/s/ Richard T. Lommen February 28, 1999
Richard T. Lommen
Director
/s/ Patrick J. Luby February 28, 1999
Patrick J. Luby
Director
62
<PAGE> 64
/s/ David C. Mebane February 28, 1999
David C. Mebane
Director
/s/ Phillip J. Quillin February 28, 1999
Phillip J. Quillin
Director
/s/ Don P. Rundle February 28, 1999
Don P. Rundle
Director
/s/ Jack C. Rusch February 28, 1999
Jack C. Rusch
Executive Vice President and
Chief Financial Officer
(principal financial officer)
/s/ Michael W. Dosland February 28, 1999
Michael W. Dosland
Vice president and Controller
(principal accounting officer)
63
<PAGE> 1
EMPLOYMENT AGREEMENT
(As Amended Effective July 1, 1998)
THIS EMPLOYMENT AGREEMENT is made effective as of this 1st day of July,
1998, by and between First Federal Savings Bank, LaCrosse-Madison, a
federally-chartered savings bank (the "Bank"), and Joseph M. Konradt (the
"Executive").
WHEREAS, Executive has been employed by the Bank for a number of years,
and currently serves as its Senior Vice President and Retail Banking Division
Manager ("Corporate Position"); and
WHEREAS, Executive possesses an intimate knowledge of the business and
affairs of the Bank, including its policies, markets and financial and human
resources; and
WHEREAS, the Board of Directors of the Bank (the "Board"), recognizes
that Executive's contribution to the growth and success of the Bank has been
substantial and desires to assure the Bank of Executive's continued employment
in an executive capacity and to compensate him therefore; and
WHEREAS, Executive is desirous of committing himself to serve the Bank
on the terms provided in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the Bank and Executive agree as follows:
1. Employment. Bank shall continue to employ Executive and
Executive shall continue to serve Bank under the terms and conditions of this
Agreement (which terms and conditions are intended to amend and supercede the
agreement of July 1, 1994 as previously in effect between the parties), for the
period stated in paragraph 2 below.
2. Term of Employment. The period of Executive's employment under
this Agreement shall commence on the date set forth above ("Commencement Date")
and shall expire on the third annual anniversary of said Commencement Date,
unless sooner terminated as provided herein. Effective as of any annual
anniversary of the Commencement Date during the term of this Agreement, the term
of employment hereunder may be extended by the action of the Bank's Board of
Directors to add one additional year to the then remaining term of employment
hereunder so that said term is annually restored to a full three-year term. The
Board of Directors or the Executive shall each provide the other with at least
forty-five (45) days' advance written notice of any decision on their respective
parts not to extend the Agreement on the anniversary date. The term of
employment under this
<PAGE> 2
Agreement, as in effect from time to time, shall be referred to as the
"Employment Term."
3. Position and Duties. Subject to Section 5(iv)(B), the Executive
shall serve in his Corporate Position, reporting to the President, and shall
have supervision and control over, and responsibility for, the retail banking
activities of the Bank and shall have such other powers and duties as may from
time to time be prescribed by the President, provided that such duties are
consistent with his present duties and with the Executive's position as an
executive officer of the Bank. The Executive shall devote substantially all his
working time and efforts to the business and affairs of the Bank.
4. Compensation. As compensation for the services to be provided
pursuant to this Agreement, Executive shall receive from Bank the compensation
and other benefits set forth below:
(i) Base Salary. During the Employment Term the Executive
shall receive a base salary ("Base Salary") in such amount as may from time to
time be approved by the Board. The Base Salary shall at no time be less than the
annual base salary payable to the Executive on the date of this Agreement. Any
increase in Base Salary or other compensation granted by the Board shall in no
way limit or reduce any other obligation of the Bank under this Agreement and,
once established at an increased specified rate, Executive's Base Salary under
this Agreement shall not thereafter be reduced. Executive's Base Salary and
other compensation shall be paid in accordance with the Bank's regular payroll
practices, as from time to time in effect.
(ii) Bonus Payments. In addition to Base Salary, Executive
shall be entitled during the Employment Term to receive such bonus payments as
the Board may determine in accordance with the Bank's Management Incentive Plan
(the "Incentive Plan") in effect on the date of this Agreement or as the same
may be amended or modified from time to time for the Bank's executive officers.
(iii) Other Benefits. During the Employment Term the Bank shall
provide to Executive all other benefits of employment generally made available
to the Bank's executive officers as in effect with other plans or arrangements
providing Executive with at least equivalent benefits thereunder. Executive
shall be entitled to participate in or receive benefits under any group health
and life insurance plan, pension plan, stock purchase, incentive savings, stock
option, restricted stock, stock appreciation rights and any other similar plans
or arrangements presently or hereafter made available by the Bank to its
executive officers (collectively the "Benefit Plans"), subject to and on a basis
consistent with the terms, conditions and overall administration of such Benefit
Plans. Executive shall be
-2-
<PAGE> 3
entitled to vacations and perquisites in accordance with the Bank's policies as
in effect from time to time for its executive officers.
5. Termination. This Agreement may be terminated, subject to
payment of the compensation and other benefits described below, upon the
occurrence of any of the events described below. In case of such termination,
the date on which Executive ceases to be employed under this Agreement, after
giving effect to any prior notice requirement set forth below, is referred to as
the "Termination Date."
(i) Death; Disability; Retirement. This Agreement shall
terminate upon the death, disability or retirement of Executive. As used in this
Agreement, the term "disability" shall mean Executive's inability, as a result
of physical or mental incapacity, to substantially perform his duties with the
Bank for a period of 180 consecutive days. Any question as to the existence of
Executive's disability upon which the Executive and the Bank cannot agree shall
be determined by a qualified independent physician mutually agreeable to
Executive and the Bank or, if the parties are unable to agree upon a physician
within ten (10) days after notice from either to the other suggesting a
physician, by a physician designated by the then president of the medical
society for the county in which Executive maintains his principal residence,
upon the request of either party. The costs of any such medical examination
shall be borne by the Bank. If Executive is terminated due to disability he
shall be paid 100% of his Base Salary at the rate in effect at the time notice
of termination is given for the remainder of the Employment Term, payable in
substantially equal monthly installments less, in each case, any disability
payments otherwise payable under plans provided by the Bank for disability or
any governmental social security or workers compensation program, and actually
paid to Executive in substantially equal monthly installments.
As used in this Agreement, the term "retirement" shall mean
Executive's retirement in accordance with and pursuant to any retirement plan of
the Bank generally applicable to its executive officers or in accordance with
any retirement arrangement established with Executive's consent with respect to
Executive.
If termination occurs for such reason, no additional
compensation shall be payable to the Executive under this Agreement except as
specifically provided in this Agreement. Notwithstanding anything to the
contrary contained in this Agreement, the Executive shall receive all
compensation and other benefits to which he was entitled under Section 4 through
the Termination Date and, in addition, shall receive all other
-3-
<PAGE> 4
benefits available to him under the Bank's Benefit Plans as in effect on the
date of death, disability or retirement.
(ii) Cause. The Bank may terminate the Executive's employment
under this Agreement for Cause at any time, and thereafter the Bank's
obligations under this Agreement shall cease and terminate. Notwithstanding
anything to the contrary contained in this Agreement, Executive shall receive
all compensation and other benefits to which he was entitled under Section 4
through the Termination Date and, in addition, shall receive all benefits
available to him under the Bank's Benefit Plans as in effect on the Termination
Date. For purposes of this Agreement, "Cause" shall mean (A) the willful and
continued failure by Executive to substantially perform his duties with the Bank
(other than failure resulting from the Executive's incapacity due to physical or
mental illness) after a written demand for substantial performance is delivered
to Executive by the Board, which demand specifically identifies the manner in
which the Board believes Executive has not substantially performed his duties,
(B) any willful act of misconduct by Executive which is materially injurious to
the Bank, monetarily or otherwise, (C) a criminal conviction of Executive for
any act involving dishonesty, breach of trust or a violation of the banking or
savings and loan laws of the State of Wisconsin or the United States, (D) a
criminal conviction of the Executive for the commission of any felony, (E) a
willful breach of fiduciary duty involving personal profit, (F) a willful
violation of any law, rule or regulation or final cease and desist order where
such violations materially, adversely, affect the Bank, (G) incompetence,
personal dishonesty or material breach of any provision of this Agreement which
would have a material adverse impact on the Bank. For purposes of this
Subsection 5(ii), no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the action or omission was in the
best interest of the Bank.
(iii) Voluntary Termination by Executive. Executive may
voluntarily terminate his employment under this Agreement at any time by giving
at least forty-five (45) days prior written notice to the Bank. In such event,
Executive shall receive all compensation and other benefits to which he was
entitled under Section 4 through the Termination Date and, in addition, shall
receive all other benefits available to him under the Bank's Benefit Plans as in
effect on the Termination Date.
(iv) Termination by Executive After Change in Control. For
purposes of this Agreement, a "change in control" shall mean a change in control
with respect to the Bank or its parent holding company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended
-4-
<PAGE> 5
("Exchange Act") or any successor thereto; provided that, without limitation,
such a change in control shall be deemed to have occurred if (i) any "person"
(as such 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 representing 25% or more of the
combined voting power of the Bank or holding company's then outstanding
securities; or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Bank or
company cease for any reason to constitute at least a majority thereof unless
the election, or the nomination for election by stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. The Executive
may terminate his employment under this Agreement by giving at least ninety (90)
days prior written notice to the Bank at anytime (1) within eighteen (18) months
of the effective date of a "change in control", or (2) after the occurrence, at
any time subsequent to a "change in control," of any of the following events,
without Executive's express written consent:
(A) Executive is assigned to any positions, duties or
responsibilities that are less significant than his positions, duties and
responsibilities as of the time immediately prior to any change in control;
(B) Executive is removed from or the Board fails to
re-elect Executive to any of his Corporate Position, except (1) in connection
with termination of Executive's employment for cause, disability or retirement,
or (2) in connection with any change in control after which the Bank is not the
continuing or surviving corporation, if the successor organization has executed
an agreement as required by Section 8(i)(A) and the removal or failure to
re-elect is limited to his Corporate Position with the Bank;
(C) Executive's Base Salary is materially reduced or the
Executive experiences in any year a material reduction of the ratio of his bonus
payment to his Base Salary which is greater than the average reduction in the
ratio of bonus payments to base salaries in such year experienced by all other
executive officers of the Bank or any other material failure by the Bank to
comply with Section 4;
(D) Executive is transferred to a location not within a 25
mile radius of the City of LaCrosse, Wisconsin; or
(E) The Bank fails to obtain an agreement from any
successor organization as required by Section 8(i)(A).
-5-
<PAGE> 6
(v) Suspension or Termination Required by the OTS
(A) If Executive is suspended and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under section 8(e)(3), or section 8(g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. Sections 1818(e)(3) and (g)(1), the Bank's obligations
under the Agreement shall be suspended as of the date of service of the notice
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, Bank shall (1) pay Executive all of the compensation withheld while
its obligations under this Agreement were suspended and (2) reinstate any of its
obligations which were suspended.
(B) If Executive is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. Sections 1818(e)(4) or (g)(1) obligations of the Bank under the Agreement
shall terminate as of the effective date of the order, but vested rights of the
Executive to compensation and to any benefits under the Bank's Pension Plan
shall not be affected.
(C) If the Bank is in default as defined in section
3(x)(1) of the Federal Deposit Insurance Act, (12 U.S.C. 1813 (x)(1))all
obligations under the Agreement shall terminate as of the date of default,
except that this paragraph shall not affect any vested rights of the
Executive under any qualified retirement plan nor, in the event the Executive
terminates prior to the date of such default, the Executive's vested rights to
continue to receive severance payments and benefits pursuant to section 5(vi) of
this Agreement.
(D) All obligations under the Agreement shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank, (i) by the OTS, at the time
the FDIC or Resolution Trust Corporation ("RTC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
section 13(c) of the Federal Deposit Insurance Act; or (ii) by the OTS at the
time it approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the OTS to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action, and the Executive shall receive the
compensation and benefits set forth in section 5(vi) of this Agreement.
(E) In the event that 12 C.F.R. Section 563.39, or any
successor regulation, is repealed, this section 5(v) shall cease to be effective
on the effective date of such repeal. In the event that 12 C.F.R. Section
563.39, or any successor regulation, is
-6-
<PAGE> 7
amended or modified, this Agreement shall be revised to reflect the amended or
modified provisions if: (1) the amended or modified provision is required to be
included in this Agreement; or (2) if not so required, the Executive requests
that the Agreement be so revised.
(vi) Termination by the Bank Other Than Due to Death,
Disability, Retirement or For Cause; Termination of Executive. If this Agreement
is terminated by the Bank for any reason other than death, disability,
retirement or for cause as set forth in Section 5(i) or (ii), or is terminated
by the Executive pursuant to Section 5(iv), then, following the Date of
Termination:
(A) In lieu of any further salary payments to the
Executive for a period subsequent to the Termination Date, the Executive shall
receive severance pay in the form of payments continuing for the remaining
unexpired portion of the Employment Term, fully restored as of the Termination
Date, in the amount and at the times provided in Section 4(i) and 4 (ii)
("Severance Payments"). In the event of a termination as a result of a change in
control, the Executive may elect to receive the Severance Payment in one lump
sum, calculated on the basis of his average annual compensation for the past
three years multiplied by the time remaining to the end of the term of this
Agreement, fully restored as of the Termination Date, subject to any applicable
limitations set forth in Section 6 below; provided that the amount of such
Severance Payment in connection with a change in control shall be at least equal
to the particular Executive's annual compensation as of the Termination Date.
(B) In addition to the retirement benefits to which the
Executive is entitled under the Bank's Group Pension Plan, as amended from time
to time (the "Pension Plan"), the Executive shall receive as additional
severance benefits a retirement benefit under this Agreement, which benefit
(except as provided below) shall be determined in accordance with, and payable
in the form and at the times provided in, the Pension Plan. Such benefits shall
be determined as if the Executive were fully vested under the Pension Plan and
had accumulated (after any termination under this Agreement) the additional
years of credited service under the Pension Plan that he would have received had
he continued in the employment of the Bank for the entire Employment Term at the
highest annual rate of Base Salary in effect during the twelve (12) months
immediately preceding the Termination Date. Such Base Salary shall be deemed to
represent the compensation (as defined in the Pension Plan) received by the
Executive during each such additional year for purposes of determining his
additional retirement benefits under this Subsection 5(vi), subject to Chapter V
of the Pension Plan and as it may be amended from time to time.
-7-
<PAGE> 8
(C) In addition to all other amounts payable under this
section 5, Executive shall be entitled to receive all benefits otherwise payable
to Executive under (i) any tax qualified Bank plan or agreement relating to
pension or retirement benefits, and (ii) any other Bank plan or agreement,
regardless of tax status, established to provide deferred compensation,
retirement, or other benefits for the Executive.
(D) If Executive is under fifty-five (55) years of age on
the Termination Date, Executive shall take reasonable steps to obtain employment
and thereby mitigate the amount of compensation and benefits due under Section
5(vi); provided, however, that Executive shall not be required to accept a
position other than one within a 25 mile radius of the City of LaCrosse,
Wisconsin. If the Executive is fifty-five (55) years of age or older on the
Termination Date or if Executive determines upon the advice of a qualified
independent physician that he is physically or medically unable to substantially
perform duties with another employer comparable to those performed by him with
the Bank, the Executive shall have no obligation to seek other employment.
Notwithstanding the foregoing, and regardless of age, during any portion of the
Employment term remaining after the Termination Date, if the Executive becomes
employed on a full-time basis by another employer, then to the extent the
Executive shall receive compensation, benefits or service credit from such other
employer, the aggregate amount of all compensation to be paid and benefits and
service credit to be provided by the Bank under this Agreement shall be
correspondingly reduced.
(E) The requirement for mitigation, as set forth in
Section 5 (vi)(D) above, shall not apply with respect to any termination under
Section 5(iv) subsequent to a change in control.
6. Limitations on Termination Compensation.
(i) In the event that the severance benefits payable to the
Executive under Subsection 5(vi) ("Severance Benefits"), or any other payments
or benefits received or to be received by the Executive from the Bank (whether
payable pursuant to the terms of this Agreement, any other plan, agreement or
arrangement with the Bank or any corporation ("Affiliate") affiliated with the
Bank within the meaning of Section 1504 of the Internal Revenue Code of 1954, as
amended (the "Code"), in the opinion of tax counsel selected by the Bank's
independent auditors and acceptable to the Executive, constitute "parachute
payments" within the meaning of Section 280G(b)(2) of the Code, and the present
value of such "parachute payments" equals or exceeds three (3) times the average
of the annual compensation payable to the Executive by the Bank (or an
Affiliate) and includible in the Executive's gross income for federal income tax
purposes for the five (5)
-8-
<PAGE> 9
calendar years preceding the year in which a change in ownership or control of
the Bank occurred ("Base Amount"), such severance benefits shall be reduced to
an amount the present value of which (when combined with the present value of
any other payments or benefits otherwise received or to be received by the
Executive from the Bank (or an Affiliate) that are deemed "parachute payments")
is equal to 2.99 times the Base Amount, notwithstanding any other provision to
the contrary in this Agreement. The Severance Benefits shall not be reduced if
(A) the Executive shall have effectively waived his receipt or enjoyment of any
such payment or benefit which triggered the applicability of this Section 6, or
(B) in the opinion of such tax counsel, the Severance Benefits (in its full
amount or as partially reduced, as the case may be) plus all other payments or
benefits which constitute "parachute payments" within the meaning of Section
280G(b)(2) of the code are reasonable compensation for services actually
rendered, within the meaning of Section 280G(b)(4) of the code, and such
payments are deductible by the Bank. The Base Amount shall include every type
and form of compensation includible in the Executive's gross income in respect
of his employment by the Bank (or an Affiliate), except to the extent otherwise
provided in temporary or final regulations promulgated under Section 280G(b) of
the Code. For purposes of this Section 6, a "change in ownership or control"
shall have the meaning set forth in Section 280G(b) of the code and any
temporary or final regulations promulgated thereunder. The present value of any
non-cash benefit or any deferred cash payment shall be determined by the Bank's
independent auditors in accordance with the principles of Sections 280G(b)(3)
and (4) of the Code.
(ii) Executive shall have the right to request that the Bank
obtain a ruling from the Internal Revenue Service ("Service") as to whether any
or all payments or benefits determined by such tax counsel are, in the view of
the Service, "parachute payments" under Section 280G. If a ruling is sought
pursuant to the Executive's request, no severance benefits payable under this
Agreement shall be made to the Executive until after fifteen (15) days from the
date of such ruling. For purposes of this Subsection 6(ii), the Executive and
the Bank agree to be bound by the Service's ruling as to whether payments
constitute "parachute payments" under Section 280G. If the service declines, for
any reason, to provide the ruling requested, the tax counsel's opinion provided
under Subsection 6(i) with respect to what payments or benefits constitute
"parachute payments" shall control, and the period during which the Severance
Benefits may be deferred shall be extended to a date fifteen (15) days from the
date of the Service's notice indicating that no ruling would be forthcoming.
(iii) In the event that Section 280G, or any successor statute,
is repealed, this Section 6 shall cease to be effective
-9-
<PAGE> 10
on the effective date of such repeal. The parties to this Agreement recognize
that final regulations under Section 280G of the Code may affect the amounts
that may be paid under this Agreement and agree that, upon issuance of such
final regulations this Agreement may be modified as in good faith deemed
necessary in light of the provisions of such regulations to achieve the purposes
of this Agreement, and that consent to such modifications shall not be
unreasonably withheld.
7. Noncompetition After Voluntary Termination And Duty of
Confidentiality.
(a) Noncompetition. Executive acknowledges that the
development of personal contacts and relationships is an essential element of
the Bank's business, that the Bank has invested considerable time and money in
his development of such contacts and relationships, that the Bank could suffer
irreparable harm if he were to leave employment and solicit the business of
Bank's customers, and that it is reasonable to protect the Bank against
competitive activities by Executive. Executive covenants and agrees, in
recognition of the foregoing and in consideration of the mutual promises
contained herein, that in the event of a voluntary termination of employment by
Executive pursuant to Section 5(iii), or upon expiration of this Agreement as a
result of Executive's election not to continue automatic annual renewals,
Executive shall not accept employment in La Crosse, Dane or St. Croix counties
with any Significant Competitor of the Bank for a period of eighteen (18) months
following such termination. For purposes of this Agreement, the term Significant
Competitor means any financial institution including, but not limited to, any
commercial bank, savings bank, savings and loan association, credit union, or
mortgage banking corporation which, at the time of termination of Executive's
employment or during the period of this covenant not to compete, (i) maintains a
home, branch or other office in any of said counties, or (ii) has originated
within any of said counties $10,000,000 or more in residential mortgage loans
during any consecutive twelve (12) month period within the thirty-six (36)
months prior to Executive's termination and inclusive of the period covered by
this covenant.
Executive agrees that the non-competition provisions set forth
herein are necessary for the protection of the Bank and are reasonably limited
as to (i) the scope of activities affected, (ii) their duration and geographic
scope, and (iii) their effect on Executive and the public. In the event
Executive violates the non-competition provisions set forth herein, Bank shall
be entitled, in addition to its other legal remedies, to enjoin the employment
of Executive with any Significant Competitor for the period set forth herein. If
Executive violates this covenant and the Bank brings legal action for injunctive
or other relief, the Bank shall not, as a result of the time involved in
obtaining
-10-
<PAGE> 11
such relief, be deprived of the benefit of the full period of the restrictive
covenant. Accordingly, the covenant shall be deemed to have the duration
specified herein, computed from the date such relief is granted, but reduced by
any period between commencement of the period and the date of the first
violation. In addition to such other relief as may be awarded, if the Bank is
the prevailing party it shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in enforcing its rights hereunder.
(b) Duty of Confidentiality. Executive acknowledges that he
will, as the result of services performed on behalf of the Bank, obtain or
otherwise become aware of confidential and/or proprietary information regarding
the Bank's affairs, including, but not limited to, information relative to (i)
customers, customer accounts and customer lists, (ii) marketing, (iii) customer
development strategies, (iv) financial and economic plans and projections, and
(v) other similar information. Executive agrees that following termination of
his employment for any reason, he will treat all such matters as confidential
and will refrain both from divulging such information in any manner and from the
use of such information for his benefit or for the benefit of any employer
(regardless of whether such employer would constitute a Significant Competitor
under this Agreement) or third-party.
8. General Provisions.
(i) Successors; Binding Agreement.
(A) The Bank will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank ("successor
organization") to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Bank would be required to perform it
if no such succession had taken place. As used in this Agreement, "Bank" shall
mean the Bank as hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement provided for in
this Section 8 or which otherwise becomes bound by the terms and provisions of
this Agreement by operation of this Agreement or law. Failure of the Bank to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle the Executive as his exclusive
remedy to compensation from the Bank in the same amount and on the same terms as
he would be entitled to under this agreement if he terminated his employment
under Section 5(iv). For purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date.
-11-
<PAGE> 12
(B) No right or interest to or in any payments or benefits
under this Agreement shall be assignable or transferrable in any respect by the
Executive, nor shall any such payment, right or interest be subject to seizure,
attachment or creditor's process for payment of any debts, judgments, or
obligations of the Executive.
(C) This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the Executive and his heirs, beneficiaries and
personal representatives and the Bank and any successor organization.
(ii) Notice. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Bank:
605 State Street
LaCrosse, WI 54601
Attn: Secretary
or if to Executive at the address set forth below the Executive's signature line
of this Agreement, or to such other address as either party may have furnished
to the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
(iii) Expenses. If any legal proceeding is necessary to enforce
or interpret this Agreement, or to recover damages for breach of it, the
prevailing party, shall be entitled to recover from the other party reasonable
attorneys' fees and necessary costs and disbursements incurred in such
litigation, in addition to any other relief to which such prevailing party may
be entitled.
Notwithstanding the foregoing, in the event of a legal
proceeding to enforce or interpret the terms of this Agreement following a
change in control, Executive shall be entitled to recover from Bank, regardless
of the outcome of said action, necessary costs and disbursements incurred
together with actual attorney's fees up to the greater of (A) $25,000, or (B)
thirty percent (30%) of the amount in dispute between the parties [which amount,
for purposes of this Agreement, shall be deemed to be the difference between the
highest written settlement offer from the Bank and the lowest written settlement
offer (exclusive of any claim for consequential, punitive, or other forms or
amounts of damages not based on specific contract terms) from Executive].
Recovery by Executive of attorneys fees and costs as provided
-12-
<PAGE> 13
herein following a change in control shall be in addition to any other relief to
which Executive may be entitled.
(iv) Withholding. The Bank shall be entitled to withhold from
amounts to be paid to the Executive under this Agreement any federal, state or
local withholding or other taxes of charges which it is from time to time
required to withhold. the Bank shall be entitled to rely on an opinion of
counsel if any question as to the amount or requirement of any such withholding
shall arise.
(v) Miscellaneous. No provision of this Agreement may be
amended, waived or discharged unless such amendment, waiver or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Wisconsin.
(vi) Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
(vii) Counterparts. This Agreement may be executed in several
counterparts, each of which together will constitute one and the same
instrument.
(viii) Headings. Headings contained in this Agreement are for
reference only and shall not affect the meaning or interpretation of any
provision of this Agreement.
(ix) Effective Date. The effective date of this Agreement shall
be the date indicated in the first paragraph of this Agreement, notwithstanding
the actual date of execution by any party.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as
of the date first above written.
Executive: Joseph M. Konradt
---------------------------------
-13-
<PAGE> 14
---------------------------------
(Address)
First Federal Savings Bank,
LaCrosse-Madison
(CORPORATE SEAL)
By:
------------------------------
By:
------------------------------
-14-
<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 22, 1999, 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, 1998.
Ernst & Young LLP
Milwaukee, Wisconsin
March 17, 1999
<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, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,642,705
<INT-BEARING-DEPOSITS> 96,549,775
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 204,108,879
<INVESTMENTS-CARRYING> 102,500,238
<INVESTMENTS-MARKET> 102,908,423
<LOANS> 1,177,525,727
<ALLOWANCE> 7,623,526
<TOTAL-ASSETS> 1,786,503,716
<DEPOSITS> 1,460,135,660
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 13,905,425
<LONG-TERM> 186,777,984
0
0
<COMMON> 36,534,228
<OTHER-SE> 86,150,419
<TOTAL-LIABILITIES-AND-EQUITY> 1,786,503,716
<INTEREST-LOAN> 95,469,420
<INTEREST-INVEST> 23,198,448
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 118,667,868
<INTEREST-DEPOSIT> 59,421,641
<INTEREST-EXPENSE> 71,457,194
<INTEREST-INCOME-NET> 47,210,674
<LOAN-LOSSES> 293,112
<SECURITIES-GAINS> 342,803
<EXPENSE-OTHER> 47,596,523
<INCOME-PRETAX> 30,681,109
<INCOME-PRE-EXTRAORDINARY> 30,681,109
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,424,134
<EPS-PRIMARY> 1.05
<EPS-DILUTED> .98
<YIELD-ACTUAL> 7.71
<LOANS-NON> 770,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,400,000
<ALLOWANCE-OPEN> 7,637,527
<CHARGE-OFFS> 365,511
<RECOVERIES> 58,398
<ALLOWANCE-CLOSE> 7,623,526
<ALLOWANCE-DOMESTIC> 7,623,526
<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 Rule 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 19, 1999
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 21, 1999, 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,
1998 also is included in the 1998 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 appreciated.
Sincerely,
/s/ Thomas W. Schini
-----------------------------------------------
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 21, 1999
---------------------
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 21, 1999, 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 four directors each for three-year terms and in each
case until their successors are elected and qualified;
(2) To approve an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of
the Company's common stock from 20,000,000 to 100,000,000
shares;
(3) 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, 1999; and
(4) 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 3, 1999 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
/s/ Bradford R. Price
--------------------------------------
La Crosse, Wisconsin Bradford R. Price
March 19, 1999 Executive Vice President and Secretary
================================================================================
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 21, 1999
---------------------
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 21, 1999, 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 1998 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, 1998, accompany this
Proxy Statement and appointment form of proxy ("proxy"), which are first being
mailed to stockholders on or about March 19, 1999.
RECORD DATE AND OUTSTANDING SHARES
Only stockholders of record at the close of business on March 3, 1999
(the "Voting Record Date") will be entitled to vote at the Annual Meeting. On
the Voting Record Date, there were 18,098,472 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.
QUORUM
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.
ABSTENTIONS AND BROKER NON-VOTES
Abstentions (i.e., shares for which authority is withheld to vote for a
matter) are included in the determination of shares present and voting for
purposes of whether a quorum exists. For the election of directors, abstentions
will have no effect on the outcome of the vote because directors are elected by
a plurality of the votes cast. For all other matters to be voted on at the
Annual Meeting, abstentions will be included in the number of shares voting on a
matter, and consequently, an abstention will have the same practical effect as a
vote against such matter.
Proxies relating to "street name" shares (i.e., shares held of record
by brokers or other third party nominees) that are voted by brokers or other
third party nominees on certain matters will be treated as shares present and
voting for purposes of determining the presence or absence of a quorum. "Broker
non-votes" (i.e., proxies submitted by brokers or third party nominees
indicating that such persons have not received instructions from the beneficial
owners or other persons entitled to vote shares as to a matter with respect to
which the brokers or third party nominees do not have discretionary power to
vote under the rules of the New York Stock Exchange) will be considered present
for the purpose of establishing a quorum, but will not be treated as shares
entitled to vote on such matters.
<PAGE> 5
ALL MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING ARE CONSIDERED
"DISCRETIONARY" PROPOSALS FOR WHICH BROKERS AND THIRD PARTY NOMINEES MAY VOTE
PROXIES NOTWITHSTANDING THE FACT THAT THEY HAVE NOT RECEIVED VOTING INSTRUCTIONS
FROM THE BENEFICIAL OWNERS OF SHARES; CONSEQUENTLY, SHARES HELD BY BROKERS OR
THIRD PARTY NOMINEES WILL BE COUNTED IF AND AS VOTED BY SUCH BROKERS AND THIRD
PARTY NOMINEES.
VOTING
Matter 1 (Election of Directors). The proxy being provided by the Board
of Directors enables a stockholder to vote for the election of the nominees
proposed by the Board, or to withhold authority to vote for the nominees being
proposed. Under the Wisconsin Business Corporation Law ("WBCL"), directors are
elected by a plurality of the votes cast with a quorum present, meaning that the
four nominees receiving the most votes will be elected directors.
Matter 2 (Amendment to Articles of Incorporation). The affirmative vote
of the holders of two-thirds of the issued and outstanding shares of Common
Stock entitled to vote at the Annual Meeting is required for the approval and
adoption of the amendment to the Company's Articles of Incorporation to increase
the authorized shares of Common Stock from 20,000,000 to 100,000,000 shares.
Matter 3 (Appointment of Ernst & Young LLP). The affirmative vote of 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
auditors for the fiscal year ending December 31, 1999.
SOLICITATION AND REVOCATION
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 directions contained
therein. Where no instructions are indicated, each proxy received will be voted:
- FOR the election of the nominees for director named in this Proxy
Statement;
- FOR approval of the amendment to the Company's Articles of
Incorporation to increase the authorized shares of Common Stock
from 20,000,000 to 100,000,000 shares;
- FOR the ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1999; and
- In accordance with the best judgment of the persons appointed as
proxies upon the transaction of such other business as may
properly come before the Annual Meeting or any adjournments or
postponements thereof.
Returning your completed proxy form will not prevent you from voting in person
at the Annual Meeting should you be present and wish to do so.
Any stockholder giving a proxy has the power to revoke it 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. If you are a stockholder whose shares are not registered in your own
name, you will need additional documentation from your record holder to vote
personally at the Annual Meeting. 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.
-2-
<PAGE> 6
The cost of solicitation of proxies by mail on behalf of the Board of
Directors will be borne by the Company. The Company has retained Regan and
Associates, Inc. ("Regan & Associates"), a professional proxy solicitation firm,
to assist in the solicitation of proxies. Regan & Associates will be paid a fee
of approximately $3,500, plus reimbursement for out-of-pocket expenses. Pursuant
to the retainer agreement with Regan & Associates, all fees to be paid to Regan
& Associates will be waived if the proposals submitted for approval at the
Annual Meeting are not approved by shareholders. Proxies also may be solicited
by personal interview or by telephone, in addition to the use of the mails by
directors, officers and regular employees of the Company and the Bank, without
additional compensation therefor. The Company also has made arrangements with
brokerage firms, banks, nominees and other fiduciaries to forward proxy
solicitation materials for shares of Common Stock held of record by the
beneficial owners of such shares. The Company will reimburse such holders for
their reasonable out-of-pocket expenses.
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 Messrs. David C. Mebane and Dale A.
Nordeen for election as directors at the Annual Meeting pursuant to such
agreement. Therefore, with the exception of the foregoing agreement relating to
the nomination of Messrs. Mebane and Nordeen, 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.
-3-
<PAGE> 7
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 DIRECTOR
NAME AGE AND PRINCIPAL OCCUPATION SINCE(1)
---- --- ------------------------ ----------
NOMINEES FOR DIRECTOR FOR
THREE-YEAR TERM EXPIRING IN 2002
<S> <C> <C> <C>
John F. Leinfelder 67 Director; President of Joseph J. Leinfelder and Sons, 1978
Inc., a steel fabricating business, located in La Crosse,
Wisconsin.
David C. Mebane 65 Director; Chairman, President, Chief Executive and 1985
Operating Officer and director of Madison Gas and
Electric Co., a publicly held utility company, located in
Madison, Wisconsin.
Dale A. Nordeen 71 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 63 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.
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Marjorie A. Davenport 70 Director; President of Gordon & Marjorie Davenport, 1976
Inc., a company which appraises and sells antique
American furniture, located in Madison, Wisconsin.
Richard T. Lommen 54 Director; President of Courtesy Corporation, a 1978
McDonald's licensee, located in La Crosse, Wisconsin.
Phillip J. Quillin 62 Director; President of Quillin's Inc., which owns and 1984
operates supermarkets and drugstores in the La Crosse,
Wisconsin area.
</TABLE>
-4-
<PAGE> 8
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
NAME AGE AND PRINCIPAL OCCUPATION SINCE (1)
---- --- ------------------------ ----------
DIRECTORS WHOSE TERMS EXPIRE IN 2001
<S> <C> <C> <C>
Henry C. Funk 73 Director; President and Treasurer of Mills Investment 1976
Corporation, an investment management company,
located in La Crosse, Wisconsin.
Patrick J. Luby 68 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 66 Director; Retired; Until December 1991, Executive Vice 1984
President of Inland Printing Co., Inc., a printing
company, located in La Crosse, Wisconsin.
</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.
-5-
<PAGE> 9
MATTER 2.
PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
GENERAL
The Board of Directors unanimously has adopted a resolution approving
and recommending to the shareholders for their approval an amendment to Article
IV of the Articles of Incorporation of the Company that would increase the
number of shares of Common Stock the Company has authority to issue from
20,000,000 to 100,000,000 shares. The full text of the proposed amendment is
attached as Appendix A to this Proxy Statement. The Board of Directors believes
that the increase in the authorized shares is necessary to ensure that the
Company will retain the flexibility to issue a substantial number of shares of
Common Stock, as dictated by corporate necessity, without the delay and expense
of further shareholder action (although the rules of NASDAQ and the WBCL would
require shareholder approval of issuances of Common Stock in certain
situations).
As of the Voting Record Date, there were 18,098,472 shares of Common
Stock outstanding and 1,332,132 shares were reserved for issuance in connection
with various stock plans. This leaves the Company with only 569,396 authorized,
but unissued or unreserved, shares of Common Stock currently available for other
corporate purposes.
HISTORICAL APPLICATION OF COMMON STOCK SHARE RESERVE
Of the 20,000,000 shares of Common Stock originally authorized for
issuance in 1989, the Company had issued 19,941,630 shares of Common Stock at
December 31, 1998. Since the Company's initial public offering in 1989, the
Company has not amended its Articles of Incorporation to increase its authorized
Common Stock. The following table illustrates the number of shares issued by the
Company from its authorized but unissued share reserve each year over the past
ten years and the types of transactions in which such shares were issued.
<TABLE>
<CAPTION>
SHARES SHARES
ISSUED OUTSTANDING
DURING AT DECEMBER 31
YEAR TYPE OF TRANSACTION THE YEAR OF EACH YEAR
- ---- ------------------- -------- --------------
<S> <C> <C> <C>
1989 Initial public offering 1,897,500 1,897,500
1991 Stock options exercised and restriced stock issued 26,585 1,924,085
1992 Stock options exercised 2,000
4-for-3 stock split 642,028
Stock options exercised and repurchase fractional shares 326 2,568,439
1993 Stock options exercised 3,517
2-for-1 split 2,571,956
Stock options exercised 18,277 5,162,189
1994 Stock options exercised and restricted stock issued 58,243
11-for-10 stock dividend 522,043
Stock options exercised and repurchase fractional shares 18,168 5,760,643
1995 Shares issued to acquire Rock Financial Corp. 747,077
Stock options exercised and restricted stock issued 104,585 6,612,305
1996 Stock options exercised 27,021 6,639,326
1997 Stock options exercised and repurchase fractional shares 7,803
3-for-2 stock split 3,323,686 9,970,815
1998 2-for-1 stock split 9,970,815 19,941,630
----------
TOTAL SHARES ISSUED AS OF DECEMBER 31, 1998.................................................. 19,941,630
==========
</TABLE>
-6-
<PAGE> 10
REASONS FOR THE PROPOSED AMENDMENT
The Board of Directors has no present plans, arrangements,
understanding or commitments with respect to the issuance of any shares of
Common Stock, other than those already reserved for issuance. The additional
shares of Common Stock that would be authorized by the proposed amendment to the
Articles of Incorporation could be used by the Company for any proper corporate
purpose approved by the Board of Directors. The availability of such additional
shares would enable the Company's Board of Directors and management, to the
extent authorized by the Board of Directors, to act with flexibility when
favorable business opportunities arise to expand and strengthen the Company's
business and prospects through the issuance of shares of Common Stock. Among
other reasons, additional shares of Common Stock could be issued for: (i)
possible acquisition transactions; (ii) capital-raising measures; (iii) stock
options and other employee benefit plans; (iv) stock dividends or splits that
help to maintain an efficient trading market in the Company's Common Stock; and
(v) other corporate purposes.
CERTAIN OTHER CONSIDERATIONS
The increase in the authorized number of shares of Common Stock
and the subsequent issuance of such shares could have the effect of delaying or
preventing a change in control of the Company without further action from the
shareholders. Shares of authorized and unissued Common Stock could (within the
limits imposed by applicable law) be issued in one or more transactions which
would make a change in control of the Company more difficult and costly, and
therefore, less likely. Any such issuance of additional stock also could have
the effect of diluting the earnings and book value per share or the stock
ownership and voting rights of shareholders of the Company, including a person
seeking to obtain control of the Company. The Company is not presently aware of
any pending or proposed transaction involving a change in control of the
Company. While authorization of additional shares may be deemed to have
potential anti-takeover effects, this proposal is not prompted by any specific
effort or perceived threat of takeover.
The proposed amendment would not alter any of the rights incident
to the ownership of shares of Common Stock or affect the terms and conditions
upon which shares of Common Stock presently may be issued. Holders of shares of
Common Stock currently have no preemptive rights to acquire any additional
securities of the Company, including any shares of Common Stock, and this will
continue to be the case if the proposed amendment is approved and adopted.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE ISSUED
AND OUTSTANDING SHARES OF COMMON STOCK IS REQUIRED FOR THE APPROVAL OF THE
PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK. UNLESS MARKED TO THE CONTRARY, THE SHARES OF
COMMON STOCK REPRESENTED BY THE ENCLOSED PROXY WILL BE VOTED FOR APPROVAL OF THE
AMENDMENT TO THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
MATTER 3.
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, 1999, and
further directed that the selection of auditors be submitted for ratification by
the stockholders at the Annual Meeting.
-7-
<PAGE> 11
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 1999.
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 one special meeting during the fiscal year ended December
31, 1998. 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,
1998.
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 1998, the members of the
Audit Committee, which met two times during the fiscal year ended December 31,
1998, 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 1998, the Stock Option Committee
consisted of Messrs. Luby (Chairman), Lommen and Rundle and Ms. Davenport. The
Stock Option Committee met three times during the fiscal year ended December 31,
1998.
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, 1998 to consider director nominees for the
Annual Meeting of Shareholders of the Company held in April 1998. In January
1999, 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 1999. 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."
-8-
<PAGE> 12
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
- ---- --- ------------------------------------------------------------------------------
<S> <C> <C>
Bradford R. Price.......... 45 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.............. 52 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............ 50 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.
Milne J. Duncan............ 50 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.
Joseph M. Konradt.......... 42 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>
-9-
<PAGE> 13
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, 1999 (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 (2).... 1,463,479 8.0%
c/o Cleary Management Corporation
301 Sky Harbour Drive
La Crosse, Wisconsin 54603
Dimensional Fund Advisors Inc. (7).................................................. 936,546 5.0
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Directors:
Marjorie A. Davenport (3)...................................................... 55,235 *
Henry C. Funk (3).............................................................. 186,926 1.0
John F. Leinfelder (3)........................................................ 105,344 *
Richard T. Lommen (3).......................................................... 267,900 1.5
Patrick J. Luby (3)............................................................ 120,556 *
David C. Mebane (3)............................................................ 48,700 *
Dale A. Nordeen (3)............................................................ 151,918 *
Phillip J. Quillin (3)......................................................... 188,238 1.0
Don P. Rundle (3).............................................................. 109,972 *
Thomas W. Schini (3) (4) (6)................................................... 834,590 4.5
Executive Officers who are not Directors:
Jack C. Rusch (3) (4) (6)...................................................... 400,859 2.2
Bradford R. Price (3) (4) (6).................................................. 392,511 2.2
Joseph M. Konradt (3) (4) (5) (6).............................................. 209,136 1.2
Robert P. Abell (3) (4) (5) (6)................................................ 170,995 *
All directors and executive officers of the Company and the Bank as a group
(16 persons) (3) (4) (5) (6)................................................... 3,469,703 18.1%
</TABLE>
* Represents less than 1% of the total number of shares of Common Stock
outstanding on the Voting Record Date.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
-10-
<PAGE> 14
(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 individual as well as by
members of such individual's immediate family who share the same household,
shares held in trust and other indirect forms of ownership over which
shares the individual effectively exercises 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
1,000,437 of the indicated shares and the Estate of Russell G. Cleary holds
82,500 of such shares. 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
42,402 shares and 35,032 shares, respectively; L. Hope Kumm, Gail K.
Cleary's mother, who possesses sole voting and dispositive power with
respect to 127,600 shares held in the Lillian Hope Kumm Trust; Megan
Coffey, Sara Coffey, William Coffey and Katherine Heise, grandchildren of
Mr. and Mrs. Cleary, who beneficially own 11,883, 11,883, 3,100 and 800
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 119,449 and 58,094 shares,
respectively; and the Roy E. Kumm Family Trust, La Crosse Trust Company,
Trustee, of which L. Hope Kumm, Gail K. Cleary, Sandra G. Cleary and
Kristine H. Cleary are beneficiaries, which possesses sole voting and
dispositive power with respect to 52,800 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 - 26,400; Mr. Funk - 26,400; Mr. Leinfelder - 17,600; Mr. Lommen
- 44,000; Mr. Luby - 8,800; Mr. Mebane - 0; Mr. Nordeen - 17,600; Mr.
Quillin - 43,996; Mr. Rundle - 8,800; Mr. Schini - 275,280; Mr. Rusch -
127,072; Mr. Price - 123,472; Mr. Konradt - 82,192 and Mr. Abell - 61,400.
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 2,197 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. Konradt - 946; and Mr. Abell - 1,251.
(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 111,553 shares were allocated to executive officers
named in the Summary Compensation Table as follows: Mr. Schini - 36,760;
Mr. Rusch - 21,826; Mr. Price - 21,403; Mr. Konradt - 15,934; and Mr. Abell
- 15,630.
(7) Based upon a Schedule 13G, dated February 12, 1998, 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 936,546 shares of Common Stock as of December
31, 1998, all of which shares are held in portfolios of four investment
companies registered under the Investment Company Act of 1940, as amended,
and certain other investment vehicles, including commingled group trusts,
of which Dimensional serves as investment adviser and 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, 1998, officers, directors and greater than ten percent
shareholders complied with all Section 16(a) filing requirements, with the
exception of: (i) Mr. Bradford R. Price, who inadvertently failed to timely file
a Form 4 with respect to the exercise of options to purchase 6,600 shares of
Common Stock in December 1998, which subsequently was reported in January 1999;
and (ii) Mr. Don P. Rundle, who inadvertently failed to timely file a Form 4
with respect to the sale of 5,000 shares of Common Stock in October 1998, which
subsequently was reported on a Form 5 in February 1999.
-11-
<PAGE> 15
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,
1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------
VALUE OF NUMBER
ANNUAL COMPENSATION (3) 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................. 1998 $333,333 $171,936 $669,042 76,800 $17,501
Chairman, President and 1997 317,417 135,768 -- -- 19,457
and Chief Executive 1996 302,083 70,796 -- -- 18,057
Officer
Jack C. Rusch.................... 1998 $159,600 $ 68,051 $263,257 31,200 $ 7,509
Executive Vice President, 1997 150,667 51,542 -- -- 7,328
Treasurer and 1996 141,917 25,277 -- -- 6,890
Chief Financial Officer
Bradford R. Price................ 1998 $159,600 $ 68,051 $263,257 31,200 $ 6,443
Executive Vice President 1997 150,667 51,542 -- -- 6,434
and Secretary 1996 141,917 25,277 -- -- 6,034
Joseph M. Konradt................ 1998 $150,312 $ 63,142 $235,772 28,800 $ 6,301
Senior Vice President 1997 136,458 46,900 -- -- 6,237
1996 121,668 21,914 -- -- 5,601
Robert P. Abell.................. 1998 $123,135 $ 37,952 $160,121 19,800 $ 6,352
Senior Vice President 1997 112,467 28,899 -- -- 5,758
1996 104,317 13,937 -- -- 4,921
</TABLE>
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
-12-
<PAGE> 16
(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, 1996, 1997 and 1998, 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 awarded pursuant to the terms of the Company's long-term stock
incentive plans during the fiscal year ended December 31, 1998 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. The amounts indicated for fiscal 1998
represent:
- The aggregate value of restricted stock contingently awarded
pursuant to the 1998-2000 long-term incentive plan, assuming
the Company achieves the average ROE target for 1998-2000, and
awarded shares as follows: (i) Mr. Schini - 25,600 shares;
(ii) Mr. Rusch - 10,400 shares; (iii) Mr. Price - 10,400
shares; (iv) Mr. Konradt - 9,600 shares; and (v) Mr. Abell -
6,600 shares; and
- The aggregate value of additional shares of restricted stock
awarded pursuant to the 1995-1997 long-term incentive plan in
fiscal 1998, based upon the Company exceeding plan performance
targets for the 1995-1997 period, and awarded shares as
follows: (i) Mr. Schini - 17,764 shares; (ii) Mr. Rusch -
6,696 shares; (iii) Mr. Price - 6,696 shares; (iv) Mr. Konradt
- 5,740 shares; and (v) Mr. Abell - 3,826 shares.
Restricted stock awarded for the 1995-1997 period vests at the rate of
50% on January 1, 1999 and 2000. Restricted stock awarded for the
1998-2000 period will vest at the rate of 50% on January 1, 2002 and
January 1, 2003, provided the applicable plan performance criteria are
satisfied for the 1998-2000 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 1998 to reflect the
Company's 2-for-1 stock split in June 1998.
(5) At December 31, 1998, the aggregate value of restricted (unvested) stock
holdings by Messrs. Schini, Rusch, Price, Konradt and Abell was
$1,348,711, $520,660, $520,660, $457,518 and $308,276, respectively,
based on a total of 82,364, 31,796, 31,796, 27,940 and 18,826 shares
awarded in fiscal 1998, respectively (adjusted for the 2-for-1 stock
split in June 1998), and the closing market price of the Company's Common
Stock on that date ($16.375 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, 1998. 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 1998 to reflect the
Company's 2-for-1 stock split in June 1998. 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, 1996,
1997 and 1998. The amounts shown for each individual for the fiscal year
ended December 31, 1998 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 $954 - 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
$946 - 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 $552 - disability premium; (iv) Mr. Konradt -$2,400 -
matching contribution under the 401(k) Plan; $2,400 - ESOP contribution;
$1,100 - Life Bonus Plan payment; and $401 disability premium; and (v)
Mr. Abell - $2,400 - matching contribution under the 401(k) Plan; $2,400
- ESOP contribution; $956 - Life bonus Plan payment; and $596 -
disability premium.
-13-
<PAGE> 17
STOCK OPTIONS
As of December 31, 1998, the Company and its subsidiaries had 929
officers and employees eligible to participate in the Company's current stock
option and incentive plans, which include the First Federal Capital Corp. 1989
Stock Incentive Plan, the First Federal Capital Corp. 1992 Stock Incentive Plan,
the First Federal Capital Corp. 1992 Stock Option and Incentive Plan (f/k/a the
Rock Financial Corp. 1992 Stock Option and Incentive Plan) and the First Federal
Capital Corp. 1997 Stock Option and Incentive Plan (collectively, the "Stock
Option and Incentive Plans"). As of December 31, 1998, 3,148,184 shares of
Common Stock had been granted under the Stock Option and Incentive Plans (either
in the form of option grants or restricted stock awards) and a total of
1,335,132 shares of Common Stock were available for granting.
The following table sets forth certain information concerning
individual grants of stock options to the executive officers named in the
Summary Compensation Table under the Stock Option and Incentive Plans during the
fiscal year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------------------------------------------
POTENTIAL
% OF TOTAL REALIZABLE VALUE AT
OPTIONS PER SHARE ASSUMED ANNUAL RATES OF
GRANTED TO EXERCISE STOCK PRICE APPRECIATION(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(1) FISCAL YEAR(2) ($/SH)(1) DATE 5% 10%
------ ---------- -------------- ----------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Schini.................... 76,800 24.9% $14.75 1/27/08 $712,704 $1,805,568
Jack C. Rusch....................... 31,200 10.1 14.75 1/27/08 289,536 733,512
Bradford R. Price................... 31,200 10.1 14.75 1/27/08 289,536 733,536
Joseph M. Konradt................... 28,800 9.3 14.75 1/27/08 267,264 677,088
Robert P. Abell..................... 19,800 6.4 14.75 1/27/08 183,744 465,498
</TABLE>
- ----------
(1) The options granted are subject to a vesting schedule under the stock
option plans and are exercisable as follows: (i) Mr. Schini -25,600 -
(1/27/99); 25,600 - (1/27/00); 25,600 - (1/27/01); (ii) Mr. Rusch -
10,400 - (1/27/99); 10,400 - (1/27/00); 10,400 - (1/27/01); (iii) Mr.
Price - 10,400 - (1/27/99); 10,400 - (1/27/00); 10,400 - (1/27/01); (iv)
Mr. Konradt - 9,600 - (1/27/99); 9,600 - (1/27/00); 9,600 - (1/27/01);
and (v) Mr. Abell - 6,600 - (1/27/99); 6,600 - (1/27/00); 6,600 -
(1/27/01). Pursuant to the terms of the plan under which the options were
granted, the number of shares subject to the options granted and the
exercise price of the options were adjusted in fiscal 1998 to reflect the
Company's 2-for-1 stock split in June 1998.
(2) Options to purchase 309,000 shares of Common Stock were granted to
eligible participants under the Company's stock option plans during the
fiscal year ended December 31, 1998.
(3) Amount shown represents the potential realizable value, net of the option
exercise price, assuming that the underlying market price of the Common
Stock appreciates in value from the date of grant to the end of the
option term at annualized rates of 5% and 10%. These amounts represent
certain assumed rates of appreciation only. Actual gains, if any, on
stock option exercises are dependent upon the future performance of the
Common Stock and overall stock market conditions. There can be no
assurance that the amounts reflected in this table will be achieved.
-14-
<PAGE> 18
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, 1998, and the value of their unexercised
stock options at December 31, 1998.
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........... 75,502 $ 832,470 329,298 76,800 $ 4,280,531 $ 124,800
Jack C. Rusch.............. 35,000 448,293 153,074 31,200 2,069,194 50,700
Bradford R. Price.......... 41,600 520,634 150,074 31,200 2,006,056 50,700
Joseph M. Konradt.......... 24,000 299,488 109,392 28,800 1,454,867 46,800
Robert P. Abell ........... 9,000 235,216 85,980 19,800 1,146,364 32,175
</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 ($16.375) (which was the
closing price on December 31, 1998) and the exercise price of the options
at December 31, 1998.
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 $130,000. At
December 31, 1998, Messrs. Schini, Rusch, Price, Konradt and Abell had 39.5,
14.7, 18.8, 17.6 and 11.1 years of credited service, respectively, under the
Pension Plan.
-15-
<PAGE> 19
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, Price and Konradt. The
Supplemental Plan provides that Messrs. Schini, Rusch, Price and Konradt 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 1998) and the maximum
annual compensation limitation in Section 401(a)(17) of the Internal Revenue
Code ($160,000 for 1998). 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,
Price and Konradt amounted to an annual benefit at age 65 of $123,855, $32,532,
$32,918 and 25,926, respectively, with respect to the Pension Plan and a lump
sum benefit of $222,332, $4,636, $4,691 and $2,583, respectively, with respect
to the 401(k) Plan and the ESOP at December 31, 1998.
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 in fiscal 1998 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.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
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 $23,000
80,000...................................... 13,000 20,000 26,000 33,000
100,000...................................... 17,000 25,000 33,000 42,000
120,000...................................... 20,000 31,000 41,000 51,000
140,000...................................... 24,000 36,000 48,000 60,000
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>
-16-
<PAGE> 20
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 $336,000, $161,100,
$161,100, $120,800 and $150,000, respectively. Messrs. Schini, Price and Rusch's
employment agreements initially extended for three years, Mr. Konradt's
employment agreement initially extended for two years (but was amended in 1998
to a three-year term) and Mr. Abell's employment agreement 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
1998, 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.
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
1998, severance pay in the event of a Change in Control would amount to
$1,008,000, $483,300, $483,300, $241,600 and $450,000 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.
-17-
<PAGE> 21
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, 1998, 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 8,800 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.
-18-
<PAGE> 22
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 1998, the average increase in base salary for
the four highest paid executive officers (other than the CEO) was 6.5%. 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 1998 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 1998, 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,
-19-
<PAGE> 23
of the peer group. 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 1998, the Company is projected to achieve financial
performance objectives that exceed the 80th percentile for ROA and the 80th
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 1998 representing part of the ROA and ROE
components of their 1998 bonus award. The balance of the 1998 incentive cash
bonus will be paid in fiscal 1999 when final peer data is available. The average
bonus earned under the Annual Bonus Plan in fiscal 1998 by the four highest paid
executive officers at year-end (other than the CEO) was 40.0% of their base
salaries compared to 32.0% in fiscal 1997.
LONG-TERM AWARD PLAN: 1998 - 2000 PLAN PERIOD
In fiscal 1998, the Board of Directors of the Company reviewed and
approved the terms of the First Federal Capital Corporation Long-Term
Performance Award Plan (1998-2000) (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.
In fiscal 1998, pursuant to the Long-Term Award Plan (1998-2000),
options to acquire 204,000 shares of Common Stock (adjusted for the June 1998
2-for-1 stock split) were granted to executive officers of the Company
(including the CEO), and 68,000 shares of restricted stock (adjusted for the
June 1998 2-for-1 stock split) were contingently awarded to such executive
officers, subject to the Company achieving the above-noted benchmark ROE
-20-
<PAGE> 24
performance during the 1998-2000 plan period. At the end of the 1998-2000
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 (1998-2000). The balance of such additional
awards, if any, will be made in fiscal 2001 when final peer data is received.
The restricted stock awards when finalized for the 1998-2000 plan period will be
subject to a two-year vesting period with 50% of the award vesting on January 1
of each year in 2002 and 2003. 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.
LONG-TERM AWARD PLAN: 1995-1997 PLAN PERIOD
In fiscal 1995, pursuant to the Long-Term Award Plan (1995-1997),
options to acquire 289,800 shares of Common Stock (adjusted for the June 1997
3-for-2 stock split and the June 1998 2-for-1 stock split) were granted to
executive officers of the Company (including the CEO), and 96,600 shares of
restricted stock (adjusted for the June 1997 3-for-2 stock split and the June
1998 2-for-1 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 publicly traded thrifts
peer group.
For the 1995-1997 plan period, relative to the peer group of publicly
traded thrifts, the Company achieved an average ROE percentile ranking of 89%,
exceeding the 75th percentile performance. Therefore, in fiscal 1998, additional
restricted stock awards for 26,238 shares of Common Stock were made to executive
officers of the Company (other than the CEO) as final payment under the
Company's long-term performance award plan for the 1995-1997 plan period. All
restricted stock awards for the 1995-1997 plan period are subject to a two-year
vesting period with 50% of the award vesting on January 1 of each year in 1999
and 2000.
Shares of restricted stock and stock options granted pursuant to the
Company's long-term award plans 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 1998
consisted of a competitively determined base salary as well as the payment of a
cash incentive bonus based upon the Company's 1997 and 1998 financial
performance. Mr. Schini's base salary was increased 5.0% over 1997 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 1998, a cash incentive bonus of $171,936 was paid to Mr.
Schini which represented a portion of his 1998 bonus as well as the balance of
his 1997 bonus under the Company's Annual Bonus Plan. The 1997 cash bonus
reflected the Company's financial performance relative to its peer group which
data was at the 79th percentile for ROA and the 93rd percentile for ROE. The
Company achieved a ROA of 1.13% and a ROE of 17.20% for fiscal 1997, which
resulted in a final payment to Mr. Schini in fiscal 1998 representing a portion
of the ROA and ROE components of his bonus. For fiscal 1998, the Company is
projected to achieve financial
-21-
<PAGE> 25
performance objectives that exceed the 80th percentile for ROA and the 80th
percentile for ROE. The balance of Mr. Schini's 1998 incentive cash bonus will
be paid to him in 1999 when final peer data is received. Incentive cash
compensation paid in 1998 was 52.0% of base compensation compared to 42.0% of
base compensation in 1997.
In fiscal 1998, Mr. Schini was awarded 17,764 shares of Common Stock as
final payment under the Company's long-term performance award plan for the
1995-1997 plan period. As noted above, relative to a peer group of all publicly
traded thrift institutions, the Company achieved an average ROE percentile
ranking of 89% for the 1995-1997 plan period, exceeding the target 75th
percentile performance. The award is subject to a two-year vesting period with
50% of the award vesting on January 1 of each year in 1999 and 2000.
During fiscal 1998, Mr. Schini was granted options to acquire 76,800
shares of Common Stock and was awarded 25,600 shares of restricted stock
pursuant to the Company's Long-Term Award Plan (1998-2000). The options vest at
the rate of 331/3% over a three-year period from the date of grant. The
restricted stock will vest at the rate of 50% on January 1, 2002 and 2003,
provided the applicable plan performance criteria are satisfied for the
1998-2000 plan period.
MARJORIE A. DAVENPORT
RICHARD T. LOMMEN
PATRICK J. LUBY
DON P. RUNDLE
-22-
<PAGE> 26
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 01/20/1999 including data to 12/31/1998
[LINE GRAPH]
<TABLE>
<CAPTION>
CRSP Total Returns Index for: 12/1993 12/1994 12/1995 12/1996 12/1997 12/1998
- ---------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
First Federal Capital Corp. 100.0 113.4 129.9 164,5 378.5 378.8
Nasdaq Stock Market (U.S. companies) 100.0 97.8 138.3 170.0 208.6 293.2
Nasdaq Bank Stocks 100.0 99.6 148.4 195.9 328.0 324.9
SIC 6020-6029, 6710-6719 US & Foreign
</TABLE>
NOTES:
A. The lines represent monthly index levels 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
only.
D. The index level for all series was set to $100.0 on 12/31/1993.
-23-
<PAGE> 27
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 1998, 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, 1998, the Bank had eleven loans to directors and executive officers of the
Company and the Bank and their affiliates which amounted to $968,352 or less
than 1.0% 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 2000 ANNUAL MEETING
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR INCLUSION IN 2000 PROXY
MATERIALS
To be considered for inclusion in the proxy statement relating to the
Annual Meeting (for fiscal year ended December 31, 1999) to be held in April
2000, stockholder proposals must be received at the principal executive offices
of the Company at 605 State Street, La Crosse, Wisconsin 54601, Attention:
Bradford R. Price, Executive Vice President and Secretary, no later than
November 21, 1999. If such proposal is in compliance with all of the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), it will be included in the proxy statement and set forth
on the appointment form of proxy issued for such annual meeting of stockholders.
It is urged that any such proposals be sent certified mail, return receipt
requested. Nothing in this section shall be deemed to require the Company to
include in its proxy statement and proxy relating to the 1999 Annual Meeting any
stockholder proposal which does not meet all of the requirements for inclusion
established by the SEC in effect at the time such proposal is received.
ADVANCE NOTICE REQUIREMENT FOR ANY PROPOSAL OR NOMINATION TO BE RAISED BY A
STOCKHOLDER
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.
-24-
<PAGE> 28
DISCRETIONARY VOTING OF 2000 PROXIES
Effective June 29, 1998, the SEC amended Rule 14a-4(c) under the
Exchange Act which governs a company's use of discretionary proxy voting
authority with respect to stockholder proposals that are not being included in a
company's proxy solicitation materials pursuant to Rule 14a-8 of the Exchange
Act. New Rule 14a- 4(c)(1) provides that if a stockholder fails to notify the
Company of such proposal by January 20, 2000, then the management proxies named
in the form of proxy distributed in connection with the Company's proxy
statement would be allowed to use their discretionary voting authority to
address the proposal submitted by the stockholder, without discussion of the
proposal in the proxy statement.
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
/s/ Bradford R. Price
--------------------------------------
La Crosse, Wisconsin Bradford R. Price
March 19, 1999 Executive Vice President and Secretary
-25-
<PAGE> 29
APPENDIX A
PROPOSED AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION
The first paragraph of Article IV of the Articles of Incorporation of
the Company, providing for the authorization of 25,000,000 shares, consisting of
5,000,000 shares of preferred stock, $0.10 par value per share, and 20,000,000
shares of common stock, $0.10 par value per share, will be eliminated and
replaced in its entirety by the following new paragraph of Article IV, assuming
receipt of shareholder approval of Matter 2:
"Capital Stock. The total number of shares of capital stock
which the Corporation has authority to issue is 105,000,000,
of which 5,000,000 shall be serial preferred stock, $.10 par
value per share (hereinafter the "Preferred Stock"), and of
which 100,000,000 shall be common stock, par value $.10 per
share (hereinafter "Common Stock"). Except to the extent
required by governing law, rule or regulation, the shares of
capital stock may be issued from time to time by the Board of
Directors without further approval of the stockholders of the
Corporation."
-26-
<PAGE> 30
FIRST FEDERAL CAPITAL CORP
A Federal Savings Bank Holding Company
- --------------------------------------------------------------------------------
FIRST FEDERAL CAPITAL CORP.
ANNUAL MEETING OF STOCKHOLDERS REVOCABLE PROXY
- --------------------------------------------------------------------------------
The undersigned hereby instructs Firstar Trust Company, the Trustee of the
Trust created pursuant to the Savings Investment Plan ("SIP") of First Federal
Savings Bank LaCrosse-Madison, to vote the shares of common stock, $0.010 par
value per share ("Common Stock") of First Federal Capital Corp. (the "Company")
which were allocated to my account as of March 3, 1999 under the SIP upon the
following proposals to be presented at the Annual Meeting of Stockholders of the
Company on April 21, 1999, at 10:30 a.m., Central Time, or any adjournments or
postponements thereof.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE
NOMINEES FOR DIRECTOR AND FOR THE PROPOSALS SPECIFIED IN ITEMS 2 AND 3. SUCH
VOTES ARE HEREBY SOLICITED BY THE BOARD OF DIRECTORS.
(Continued, and to be signed and dated, on the reverse side)
<PAGE> 31
FIRST FEDERAL CAPITAL CORP
A Federal Savings Bank Holding Company
Please detach here
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS
Nominees for three-year term expiring in 2002: [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
01 John F. Leinfelder 03 Dale A. Nordeen below (except as marked to vote for all nominees
02 David C. Mebane 04 Thomas W. Schini to the contrary below) listed below
-----------------------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
-----------------------------------------------------
2. TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION to increase the number of authorized shares of the Company's
common stock from 20,000,000 to 100,000,000 shares. [ ] For [ ] Against [ ] Abstain
3. PROPOSAL TO RATIFY the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999. [ ] For [ ] Against [ ] Abstain
4. 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.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below: Date: , 1999
----------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
Signature(s) in Box
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 Proposals 2 and 3.
</TABLE>
<PAGE> 32
FIRST FEDERAL CAPITAL CORP
A Federal Savings Bank Holding Company
- --------------------------------------------------------------------------------
FIRST FEDERAL CAPITAL CORP. REVOCABLE PROXY
- --------------------------------------------------------------------------------
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 21, 1999, AND AT ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF.
The undersigned hereby appoints Bradford R. Price and Jack 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 3, 1999 at the Annual Meeting of
Stockholders to be held at the Radisson Hotel, 200 Harborview Plaza, La Crosse,
Wisconsin, on Wednesday, April 21, 1999, at 10:30 a.m., Central Time, 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 PROPOSALS SPECIFIED IN
ITEMS 2 AND 3 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.
(Continued, and to be signed and dated, on the reverse side)
<PAGE> 33
FIRST FEDERAL CAPITAL CORP
A Federal Savings Bank Holding Company
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
Please detach here
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS
Nominees for three-year term expiring in 2002: [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
01 John F. Leinfelder 03 Dale A. Nordeen below (except as marked to vote for all nominees
02 David C. Mebane 04 Thomas W. Schini to the contrary below) listed below
-----------------------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) OF THE BOX PROVIDED TO THE RIGHT.)
-----------------------------------------------------
2. TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION to increase the number of authorized shares of the Company's
common stock from 20,000,000 to 100,000,000 shares. [ ] For [ ] Against [ ] Abstain
3. PROPOSAL TO RATIFY the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999. [ ] For [ ] Against [ ] Abstain
4. 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.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below: Date: , 1999
----------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
Signature(s) in Box
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.
</TABLE>
<PAGE> 34
FIRST FEDERAL CAPITAL CORP
A Federal Savings Bank Holding Company
- --------------------------------------------------------------------------------
FIRST FEDERAL CAPITAL CORP.
ANNUAL MEETING OF STOCKHOLDERS REVOCABLE PROXY
- --------------------------------------------------------------------------------
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 3, 1999 under the ESOP upon the following proposals to be
presented at the Annual Meeting of Stockholders of the Company on April 21,
1999, at 10:30 a.m., Central Time, or any adjournments or postponements thereof.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE
NOMINEES FOR DIRECTOR AND FOR THE PROPOSALS SPECIFIED IN ITEMS 2 AND 3. SUCH
VOTES ARE HEREBY SOLICITED BY THE BOARD OF DIRECTORS.
(Continued, and to be signed and dated, on the reverse side)
<PAGE> 35
FIRST FEDERAL CAPITAL CORP
A Federal Savings Bank Holding Company
Please detach here
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS
Nominees for three-year term expiring in 2002: [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
01 John F. Leinfelder 03 Dale A. Nordeen below (except as marked to vote for all nominees
02 David C. Mabane 04 Thomas W. Schini to the contrary below) listed below
-----------------------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
-----------------------------------------------------
2. TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION to increase the number of authorized shares of the Company's
common stock from 20,000,000 to 100,000,000 shares. [ ] For [ ] Against [ ] Abstain
3. PROPOSAL TO RATIFY the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999. [ ] For [ ] Against [ ] Abstain
4. 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.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below: Date: , 1999
----------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
Signature(s) in Box
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 Proposals 2 and 3. If you
do not return this card, shares will be voted by the
Trustee.
</TABLE>
