<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended.....................................JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.......................to.........................
Commission file number...................................................0-18046
FIRST FEDERAL CAPITAL CORP
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1651288
(State or other jurisdiction of (IRS employer
incorporation or organization) identification)
605 STATE STREET 54601
LA CROSSE, WISCONSIN (Zip code)
(Address of principal executive office)
Registrant's telephone number, including area code: (608) 784-8000
NOT APPLICABLE
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period as the Registrant has
been subject to such requirements), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: COMMON STOCK--$.10 PAR VALUE. Outstanding as of August 4, 2000:
18,298,727 (EXCLUDES 1,642,903 SHARES HELD AS TREASURY STOCK).
<PAGE> 2
FORM 10-Q TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1--Financial Statements ..................................................................2
Item 2--Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................12
Item 3--Quantitative and Qualitative Disclosures about Market Risk............................21
PART II OTHER INFORMATION
Item 1--Legal Proceedings.....................................................................22
Item 2--Changes in Securities.................................................................22
Item 3--Defaults Upon Senior Securities.......................................................22
Item 4--Submission of Matters to Vote of Security Holders.....................................22
Item 5--Other Information.....................................................................22
Item 6--Exhibits and Reports on Form 8-K......................................................22
SIGNATURES..........................................................................................23
</TABLE>
1
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000, and December 31, 1999
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
ASSETS (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $54,405,783 $65,566,021
Interest-bearing deposits with banks 5,169,062 17,790,262
Investment securities available for sale, at fair value 782,578 872,844
Mortgage-backed and related securities:
Available for sale, at fair value 227,181,439 252,165,351
Held for investment, at cost (fair value of $86,976,511 and $101,068,308,
respectively) 89,548,462 103,932,229
Loans held for sale 6,793,545 6,345,624
Loans held for investment, net 1,757,476,803 1,538,594,590
Federal Home Loan Bank stock 24,592,800 22,511,300
Accrued interest receivable, net 17,829,169 15,420,837
Office properties and equipment 25,394,329 24,620,596
Mortgage servicing rights, net 22,658,072 21,727,981
Intangible assets 11,954,632 12,463,373
Other assets 2,274,190 2,543,147
-------------------------------------------------------------------------------------------------------------------
Total assets $2,246,060,864 $2,084,554,155
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposit liabilities $1,620,707,025 $1,471,259,473
Federal funds purchased 20,000,000 20,000,000
Securities sold under agreements to repurchase 75,000,000 -
Federal Home Loan Bank advances 368,635,000 444,333,000
Other borrowings 7,297,767 5,246,701
Advance payments by borrowers for taxes and insurance 8,900,958 5,407,816
Accrued interest payable 3,029,497 2,516,280
Other liabilities 9,409,924 8,515,659
-------------------------------------------------------------------------------------------------------------------
Total liabilities 2,112,980,171 1,957,278,929
-------------------------------------------------------------------------------------------------------------------
Preferred stock, $.10 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $.10 par value, 100,000,000 shares authorized, 19,941,630 shares
issued and outstanding, including 1,644,903 and 1,538,235 shares of treasury
stock, respectively 1,994,163 1,994,163
Additional paid-in capital 34,540,064 34,540,064
Retained earnings 114,176,246 106,929,097
Treasury stock, at cost (15,662,698) (14,388,670)
Unearned restricted stock (230,758) (591,183)
Non-owner adjustments to equity, net (1,736,324) (1,208,245)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 133,080,693 127,275,226
-------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,246,060,864 $2,084,554,155
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-------------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest on loans $33,134,873 $25,072,729
Interest on mortgage-backed and related securities 5,547,808 6,068,609
Interest and dividends on investments 556,243 439,256
-------------------------------------------------------------------------------------------------------------------
Total interest income 39,238,924 31,580,594
-------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 17,313,220 14,696,783
Interest on FHLB advances and all other borrowings 6,926,436 3,425,329
-------------------------------------------------------------------------------------------------------------------
Total interest expense 24,239,656 18,122,112
-------------------------------------------------------------------------------------------------------------------
Net interest income 14,999,268 13,458,482
Provision for loan losses 111,775 77,409
-------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 14,887,493 13,381,073
-------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 5,563,606 5,109,768
Loan servicing fees, net 997,259 968,317
Premiums and commissions on annuity and insurance sales 649,674 590,087
Gain on sales of loans 506,031 2,040,665
Other income 750,170 680,144
-------------------------------------------------------------------------------------------------------------------
Total non-interest income 8,466,740 9,388,981
-------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 8,941,739 7,529,480
Occupancy and equipment 2,018,739 1,796,793
Communications, postage, and supplies 990,257 949,085
ATM and debit card expense 722,820 694,974
Advertising and marketing 569,188 567,819
Amortization of intangibles 256,815 257,943
Other expenses 1,065,133 1,388,028
-------------------------------------------------------------------------------------------------------------------
Total non-interest expense 14,564,691 13,184,122
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,789,542 9,585,932
Income tax expense 3,124,173 3,419,849
-------------------------------------------------------------------------------------------------------------------
Net income $5,665,369 $6,166,083
-------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
-------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.30 $0.32
Basic earnings per share 0.31 0.34
Dividends paid per share 0.11 0.09
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest on loans $63,790,561 $48,989,080
Interest on mortgage-backed and related securities 11,395,822 11,744,863
Interest and dividends on investments 1,131,816 1,579,250
-------------------------------------------------------------------------------------------------------------------
Total interest income 76,318,199 62,313,193
-------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 32,968,992 30,371,973
Interest on FHLB advances and all other borrowings 13,611,825 6,253,578
-------------------------------------------------------------------------------------------------------------------
Total interest expense 46,580,817 36,625,551
-------------------------------------------------------------------------------------------------------------------
Net interest income 29,737,382 25,687,642
Provision for loan losses 304,246 232,928
-------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 29,433,136 25,454,714
-------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 10,618,233 9,265,552
Loan servicing fees, net 1,999,307 959,357
Premiums and commissions on annuity and insurance sales 1,350,292 1,355,870
Gain on sales of loans 795,585 5,630,878
Other income 1,248,550 1,246,166
-------------------------------------------------------------------------------------------------------------------
Total non-interest income 16,011,967 18,457,823
-------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 17,352,643 15,137,148
Occupancy and equipment 3,905,892 3,754,558
Communications, postage, and supplies 2,043,282 1,949,734
ATM and debit card expense 1,429,709 1,329,713
Advertising and marketing 1,112,165 1,108,525
Amortization of intangibles 513,630 515,887
Other expenses 2,137,391 2,825,858
-------------------------------------------------------------------------------------------------------------------
Total non-interest expense 28,494,712 26,621,423
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,950,391 17,291,114
Income tax expense 6,022,633 6,114,049
-------------------------------------------------------------------------------------------------------------------
Net income $10,927,758 $11,177,065
-------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
-------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.59 $0.58
Basic earnings per share 0.60 0.61
Dividends paid per share 0.20 0.16
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
COMMON
STOCK AND
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 $36,534,228 $98,391,434 ($16,470,424) ($1,090,145) $2,162,220 $119,527,313
--------------
Net income 6,166,083 6,166,083
Securities valuation
adjustment, net of income taxes (1,660,169) (1,660,169)
--------------
Net income and non-owner
adjustments to equity 4,505,913
--------------
Dividends paid (1,632,500) (1,632,500)
Exercise of stock options (3,580,235) 9,395,746 5,815,511
Amortization of restricted
stock 166,421 166,421
-------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $36,534,228 $99,344,782 ($7,074,678) ($923,724) $502,051 $128,382,659
-------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $36,534,227 $110,578,540 ($15,936,683) ($360,537) ($1,615,570) $129,199,977
--------------
Net income 5,665,369 5,665,369
Securities valuation
adjustment, net of income taxes (120,754) (120,754)
--------------
Net income and non-owner
adjustments to equity 5,544,615
--------------
Dividends paid (2,015,225) (2,015,225)
Exercise of stock options (187,163) 273,985 86,822
Amortization of restricted
stock 134,725 129,779 264,504
-------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $36,534,227 $114,176,246 ($15,662,698) ($230,758) ($1,736,324) $133,080,693
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
COMMON
STOCK AND
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $36,534,228 $97,291,806 ($12,722,834) ($1,256,266) $2,837,713 $122,684,647
--------------
Net income 11,177,065 11,177,065
Securities valuation
adjustment, net of income taxes (2,335,662) (2,335,662)
--------------
Net income and non-owner
adjustments to equity 8,841,403
--------------
Dividends paid (2,902,687) (2,902,687)
Exercise of stock options (6,221,402) 13,613,811 7,392,409
Purchase of treasury stock (7,965,655) (7,965,655)
Amortization of restricted
stock 332,542 332,542
--------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $36,534,228 $99,344,782 ($7,074,678) ($923,724) $502,051 $128,382,659
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
UNAUDITED
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $36,534,227 $106,929,097 ($14,388,670) ($591,183) ($1,208,245) $127,275,226
--------------
Net income 10,927,758 10,927,758
Securities valuation
adjustment, net of income taxes (528,079) (528,079)
--------------
Net income and non-owner
adjustments to equity 10,399,679
--------------
Dividends paid (3,665,437) (3,665,437)
Exercise of stock options (132,047) 434,635 302,588
Purchase of treasury stock (1,708,663) (1,708,663)
Amortization of restricted
stock 116,875 360,425 477,300
--------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $36,534,227 $114,176,246 ($15,662,698) ($230,758) ($1,736,324) $133,080,693
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-------------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $5,665,369 $6,166,083
Adjustments to reconcile net income to net cash provided (used) by
operations:
Provision for loan and real estate losses (recoveries) 151,613 (12,033)
Net loan costs deferred (332,550) (126,057)
Amortization (including mortgage servicing rights) 1,236,160 1,600,322
Depreciation 640,314 620,974
Gains on sales of loans and other investments (506,031) (2,040,665)
Increase in accrued interest receivable (1,057,152) (483,491)
Increase in accrued interest payable 155,855 11,808
Increase (decrease) in current and deferred income taxes (2,273,327) 764,476
Other accruals and prepaids, net 424,886 438,363
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan originations and sales 4,105,137 6,939,780
Loans originated for sale (27,806,503) (106,403,677)
Sales of loans originated for sale 26,981,787 99,395,772
-------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations 3,280,421 (68,125)
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in interest-bearing deposits with banks 7,461,872 23,996,017
Purchases of mortgage-backed and related securities available for sale - (60,503,884)
Principal payments on mortgage-backed and related securities available for
sale 12,245,741 22,180,706
Principal payments on mortgage-backed and related securities held for
investment 6,753,221 15,062,531
Loans originated for investment (211,414,011) (133,188,269)
Loans purchased for investment (3,075,000) (31,229,916)
Loan principal repayments 96,440,744 96,730,607
Sales of loans originated for investment 2,025,173 4,089,886
Sales of real estate 653,572 629,545
Additions to office properties and equipment (1,288,306) (109,480)
Purchases of mortgage servicing rights (1,865,307) -
Other, net (1,575,936) (2,543,620)
-------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (93,638,237) (64,885,877)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposit liabilities 105,599,243 13,981,335
Repayment of long-term Federal Home Loan Bank advances (12,500,000) -
Net increase in short-term Federal Home Loan Bank borrowings 8,850,000 44,626,000
Decrease in other borrowings (1,401,711) (1,451,565)
Increase in advance payments by borrowers for taxes and insurance 4,390,659 2,758,386
Proceeds from sale of common stock - 2,726,251
Dividends paid (2,015,225) (1,632,500)
Other, net 136,300 1,775,095
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 103,059,266 62,783,002
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 12,701,450 (2,171,000)
Cash and due from banks at beginning of period 41,704,333 30,245,422
-------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $54,405,783 $28,074,422
-------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $38,181,772 $31,097,103
Interest paid on deposits and borrowings 24,083,801 18,110,304
Income taxes paid 5,377,500 2,650,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $10,927,758 $11,177,065
Adjustments to reconcile net income to net cash provided (used) by
operations:
Provision for loan and real estate losses 343,592 141,053
Net loan costs deferred (553,962) (316,741)
Amortization (including mortgage servicing rights) 2,621,475 4,046,589
Depreciation 1,259,564 1,248,190
Gains on sales of loans and other investments (795,585) (5,630,878)
Increase in accrued interest receivable (2,408,332) (1,547,031)
Increase in accrued interest payable 513,217 86,150
Increase (decrease) in current and deferred income taxes (29,314) 2,980,298
Other accruals and prepaids, net (37,169) 666,372
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan originations and sales 11,841,244 12,851,067
Loans originated for sale (46,766,627) (217,326,668)
Sales of loans originated for sale 45,894,804 249,258,136
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 10,969,421 44,782,535
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in interest-bearing deposits with banks 12,621,200 86,688,005
Purchases of investment securities - (941,254)
Maturities of investment securities 100,000 -
Purchases of mortgage-backed and related securities available for sale - (109,817,038)
Purchases of mortgage-backed and related securities held for investment - (51,163,258)
Principal payments on mortgage-backed and related securities available for
sale 24,366,500 51,294,971
Principal payments on mortgage-backed and related securities held for
investment 14,348,356 31,061,775
Loans originated for investment (376,684,411) (282,307,191)
Loans purchased for investment (16,125,836) (87,653,795)
Loan principal repayments 170,366,591 207,236,532
Sales of loans originated for investment 3,537,181 21,525,995
Sales of real estate 893,346 1,084,545
Additions to office properties and equipment (2,192,025) (844,547)
Purchases of mortgage servicing rights (1,865,307) -
Other, net (1,850,689) (1,433,985)
-------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (172,485,094) (135,269,245)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposit liabilities 149,447,552 (14,415,736)
Long-term advances from Federal Home Loan Bank 100,000,000 42,000,000
Repayment of long-term Federal Home Loan Bank advances (20,250,000) (4,915,000)
Net increase (decrease) in short-term Federal Home Loan Bank borrowings (155,448,000) 49,026,000
Net increase in securities sold under agreements to repurchase 75,000,000 -
Increase in other borrowings 2,051,066 4,246,356
Increase in advance payments by borrowers for taxes and insurance 3,493,142 4,026,699
Proceeds from sale of common stock 28,127 3,290,459
Purchase of treasury stock (1,708,663) (7,965,655)
Dividends paid (3,665,437) (2,902,687)
Other, net 1,407,648 2,527,991
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 150,355,435 74,918,427
-------------------------------------------------------------------------------------------------------------------
Net decrease in cash and due from banks (11,160,238) (15,568,283)
Cash and due from banks at beginning of period 65,566,021 43,642,705
-------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $54,405,783 $28,074,422
-------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $73,909,867 $60,766,162
Interest paid on deposits and borrowings 46,067,599 36,539,401
Income taxes paid 6,031,948 3,041,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and balances
of First Federal Capital Corp (the "Corporation"), First Federal Savings Bank La
Crosse-Madison (the "Bank"), and the Bank's wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 2--BASIS OF PRESENTATION
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles ("GAAP"). However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three and six month
periods ended June 30, 2000, may not necessarily be indicative of the results
that may be expected for the entire year ending December 31, 2000.
Certain 1999 balances have been reclassified to conform to the 2000
presentation.
NOTE 3--EARNINGS PER SHARE
Basic and diluted earnings per share data are based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share are further adjusted for potential common shares that were
dilutive and outstanding during the period. Potential common shares generally
consist of stock options outstanding under the Corporation's stock incentive
plans. The dilutive effect of potential common shares is computed using the
treasury stock method. All stock options are assumed to be 100% vested for
purposes of the earnings per share computations. The computation of earnings per
share for the three and six month periods ended June 30, 2000, and June 30,
1999, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
BASIC DILUTED BASIC DILUTED
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $5,665,369 $5,665,369 $6,166,083 $6,166,083
--------------------------------------------------------------------------------------------------------------------
Average common shares issued, net
of actual treasury shares 18,289,157 18,289,157 18,259,796 18,259,796
Common stock equivalents based on
the treasury stock method - 168,361 - 842,511
--------------------------------------------------------------------------------------------------------------------
Average common shares and
common stock equivalents 18,289,157 18,457,518 18,259,796 19,102,307
--------------------------------------------------------------------------------------------------------------------
Earnings per share $0.31 $0.30 $0.34 $0.32
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
BASIC DILUTED BASIC DILUTED
--------------------------------------------------------------------------------------------------------------------
Net income $10,927,758 $10,927,758 $11,177,065 $11,177,065
--------------------------------------------------------------------------------------------------------------------
Average common shares issued, net
of actual treasury shares 18,309,571 18,309,571 18,258,208 18,258,208
Common stock equivalents based on
the treasury stock method - 180,028 - 897,208
--------------------------------------------------------------------------------------------------------------------
Average common shares and
common stock equivalents 18,309,571 18,489,600 18,258,208 19,155,416
--------------------------------------------------------------------------------------------------------------------
Earnings per share $0.60 $0.59 $0.61 $0.58
--------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
NOTE 4--CONTINGENCIES
The Corporation and its subsidiaries are engaged in various routine
legal proceedings occurring in the ordinary course of business, which considered
together are believed by management to be immaterial to the consolidated
financial condition of the Corporation.
NOTE 5--SEGMENT INFORMATION
DIVISIONS AND PROFIT CENTERS The Corporation has five operating
divisions: (i) residential lending, (ii) commercial real estate lending, (iii)
retail banking, (iv) finance and administration, and (v) human resources. Each
division is headed by an executive officer that reports directly to the
president of the Corporation. The first three divisions contain all but one of
the Corporation's profit centers for segment reporting purposes. The remaining
two divisions are considered support departments for segment reporting purposes,
although the finance and administration division also provides the primary
support for the Corporation's remaining profit center--the investment and
mortgage-related securities portfolio.
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 Corporation 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
Corporation's portfolio of multi-family and non-residential mortgage loans
(together "commercial real estate 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 Corporation'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
Corporation's retail branch network, which delivers checking, savings,
certificates of deposit and other financial products and services to customers,
is also part of retail banking, but is considered a support department for
segment reporting purposes. The net costs of this network are referred to as
"net costs to acquire and maintain deposit liabilities" and are allocated
proportionately to each segment according its use of deposit liabilities as a
funding source. This cost is reported as an adjustment of each segment's net
interest income. Finally, the Corporation's investment and mortgage-related
securities portfolio is considered a profit center for segment reporting
purposes. Personnel in finance and administration support this profit center, as
previously described.
MEASUREMENT OF SEGMENT PROFIT (LOSS) Management evaluates the after-tax
performance of the Corporation'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 Corporation's accounting systems. Interest expense is allocated to each
profit center according to its use of the Corporation's funding sources, which
consist primarily of deposit liabilities, FHLB advances, other borrowings, 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.
For segment reporting purposes, management makes certain non-GAAP
adjustments and reclassifications to the results of operations and financial
condition of the Corporation that, in management's judgement, more fairly
reflect the performance and/or financial condition of certain of the
Corporation's profit centers.
SEGMENT PROFIT (LOSS) STATEMENTS AND OTHER INFORMATION The following
table summarizes the profit (loss) and average assets of each of the
Corporation's reportable segments for the three and six month periods ended June
30, 2000 and 1999. In addition to the after-tax performance of profit centers,
management of the Corporation closely monitors the net cost to acquire and
maintain deposit liabilities, which consists principally of the net costs to
operate the Corporation's retail branch network, as previously described. The
net cost to acquire and maintain deposit liabilities was 1.14% and 1.06% of
average deposit liabilities outstanding during the three months ended
10
<PAGE> 12
June 30, 2000 and 1999, respectively. The net cost for the six month periods
ending as of the same dates was 1.16% and 1.19%, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
PROFIT CENTER PROFIT (LOSS) AVERAGE ASSETS PROFIT (LOSS) AVERAGE ASSETS
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage banking $1,249,171 $41,108,438 $1,211,693 $77,122,198
Residential loans 1,747,599 799,796,270 1,500,562 546,265,691
Commercial real estate lending 1,200,412 447,541,473 1,239,620 362,807,863
Consumer lending 882,591 316,890,583 814,084 247,069,136
Education lending 1,046,741 207,368,442 745,345 191,830,340
Investment and mortgage-related securities 849,733 375,032,417 1,115,741 424,508,259
Other segments (168,392) 300,874 (118,176) 377,442
Non-GAAP adjustments (1,142,486) (12,514,152) (342,786) (8,030,529)
--------------------------------------------------------------------------------------------------------------------
Net income/total average assets $5,665,369 $2,175,524,345 $6,166,083 $1,841,950,400
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
PROFIT CENTER PROFIT (LOSS) AVERAGE ASSETS PROFIT (LOSS) AVERAGE ASSETS
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage banking $1,584,458 $41,259,769 $1,848,697 $80,712,629
Residential loans 3,519,181 771,608,145 2,552,775 512,921,161
Commercial real estate lending 2,460,477 436,678,897 2,298,617 357,369,704
Consumer lending 1,758,705 304,009,199 1,426,323 242,844,650
Education lending 1,834,175 208,105,514 1,322,390 194,071,119
Investment and mortgage-related securities 1,882,191 386,595,941 1,882,371 437,579,753
Other segments (338,003) 299,207 (220,820) 321,966
Non-GAAP adjustments (1,773,426) (12,241,269) 66,712 (7,404,432)
--------------------------------------------------------------------------------------------------------------------
Net income/total average assets $10,927,758 $2,136,315,401 $11,177,065 $1,818,416,550
--------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The discussion in this report includes certain forward-looking
statements based on current management's expectations. Examples of factors which
could cause future results to differ from management's expectations include, but
are not limited to, the following: general economic and competitive conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; general market rates of interest; interest rates on
competing investments; interest rates on funding sources; consumer demand for
deposit and loan products and services; consumer demand for other financial
services; changes in accounting policies or guidelines; and changes in the
quality or composition of the Corporation's loan and investment portfolios.
Readers are cautioned that forward-looking statements are not guarantees of
future performance and that actual results may differ materially from
management's current expectations.
RESULTS OF OPERATIONS
QUARTER OVERVIEW The Corporation's net income for the three months
ended June 30, 2000, was $5.7 million or $0.30 per diluted share compared to
$6.2 million and $0.32 in the same period last year. These amounts represented a
return on average assets of 1.04% and 1.34%, respectively, and a return on
average equity of 17.05% and 20.04%, respectively.
The decrease in net income from 1999 to 2000 was primarily attributable
to a $1.5 million decrease in gain on sales of loans and a $1.4 million increase
in non-interest expense. These developments were partially offset by a $1.5
million increase in net interest income and a $454,000 increase in retail
banking fees, as well as modest improvements in all other sources of
non-interest income. Also contributing was a $296,000 decline in income tax
expense, due to lower pre-tax earnings.
The Corporation's earnings in the second quarter of 1999 reflect
unusual circumstances that were the result of a generally rising interest rate
environment after the first quarter of 1999. The Corporation's gain on sales of
loans in the second quarter of 1999 benefited from the lag effects of a
historically low interest rate environment during the last few months of 1998
and the first few months of 1999. That is, a relatively large number of mortgage
loans originated and committed for sale in that timeframe were finally sold in
the second quarter of 1999. However, because market interest rates generally
increased after the first few months of 1999, unfavorable adjustments to the
value of the Corporation's mortgage servicing rights were not required in the
second quarter of the year. As such, there were no valuation losses on mortgage
servicing rights in that period to offset a relatively large gain on sales of
mortgage loans, as is generally the Corporation's experience in periods of lower
interest rates. Because of these circumstances, the Corporation posted record
earnings in the second quarter of 1999. Excluding gain on sales of loans from
both three month periods would have resulted in "core earnings" of approximately
$5.3 million and $4.9 million in 2000 and 1999, respectively. These core
earnings figures would have equated to per share amounts of $0.28 and $0.26 in
such periods, respectively.
SIX MONTH OVERVIEW The Corporation's net income for the six months
ended June 30, 2000, was $10.9 million or $0.59 per diluted share compared to
$11.2 million and $0.58 in the same period last year. These amounts represented
a return on average assets of 1.02% and 1.23%, respectively, and a return on
average equity of 16.56% and 18.31%, respectively.
The decrease in net income from 1999 to 2000 was primarily attributable
to a $4.8 million decrease in gain on sales of loans and a $1.9 million increase
in non-interest expense. These developments were substantially offset by a $4.0
million increase in net interest income, a $1.4 million increase in retail
banking fees, and a $1.0 million increase in loan servicing fees.
The following paragraphs discuss the aforementioned changes in more
detail along with other changes in the components of net income during the three
and six month periods ended June 30, 2000 and 1999.
12
<PAGE> 14
NET INTEREST INCOME Net interest income increased by $1.5 million or
11.4% and $4.0 million or 15.8% during the three and six month periods ended
June 30, 2000, respectively, as compared to the same periods in the previous
year. Net interest income was favorably impacted in both periods by a
substantial increase in the amount of average interest-earning assets
outstanding. Average earning assets increased by $325.0 million or 18.8% during
the three months ended June 30, 2000, and by $309.8 million or 18.1% during the
six months ended June 30, 2000, as compared to the same periods in 1999. The
principal source of this growth was in the Corporation's single-family mortgage
loan portfolio. As a result of rising interest rates, customer demand for
adjustable-rate mortgage loans increased dramatically in the latter half of
1999. Such demand has also continued into the year 2000. Because of this, almost
75% of the Corporation's single-family mortgage loan production in 2000 has
consisted of adjustable-rate loans, which the Corporation generally retains in
its portfolio of loans held for investment. Also contributing to growth in the
Corporation's earning assets in 2000 were continued increases in the commercial
real estate and consumer loan portfolios. Growth in average earning assets was
largely funded by increases in FHLB advances, securities sold under agreements
to repurchase, and overnight purchases of federal funds. Also contributing was
an increase in the Corporation's deposit liabilities, especially in the most
recent quarter. Refer to "Financial Condition" for additional discussion.
The Corporation's interest rate spread decreased during both the three
and six month periods ended June 30, 2000, as compared to the same periods in
the previous year. Since early 1999, market interest rates have risen
substantially, lead by short-term rates, which have increased by almost 200
basis points since the beginning of 1999. Although this environment has resulted
in an increase in the average yield on the Corporation's earning assets, the
Corporation's interest-bearing liabilities tend to reprice more quickly than its
earning assets, which has resulted in a decline in the Corporation's average
interest rate spread in 2000. The Corporation's average interest spread was
2.64% and 2.54% during the three and six month periods ended June 30, 1999,
respectively. This compares to 2.44% and 2.49% during the same periods in 2000,
respectively. Continued increases in market interest rates, if any, could have
additional adverse effects on the Corporation's interest rate spread in future
periods. In addition, a flatter yield curve environment, such as that which has
developed more recently, could also have an adverse impact on the Corporation's
interest rate spread, given the propensity of the Corporation's assets to
reprice off a longer end of the yield curve than its liabilities. Refer to Item
3, "Quantitative and Qualitative Disclosures about Market Risk" for additional
discussion.
The following tables set forth information regarding the average
balances of the Corporation's assets, liabilities, and equity, as well as the
interest earned or paid and the average yield or cost of each. The information
is based on daily average balances during the three and six month periods ended
June 30, 2000 and 1999.
13
<PAGE> 15
<TABLE>
<CAPTION>
Dollars in thousands THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Single-family mortgage loans $777,986 $14,177 7.29% $561,192 $9,933 7.08%
Commercial real estate loans 424,225 8,402 7.92 343,805 6,816 7.93
Consumer loans 296,991 6,261 8.43 231,076 4,794 8.30
Education loans 197,346 4,295 8.71 182,915 3,530 7.72
--------------------------------------------------------------------------------------------------------------------
Total loans 1,696,548 33,135 7.81 1,318,988 25,073 7.60
Mortgage-backed and related
securities 327,521 5,548 6.78 379,797 6,069 6.39
Investment securities 780 10 5.00 1,039 11 4.12
Interest-bearing deposits with banks 7,667 111 5.79 18,348 210 4.58
Other earning assets 24,148 435 7.21 13,462 218 6.48
--------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,056,665 39,239 7.63 1,731,634 31,581 7.29
Non-interest-earning assets:
Office properties and equipment 25,168 24,971
Other assets 93,691 85,345
--------------------------------------------------------------------------------------------------------------------
Total assets $2,175,524 $1,841,950
--------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Regular savings accounts $112,740 $417 1.48% $112,165 $416 1.48%
Checking accounts 75,584 136 0.72 70,525 129 0.73
Money market accounts 162,417 1,618 3.98 180,327 1,664 3.69
Certificates of deposit 1,038,728 15,143 5.83 930,901 12,488 5.37
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,389,469 17,314 4.98 1,293,918 14,697 4.54
FHLB advances 379,113 5,457 5.76 253,217 3,277 5.18
Other borrowings 97,933 1,469 6.00 11,608 148 5.10
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,866,515 24,240 5.19 1,558,743 18,122 4.65
Non-interest-bearing liabilities:
Non-interest-bearing deposits 158,881 142,082
Other liabilities 17,201 18,040
--------------------------------------------------------------------------------------------------------------------
Total liabilities 2,042,597 1,718,865
Stockholders' equity 132,927 123,085
--------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,175,524 $1,841,950
--------------------------------------------------------------------------------------------------------------------
Net interest income $14,999 $13,458
--------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.44% 2.64%
--------------------------------------------------------------------------------------------------------------------
Net interest income as a percent of
average earning assets 2.92% 3.11%
--------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 110.19% 111.09%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
Dollars in thousands SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Single-family mortgage loans 750,534 27,165 7.24% $533,008 $18,904 7.09%
Commercial real estate loans 413,824 16,330 7.89 338,623 13,552 8.00
Consumer loans 284,777 11,936 8.38 227,053 9,413 8.29
Education loans 198,163 8,359 8.44 185,117 7,120 7.69
--------------------------------------------------------------------------------------------------------------------
Total loans 1,647,298 63,791 7.74 1,283,801 48,989 7.63
Mortgage-backed and related securities 336,767 11,396 6.77 361,762 11,745 6.49
Investment securities 818 21 5.06 1,023 22 4.39
Interest-bearing deposits with banks 10,158 264 5.21 49,589 1,146 4.62
Other earning assets 23,904 846 7.08 12,974 411 6.34
--------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,018,945 76,318 7.56 1,709,149 62,313 7.29
Non-interest-earning assets:
Office properties and equipment 24,972 25,030
Other assets 92,398 84,238
--------------------------------------------------------------------------------------------------------------------
Total assets $2,136,315 $1,818,417
--------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Regular savings accounts $110,364 $815 1.48% $109,022 $920 1.69%
Checking accounts 74,429 272 0.73 69,155 292 0.84
Money market accounts 166,967 3,246 3.89 175,966 3,307 3.76
Certificates of deposit 1,013,157 28,636 5.65 943,124 25,853 5.48
--------------------------------------------------------------------------------------------------------------------
Total deposits 1,364,917 32,969 4.83 1,297,267 30,372 4.68
FHLB advances 395,722 11,290 5.71 234,189 6,033 5.15
Other borrowings 77,018 2,322 6.03 9,111 220 4.83
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,837,657 46,581 5.07 1,540,568 36,626 4.75
Non-interest-bearing liabilities:
Non-interest-bearing deposits 150,119 137,198
Other liabilities 16,597 18,561
--------------------------------------------------------------------------------------------------------------------
Total liabilities 2,004,373 1,696,327
Stockholders' equity 131,942 122,090
--------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,136,315 $1,818,417
--------------------------------------------------------------------------------------------------------------------
Net interest income $29,737 $25,688
--------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.49% 2.54%
--------------------------------------------------------------------------------------------------------------------
Net interest income as a percent of
average earning assets 2.95% 3.01%
--------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 109.87% 110.94%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES In general, provisions for loan losses
recorded during the three and six month periods ended June 30, 2000 and 1999,
approximated the Corporation's actual net charge-off activity during such
periods. On an annualized basis, net charge-offs were 0.03% of average loans
outstanding during the first six months of both 1999 and 2000. Management of the
Corporation expects the provision for loan losses for the remainder of 2000 to
be modest and to approximate actual charge-off activity, although there can be
no assurances.
As of June 30, 2000 and December 31, 1999, the Corporation's allowance
for loan losses was $7.7 million and $7.6 million, respectively, or 0.44% and
0.50% of loans held for investment, respectively. Although management believes
that the Corporation's present level of allowance for loan losses is adequate,
there can be no assurance that future adjustments to the allowance will not be
necessary, which could adversely affect the Corporation's results of operations.
For additional discussion, refer to "Financial Condition--Non-Performing
Assets".
NON-INTEREST INCOME Non-interest income for the three months ended June
30, 2000 and 1999, was $8.5 million and $9.4 million, respectively. The
following paragraphs discuss the principal components of non-interest income and
the primary reasons for their changes from 1999 to 2000.
15
<PAGE> 17
Retail banking fees and service charges increased by $454,000 or 8.9%
during the three months ended June 30, 2000, as compared to the same period in
the previous year. Most of this improvement can be attributed to 9.2% in
annualized growth in the number of checking accounts serviced by the Corporation
since December 31, 1998. Also contributing, however, was an increase in the
per-item charge for overdrafts on checking accounts that was instituted in the
second quarter of 1999.
Premiums and commissions on annuity and insurance sales increased by
$60,000 or 10.1% during the three months ended June 30, 2000, as compared to the
same period in the previous year. The Corporation's current sources of premium
and commission revenues are from sales of tax-deferred annuity contracts, life
and disability insurance policies on consumer loans, and mortgage insurance
policies on residential loans. The increase was principally the result of a
$50,000 or 14.9% increase in commissions from the sales of tax-deferred
annuities and a $33,000 or 17.4% increase in premiums and commissions from sales
of life and disability insurance policies. These developments were partially
offset by a $23,000 or approximately 35% decline in commissions from sales of
mortgage insurance policies, due to reduced originations of residential mortgage
loans.
Gain on sales of mortgage loans declined by $1.5 million from $2.0
million during the three months ended June 30, 1999, to $506,000 during the same
period in 2000. This decline was primarily attributable to a $74.5 million or
over 70% decrease in the Corporation's mortgage loan sales. This decrease was
caused by a substantially higher interest rate environment in 2000 as compared
to 1999, which has significantly reduced the Corporation's fixed-rate
residential mortgage loan production in recent periods.
Non-interest income for the six months ended June 30, 2000 and 1999,
was $16.0 million and $18.5 million, respectively. Most of the decrease in 2000
was the result of a $4.8 million dollar decline in gain on sale of loans from
$5.6 million in 1999 to $796,000 in 2000. This development was offset in part by
a $1.4 million or 14.6% increase in retail banking fees and a $1.0 million or
over 100% increase in loan servicing fees. Reasons for the changes in gain on
sale of loans and retail banking fees are substantially the same as those given
in the preceding paragraphs for the three month periods. The improvement in loan
servicing fees over past year was the result of higher interest rates, which
reduced the impact of loan prepayments on the Corporation's mortgage servicing
rights. During the first quarter of 1999, the Corporation recorded $1.0 million
in losses on its mortgage servicing rights over-and-above that which management
considered to be normal periodic amortization. This compared to no such losses
in 2000.
NON-INTEREST EXPENSE Non-interest expense for the three months ended
June 30, 2000 and 1999, was $14.6 million and $13.2 million, respectively, which
was 2.67% and 2.88% of average assets during such periods, respectively. The
following paragraphs discuss the principal components of non-interest expense
and the primary reasons for their changes from 1999 to 2000.
Compensation and employee benefits increased by $1.4 million or 18.8%
during the three months ended June 30, 2000, as compared to the same period in
the previous year. A large portion of this increase was the result of a $700,000
or over 150% increase in costs related to employee healthcare claims. The
Corporation is "self-insured" with respect to such costs, but has purchased
"stop-loss" insurance coverage at both the employee-group and individual
employee levels. This insurance coverage limits the Corporation's exposure to
catastrophic levels of healthcare claims. During the most recent quarter, the
Corporation experienced an abnormally high dollar amount of healthcare claims by
its employees. Although there can be no assurances, management expects
healthcare claims to moderate in the immediate future. Assuming historical claim
trends, the Corporation's employee-group stop-loss insurance coverage may be
triggered later in the year, which may reduce the Corporation's healthcare costs
in the third or fourth quarter of 2000. However, as previously stated, there can
be no assurances.
Also contributing to the increase in compensation expense were normal
annual merit increases and general growth in the number of banking facilities
operated by the Corporation. Since December 31, 1998, the Corporation has opened
six retail banking facilities and is in the process of opening three more in the
immediate future. In addition to these facilities, the Corporation intends to
open another three or four retail banking facilities during the remainder of
2000, although there can be no assurances. As of June 30, 2000, the Corporation
had 852 full-time equivalent employees. This compares to 831 and 822 as of
December 31, 1999, and June 30, 1999, respectively.
16
<PAGE> 18
Occupancy and equipment expenses increased by $222,000 or 12.4% during
the three months ended June 30, 2000, as compared to the same period in the
previous year. In addition, communications, postage, and office supplies expense
increased by $41,000 or 4.3% over the same period. These increases were
primarily attributable to general growth in the number of banking facilities
operated by the Corporation, 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 $28,000 or 4.0%
during the three months ended June 30, 2000, as compared to the same period in
the previous year. This increase corresponds to an increase in the number of
checking accounts serviced by the Corporation, as previously described, as well
as an increase in the number of ATMs operated by the Corporation.
Other non-interest expense decreased by $323,000 or approximately 23%
during the three months ended June 30, 2000, as compared to the same period in
the previous year. This decrease was due in part to the fact that the second
quarter of 1999 included a payment of $152,000 in sales and use taxes to the
State of Wisconsin for prior years. Also contributing to the decrease, however,
was a $134,000 or over 60% decline in deposit insurance premiums paid to the
Federal Deposit Insurance Corporation ("FDIC") in 2000 as compared to 1999. This
decline was caused by a decrease in the amount thrift institutions are charged
for their share of the bond obligation of a government agency known as the
Finance Corporation ("FICO"). Finally, in 2000 the Corporation has experienced
lower costs associated with the servicing of loans for the Federal National
Mortgage Association ("FNMA"). Under the terms of its servicing agreement with
FNMA, the Corporation is required to forward a full month's interest when
certain loans payoff early, regardless of the actual date the loan pays off. A
higher interest rate environment and lower prepayment activity since the first
few months of 1999 has resulted in lower payments of such amounts to FNMA.
Non-interest expense for the six months ended June 30, 2000 and 1999,
was $28.5 million and $26.6 million, respectively, which was 2.66% and 2.94% of
average assets during such periods, respectively. This increase was primarily
the result of a $2.2 million or 14.6% increase in compensation and employee
benefits, as well as smaller increases in the Corporation's other non-interest
expense categories, except for other expenses, which declined by $688,000 or
almost 25%. The explanations for these changes are substantially the same as
those given in previous paragraphs for the three month periods.
INCOME TAX EXPENSE Income tax expense for the three months ended June
30, 2000 and 1999, was $3.1 million and $3.4 million, respectively, or 35.5% and
35.7% of pretax income, respectively. Income tax expense for the six months
ended June 30, 2000 and 1999, was $6.0 million and $6.1 million, respectively,
or 35.5% and 35.4% of pretax income, respectively.
SEGMENT INFORMATION The following paragraphs contain a discussion of
the financial performance of each of the Corporation's reportable segments
(hereafter referred to as "profit centers") for the three and six month periods
ended June 30, 2000 and 1999. Refer to the table in Note 5 of the Corporation's
Unaudited Consolidated Financial Statements, included herein under Part I, Item
I, "Financial Statements", for a summary of the after-tax profit (loss) of each
of the Corporation's profit centers.
MORTGAGE BANKING Profits from the Corporation's mortgage
banking activities during the most recent quarter were comparable to the results
obtained in the same period of the previous year. On a year-to-date basis,
however, profits declined by $264,000 or 14.3%. Loan origination volumes and
mortgage servicing fees are the principal drivers of performance in this profit
center. A higher interest rate environment in 2000 has resulted in a significant
decrease in originations of single-family residential loans. In the first six
months of 2000, the Corporation's mortgage banking operation originated $253.0
million in single-family residential loans compared to $364.6 million during the
same period in 1999. The unfavorable impact of reduced originations was offset
somewhat by increased earnings from the profit center's mortgage servicing
activities, as described more fully in "Non-Interest Income", above.
17
<PAGE> 19
RESIDENTIAL LOANS Profits from the Corporation's residential
loan portfolio increased by $247,000 or 16.5% and $966,000 or 37.9% during the
three and six month periods ended June 30, 2000, respectively, as compared to
the same periods in the previous year. In 2000, the performance of this profit
center was favorably impacted by a significant increase in its average assets,
which was chiefly the result of a higher interest rate environment. Such
environments tend to increase customer preference for adjustable-rate mortgage
loans, which the Corporation generally retains in its portfolio. In addition,
higher interest rate environments tend to discourage loan prepayment activity on
the part of existing borrowers. The improvement caused by increased volume was
offset in part by a narrower interest rate margin on the portfolio. This
development was caused by the same interest rate environment, which resulted in
a larger increase in the portfolio's cost of funds than it did in its gross
yield. Refer to "Net Interest Income", above, for additional information.
COMMERCIAL REAL ESTATE LENDING Profits from commercial real
estate lending decreased by $39,000 or 3.2% during the three months ended June
30, 2000, as compared to the same period in the previous year. In a year-to-date
comparison, however, profits were up $162,000 or 7.0% in 2000 compared to 1999.
In 2000, commercial real estate lending has benefited from a substantial
increase in its average assets, which increased by $79.3 million or 22.2% during
the six months ended June 30, 2000, as compared to the same period in 1999. In
the most recent quarter, however, the improvement caused by increased volume was
entirely offset by a narrower interest rate margin in the profit center. This
development was caused by a higher interest rate environment, which resulted in
a large increase in the profit center's cost of funds. In contrast, the gross
yield on the commercial real estate loan portfolio has not increased in 2000 due
to competitive pressures that have prevented the yield from increasing along
with other interest rate measures. Refer to "Net Interest Income" for additional
information.
CONSUMER LENDING Profits from the Corporation's consumer
lending activities increased by $69,000 or 8.4% and $332,000 or 23.3% during the
three and six month periods ended June 30, 2000, respectively, as compared to
the same periods in the previous year. These improvements were principally the
result of a substantial increase in the profit center's average assets, which
increased by $61.2 million or 25.2% during the six months ended June 30, 2000,
as compared to the same period in 1999. The improvement caused by increased
volume was partially offset in the second quarter by a narrower interest rate
margin in the profit center. This development was caused by a higher interest
rate environment, which resulted in a larger increase in the profit center's
cost of funds than it did in the gross yield on its assets. Refer to "Net
Interest Income" for additional information.
EDUCATION LENDING Profits from education lending increased by
$301,000 or over 40% and $512,000 or almost 40% during the three and six month
periods ended June 30, 2000, respectively, as compared to the same periods in
the previous year. In 2000, education loans have benefited from a higher
interest rate environment, which increased the gross yield on such loans by 75
basis points during the first six months of 2000 as compared to the same period
in 1999 (refer to "Net Interest Income" for additional information). In
addition, the net interest margin of this profit center was assisted by a stable
cost of funds, which did not increase in 2000 for this profit center despite
higher interest rates. During 2000, the Corporation modified the funding source
assumptions for this profit center, allocating to it a larger portion of lower
cost deposits, such as money market savings, than had been allocated to it in
the past. The impact of this change balanced the impact of higher interest rates
on the profit center's overall cost of funds. Finally, average assets associated
with education loans increased by $15.5 million or 8.1% during the three months
ended June 30, 2000, as compared to the same period in 1999. For the six month
period, average assets increased by $14.0 million or 7.2% in 2000 compared to
the previous year.
INVESTMENT AND MORTGAGE-RELATED SECURITIES Profits from the
Corporation's investment securities portfolio declined by $266,000 or 24.1%
during the three months ended June 30, 2000, as compared to the same period in
the previous year. On a year-to-date basis, however, profits were essentially
unchanged between the six month periods. In 2000, the results of this profit
center have been significantly impacted by a decline in the average assets
associated with the profit center. Average assets for the three and six months
ended June 30, 2000, declined by $49.5 million or 11.7% and $51.0 million or
11.7%, respectively, compared to the same periods in the previous year. Also
contributing to the decline in profits in the most recent quarter was a decrease
in the net interest margin on the portfolio. This development was principally
caused by higher interest rates, which resulted in a larger increase in the
portfolio's cost of funds than it did in its gross yield (refer to "Net Interest
Income" for additional
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information). On a year-to-date basis, the impact of lower asset volumes and
reduced net interest margin was offset by the fact that the profit center held
substantially lower levels of overnight investments in 2000 than it did in the
previous year. Yields on overnight investments are typically lower than that
earned on longer-term investments. In addition, such yields are often less than
the average cost of the funding sources allocated to the profit center. The
Corporation's holdings of overnight investments were higher in the first quarter
of 1999 because of the temporary investment of proceeds from loan sales.
OTHER SEGMENTS Other segments consist primarily of the
Corporation's holding company, as well as two of the Bank's wholly-owned
subsidiaries. The increased loss from this segment was principally the result of
increased interest expense in the holding company. This increase was the result
of a higher level of borrowings, the proceeds of which were largely used to
repurchase the Corporation's stock.
NON-GAAP ADJUSTMENTS Non-GAAP adjustments were $(1.1) million
in the second quarter of 2000 compared to $(343,000) in the second quarter of
1999. On a year-to-date basis, non-GAAP adjustments were $(1.8) million in 2000
compared to $67,000 in 1999. The changes between periods were principally caused
by adjustments in the mortgage banking profit center, which originated more
loans for the Bank's residential loan portfolio in 2000 than it did in 1999.
Increases in such activity generally result in larger internal adjustments to
compensate the mortgage banking profit center for its efforts related to these
originations. In addition, in 1999 the mortgage banking profit center
experienced a higher level of internal charge-offs related to its mortgage
servicing operations, due to a lower interest rate environment and higher levels
of loan prepayments.
NET COST TO ACQUIRE AND MAINTAIN DEPOSIT LIABILITIES In
addition to the after-tax performance of the aforementioned profit centers,
management of the Corporation closely monitors the net cost to acquire and
maintain deposit liabilities. The net cost to acquire and maintain deposit
liabilities was 1.14% and 1.06% of average deposit liabilities outstanding
during the three months ended June 30, 2000 and 1999, respectively. The net cost
for the six months ending as of the same dates was 1.16% and 1.19%,
respectively. The Corporation's profit centers are allocated a share of the net
cost to acquire and maintain deposit liabilities according to their
proportionate use of such deposits as a funding source. As such, changes in the
net cost to acquire and maintain deposit liabilities also have an impact on the
profits of most of the Corporation's profit centers.
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $161.5 million or
7.7% during the six months ended June 30, 2000. This increase was the result of
a $218.9 million or 14.2% increase in loans held for investment that was funded
in part by a $149.4 million or 10.2% increase in deposit liabilities. Also
funding growth in the loan portfolio was a $39.4 million or 11.1% aggregate
decrease in mortgage-backed and related securities, as well as smaller decreases
in overnight investments and in cash and due from banks. The Corporation's cash
holdings were abnormally high at the end of 1999 as a precautionary measure
related to the year 2000 change-over. Such cash holdings proved unnecessary,
however, and were returned to the Federal Reserve System in January 2000.
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios declined by
$39.4 million or 11.1% during the six months ended June 30, 2000. This decline
was the result of normal periodic amortization of the mortgage loans that
support these types of securities. The proceeds from such amortization were
generally reinvested in the Corporation's portfolio of loans held for
investment, as previously described.
LOANS HELD FOR INVESTMENT The Corporation's portfolio of loans held for
investment increased by $218.9 million or 14.2% during the six months ended June
30, 2000. During this period, the Corporation originated $189.0 million and
purchased $13.1 million in adjustable-rate single-family mortgage loans,
originated $118.0 million in consumer loans (consisting mostly of second
mortgages), originated $64.3 million and purchased $3.1 million in commercial
real estate loans, and originated $17.3 million in education loans. During the
same period, the Corporation experienced very little loan prepayment and
refinance activity, due to higher interest rates, as previously described. As a
result of these factors, the Corporation has experienced strong growth in its
loans held for investment in recent periods.
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DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$149.4 million or 10.2% during the six months ended June 30, 2000. Management
attributes this growth to higher short-term rates and recent volatility in other
financial markets, which has made traditional bank financial offerings more
attractive to consumers. Furthermore, in recent months the Corporation has
increased the rates it offers on its certificates of deposits and certain other
account types relative to that of its competitors. Finally, during the most
recent quarter the Corporation issued $26.7 million in certificates of deposit
through third-party broker-dealers. These deposits were acquired at terms
substantially the same as those available through borrowings from the FHLB,
except that such deposits do not require the posting of collateral, as is the
case with the FHLB.
FHLB ADVANCES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The
Corporation's FHLB advances declined by $75.7 million or 17.0% during the six
months ended June 30, 2000. These borrowings were replaced by $75.0 million in
borrowings under reverse-repurchase agreements, more formally known as
"securities sold under agreements to repurchase".
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 $2.0 million or
0.09% of total assets at June 30, 2000, compared to $2.1 million or 0.10% of
total assets at December 31, 1999. The Corporation's allowance for loan and real
estate losses was 400% and 365% of non-performing assets as of the same dates,
respectively.
In addition to non-performing assets, at June 30, 2000, management was
closely monitoring $3.6 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 $3.3 million in such assets at December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain
specified levels of qualifying types of U.S government, federal agency, and
other mortgage-related and investment securities of not less than 4% of net
withdrawable accounts and short-term borrowings. The Bank was in full compliance
with these regulations during the three and six months ended June 30, 2000.
The Corporation's stockholders' equity ratio as of June 30, 2000, was
5.93% of total assets. The Corporation's long-term 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 1.1% and
16.5%, respectively. The Corporation is below its target range as of June 30,
2000, primarily as a result of stock repurchases during the fourth quarter of
1999 and, to a lesser extent, the first quarter of 2000. The Corporation expects
its equity ratio to return to its target range during the next 12 to 24 months,
although there can be no assurances.
The Bank is also required to maintain specified amounts of capital
pursuant to regulations promulgated by the 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 June 30, 2000, the Bank's regulatory capital
exceeded all regulatory minimum requirements as well as the amount required to
be classified as a "well capitalized" institution.
The Corporation paid cash dividends of $3.7 million and $2.9 million
during the six months ended June 30, 2000 and 1999, respectively. These amounts
equated to dividend payout ratios of 33.5% and 26.0% of the net income in such
periods, respectively. It is the Corporation's objective to maintain its
dividend payout ratio in a range of 25% to 35% of net income. However, the
Corporation's dividend policy and/or dividend payout ratio will be impacted by
considerations such as the level of stockholders' equity in relation to the
Corporation's stated goal, as previously described, regulatory capital
requirements for the Bank, as previously described, and certain dividend
restrictions in effect for the Bank. 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.
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On July 18, 2000, the Corporation's Board of Directors declared a
regular quarterly dividend of $0.11 per share payable on September 7, 2000, to
shareholders of record on August 17, 2000.
During the six months ended June 30, 2000, the Corporation repurchased
143,904 shares of common stock at a cost of $1.7 million under its 1999 stock
repurchase plan (the "1999 Plan"). As of June 30, 2000, 219,510 shares remain to
be purchased under the 1999 Plan. On April 18, 2000, the Corporation's Board of
Directors extended the 1999 Plan for another twelve months and approved a new
plan to repurchase up to 913,554 shares of the Corporation's outstanding common
stock (the "2000 Plan"). The shares may be repurchased from time to time in
open-market transactions during the next twelve months as, in the opinion of
management, market conditions warrant. The repurchased shares will be held as
treasury stock and will be available for general corporate purposes.
During the six months ended June 30, 2000, the Corporation reissued
37,236 shares of common stock out of its inventory of treasury stock with a cost
basis of $435,000. In general, these shares were issued upon the exercise of
stock options by employees and directors of the Corporation.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk") by monitoring its ratios of
interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates (i.e., its one- and three-year
"gaps"). Management has sought to control the Corporation's one- and three-year
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 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, FHLB advances, and other borrowing sources that tend to have 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 gap in a range between 0% and -30% and its three-year gap in a range
between 0% and -10%. 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 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.
Although management believes that its asset/liability management
strategies reduce the potential effects of changes in interest rates on the
Corporation's operations, material and prolonged increases in interest rates may
adversely affect the Corporation's operations because the Corporation's
interest-bearing liabilities which mature or reprice within one year are greater
than the Corporation's interest-earning assets which mature or reprice within
the same period. Alternatively, material and prolonged decreases in interest
rates may benefit the Corporation's operations.
The Bank is also required by the OTS to estimate the sensitivity of its
net portfolio value of equity ("NPV") to immediate and sustained changes in
interest rates and to measure such sensitivity on at least a quarterly basis.
NPV 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. In general, it is management's goal to limit estimated
changes in the Bank's NPV under specified interest rate scenarios such that the
Bank will continue to be classified by the OTS as an institution with minimal
exposure to interest rate risk.
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As of June 30, 2000, the Corporation was in compliance with its
management polices with respect to exposure to interest rate risk. Furthermore,
there was no material change in its interest rate risk exposure since December
31, 1999.
PART II OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
Refer to Note 4 of the Corporation's Consolidated Financial Statements.
ITEM 2--CHANGES IN SECURITIES
None.
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5--OTHER INFORMATION
None.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
/s/ Thomas W. Schini August 4, 2000
Thomas W. Schini
President, Chairman of the
Board and Chief Executive Officer
(duly authorized officer)
/s/ Jack C. Rusch August 4, 2000
Jack C. Rusch
President and Chief Operating Officer
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