<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
Commission File Number 0-24148
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1782733
---------------------------- ---------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
319 EAST GRAND AVENUE
EAU CLAIRE, WISCONSIN 54701
---------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(715) 833-7700
-----------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
----- -----
(2) Yes X No
----- -----
The number of shares outstanding of the issuer's common stock, $.01
par value per share, was 6,855,379 at October 31, 1996.
<PAGE> 2
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
------- --------------------- -----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at September 30, 1996 and
December 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Shareholders' Equity for the Year Ended
December 31, 1995 and the Nine Months Ended September 30, 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
-------- -----------------
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . 28
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
SIGNATURES
-i-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,386 $ 9,706
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . 4,170 3,761
---------- ---------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 13,556 13,467
Longer-term interest-bearing deposits . . . . . . . . . . . . . . 188 270
Securities available-for-sale (at fair value):
Investment securities . . . . . . . . . . . . . . . . . . . . . 6,886 7,007
Mortgage-related securities . . . . . . . . . . . . . . . . . . 146,548 116,277
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . 21,524 3,276
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . 508,676 457,278
Foreclosed properties and repossessed assets . . . . . . . . . . 109 322
Office properties and equipment . . . . . . . . . . . . . . . . . 8,578 7,835
Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . 12,403 7,668
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 10,354 8,190
---------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 728,822 $ 621,590
========== =========
LIABILITIES
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 373,982 $ 368,472
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . 248,050 150,950
Advance payments by borrowers for taxes and insurance . . . . . . 1,749 2,063
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7,213 4,743
---------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 630,994 526,228
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 4,000,000 shares;
none outstanding . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, $.01 par value; authorized 12,000,000 shares;
outstanding 6,855,379 shares . . . . . . . . . . . . . . . . . 72 72
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 70,798 70,652
Unearned ESOP compensation . . . . . . . . . . . . . . . . . . . (3,119) (3,680)
Unearned BIP compensation . . . . . . . . . . . . . . . . . . . . (1,944) (2,691)
Treasury stock, at cost - 360,809 shares . . . . . . . . . . . . (4,691) (4,691)
Net unrealized holding gain (loss) on securities
available-for-sale . . . . . . . . . . . . . . . . . . . . . . (241) 1,028
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 36,953 34,672
---------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . 97,828 95,362
---------- ---------
Total liabilities and shareholders' equity . . . . . . . . . . $ 728,822 $ 621,590
========== =========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
-1-
<PAGE> 4
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
--------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . $ 10,228 $ 8,711 $ 29,322 $ 23,644
Mortgage-related securities . . . . . . . . . . . . . 2,531 1,697 7,382 4,274
Investment securities . . . . . . . . . . . . . . . . 325 287 851 899
Interest-bearing deposits . . . . . . . . . . . . . . 37 24 100 53
-------- --------- --------- ---------
Total interest income . . . . . . . . . . . . . . . 13,121 10,719 37,655 28,870
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . 4,316 4,117 13,038 10,875
Borrowings . . . . . . . . . . . . . . . . . . . . . 3,303 1,689 8,724 4,505
-------- --------- --------- --------
Total interest expense . . . . . . . . . . . . . . 7,619 5,806 21,762 15,380
-------- --------- --------- --------
Net interest income . . . . . . . . . . . . . . . . . . 5,502 4,913 15,893 13,490
Provision for loan losses . . . . . . . . . . . . . . . 33 52 131 73
-------- --------- --------- ---------
Net interest income after provision
for loan losses . . . . . . . . . . . . . . . . . . 5,469 4,861 15,762 13,417
NON-INTEREST INCOME:
Service charges on deposits . . . . . . . . . . . . . 202 148 561 438
Service fees on loans sold . . . . . . . . . . . . . 161 175 495 539
Net gain (loss) on loans held-for-sale . . . . . . . 119 48 (312) 534
Net gain on mortgage-related securities . . . . . . . -- -- -- 301
Net gain on investment securities . . . . . . . . . . -- -- 11 --
Brokerage commission income . . . . . . . . . . . . . 107 81 286 227
Other . . . . . . . . . . . . . . . . . . . . . . . . 89 110 269 446
-------- --------- --------- --------
Total non-interest income . . . . . . . . . . . . . 678 562 1,310 2,485
NON-INTEREST EXPENSE:
Compensation and other employee benefits . . . . . . 1,795 1,645 5,517 4,506
Federal insurance special assessment . . . . . . . . 1,968 -- 1,968 --
Federal insurance premiums . . . . . . . . . . . . . 214 206 632 552
Data processing . . . . . . . . . . . . . . . . . . . 165 192 529 439
Occupancy . . . . . . . . . . . . . . . . . . . . . . 197 184 592 466
Furniture and equipment . . . . . . . . . . . . . . . 180 133 523 345
Other . . . . . . . . . . . . . . . . . . . . . . . . 856 748 2,503 2,103
-------- --------- --------- --------
Total non-interest expense . . . . . . . . . . . . 5,375 3,108 12,264 8,411
-------- --------- --------- --------
Income before income taxes . . . . . . . . . . . . . . 772 2,315 4,808 7,491
Income taxes . . . . . . . . . . . . . . . . . . . . . 178 844 1,553 2,895
-------- --------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . . $ 594 $ 1,471 $ 3,255 $ 4,596
======== ========= ========= ========
Primary earnings per share . . . . . . . . . . . . . . $ 0.09 $ 0.22 $ 0.50 $ 0.68
Fully-diluted earnings per share . . . . . . . . . . . 0.09 0.22 0.50 0.68
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
-2-
<PAGE> 5
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED UNEARNED
COMMON PAID-IN ESOP BIP
STOCK CAPITAL COMPENSATION COMPENSATION
----- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at December 31, 1994 . . . . . . . . . . $ 72 $ 70,531 $ (4,412) $ --
Net income . . . . . . . . . . . . . . . . . . . -- -- -- --
Cash dividends . . . . . . . . . . . . . . . . . -- -- -- --
Amortization of unearned ESOP compensation . . . -- 121 732 --
Purchase of common stock for the BIP, net of
deferred income tax benefit of $207 . . . . . -- -- -- (3,568)
Amortization of unearned BIP compensation . . . . -- -- -- 877
Purchase of treasury stock . . . . . . . . . . . -- -- -- --
Net change in unrealized holding gain
on securities available-for-sale,
net of deferred income taxes of $1,060 . . . . -- -- -- --
------ -------- -------- --------
Balances at December 31, 1995 . . . . . . . . . . 72 70,652 (3,680) (2,691)
Net income . . . . . . . . . . . . . . . . . . . -- -- -- --
Cash dividends . . . . . . . . . . . . . . . . . -- -- -- --
Amortization of unearned ESOP compensation . . . -- 146 561 --
Amortization of unearned BIP compensation . . . . -- -- -- 747
Net change in unrealized holding loss on
securities available-for-sale, net of
deferred income tax benefit of $664 . . . . . -- -- -- --
------ -------- -------- --------
Balances at September 30, 1996 . . . . . . . . . $ 72 $ 70,798 $ (3,119) $ (1,944)
====== ======== ======== ========
<CAPTION>
TREASURY
STOCK, UNREALIZED RETAINED
AT COST GAINS/LOSSES EARNINGS TOTAL
------- ------------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at December 31, 1994 . . . . . . . . . . -- (814) $ 29,358 $ 94,735
Net income . . . . . . . . . . . . . . . . . . . -- 5,944 5,944
Cash dividends . . . . . . . . . . . . . . . . . -- (319) (319)
Amortization of unearned ESOP compensation . . . -- -- -- 853
Purchase of common stock for the BIP, net of
deferred income tax benefit of $207 . . . . . -- -- (311) (3,879)
Amortization of unearned BIP compensation . . . . -- -- -- 877
Purchase of treasury stock . . . . . . . . . . . (4,691) -- -- (4,691)
Net change in unrealized holding gain
on securities available-for-sale,
net of deferred income taxes of $1,060 . . . . -- 1,842 -- 1,842
------- ------- -------- ---------
Balances at December 31, 1995 . . . . . . . . . . (4,691) 1,028 34,672 95,362
Net income . . . . . . . . . . . . . . . . . . . -- -- 3,255 3,255
Cash dividends . . . . . . . . . . . . . . . . . -- -- (1,219) (1,219)
Amortization of unearned ESOP compensation . . . -- -- 245 952
Amortization of unearned BIP compensation . . . . -- -- -- 747
Net change in unrealized holding loss on
securities available-for-sale, net of
deferred income tax benefit of $664 -- -- (1,269) (1,269)
------- ------- --------- --------
Balances at September 30, 1996 . . . . . . . . . $(4,691) $ (241) $ 36,953 $ 97,828
======= ======== ========= ========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
-3-
<PAGE> 6
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,255 $ 4,596
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provisions for loan losses . . . . . . . . . . . . . . . . . . 131 73
Net gain on sales of foreclosed properties . . . . . . . . . . (2) (6)
Net loss (gain) on loans held-for-sale . . . . . . . . . . . . 312 (534)
Net gain on securities . . . . . . . . . . . . . . . . . . . . (11) (301)
Provisions for depreciation . . . . . . . . . . . . . . . . . . 443 272
Net amortization of premiums on investment
and mortgage-related securities . . . . . . . . . . . . . . . 8 8
Amortization of intangibles . . . . . . . . . . . . . . . . . . 260 81
Loans originated for sale . . . . . . . . . . . . . . . . . . . (26,212) (10,550)
Proceeds from sales of loans . . . . . . . . . . . . . . . . . 7,623 16,176
Amortization of unearned ESOP compensation . . . . . . . . . . 952 616
Amortization of unearned BIP compensation . . . . . . . . . . . 747 548
Decrease in current and deferred income taxes . . . . . . . . . (456) (774)
Increase in interest receivable . . . . . . . . . . . . . . . . (779) (951)
Increase in interest payable . . . . . . . . . . . . . . . . . 490 619
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,477 1,185
--------- --------
Net cash provided (used) by operating activities . . . . . . (11,762) 11,058
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
held to maturity . . . . . . . . . . . . . . . . . . . . . . . 92 2,591
Proceeds from calls of investment securities
available-for-sale . . . . . . . . . . . . . . . . . . . . . . 2,000 --
Purchases of investment securities available-for-sale . . . . . . (1,990) --
Purchases of mortgage-related securities available-for-sale . . . (44,409) (72,412)
Proceeds from sales of mortgage-related securities
available-for-sale . . . . . . . . . . . . . . . . . . . . . . -- 11,026
Principal repayments on mortgage-related securities . . . . . . . 12,316 4,564
Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . (4,735) (3,686)
Increase in loans receivable . . . . . . . . . . . . . . . . . . (51,000) (61,438)
Purchases of loans . . . . . . . . . . . . . . . . . . . . . . . (692) (22,337)
Proceeds from sales of foreclosed properties . . . . . . . . . . 378 239
Net purchases of office properties and equipment . . . . . . . . (1,186) (2,142)
--------- --------
Net cash used by investing activities . . . . . . . . . . . . (89,226) (143,595)
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
-4-
<PAGE> 7
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------
1996 1995
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits . . . . . . . . . . . . . . . $ 5,510 $ (1,280)
Purchase of deposits . . . . . . . . . . . . . . . . . . . . . . -- 55,548
Premium paid to acquire deposits . . . . . . . . . . . . . . . . -- (4,166)
Net increase in short-term Federal Home Loan Bank advances . . . 97,100 50,500
Borrowings under long-term Federal Home Loan Bank advances . . . -- 42,000
Decrease in advance payments by
borrowers for taxes and insurance . . . . . . . . . . . . . . . (314) (122)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . (1,219) --
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . -- (4,691)
Purchase of common stock for the BIP . . . . . . . . . . . . . . -- (1,318)
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . 101,077 136,471
-------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . . . . 89 3,934
Cash and cash equivalents at beginning of period . . . . . . . . 13,467 8,546
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 13,556 $ 12,480
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid or credited to accounts during the period for:
Interest paid on deposits . . . . . . . . . . . . . . . . . . . $ 12,929 $ 10,747
Interest paid on borrowings . . . . . . . . . . . . . . . . . . 8,343 4,014
Income taxes paid, net of refunds . . . . . . . . . . . . . . . 1,863 3,716
Non-cash investing activities:
Loans receivable transferred to foreclosed properties
and repossessed assets . . . . . . . . . . . . . . . . . . . 163 483
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
-5-
<PAGE> 8
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts
of First Federal Bancshares of Eau Claire, Inc. (the "Company"), and its
wholly-owned subsidiary, First Federal Bank of Eau Claire, F.S.B. (the "Bank")
and the Bank's wholly-owned subsidiaries, First Eau Claire Investments, Inc.
("FECI") and First Service Corporation of Eau Claire, Inc. ("FSC"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
and nine-month periods ended September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
3. PER SHARE DATA
Earnings per share of common stock for the three months and nine
months ended September 30, 1996 and September 30, 1995 have been determined by
dividing net income for the period by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Book
value per share of common stock at September 30, 1996 and December 31, 1995 has
been determined by dividing total shareholders' equity by the number of shares
of common stock outstanding at the respective dates. Stock options and First
Federal Bank of Eau Claire, F.S.B. Incentive Plan and Trust (the "BIP") shares
are regarded as common stock equivalents and are, therefore, considered in the
computation of earnings per share using the treasury stock method.
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income for the period . . . . . . . . . . . . . . $ 594 $ 1,471 $ 3,255 $ 4,596
========= ========= ========= ========
Primary earnings per common share:
Weighted average common shares
outstanding during period . . . . . . . . . . . . . 6,293,567 6,559,323 6,250,946 6,707,585
Net effect of dilutive stock
options and BIP shares . . . . . . . . . . . . . . 211,208 101,830 195,777 37,482
--------- --------- --------- --------
6,504,775 6,661,153 6,446,723 6,745,067
========= ========= ========= =========
Primary earnings per common shares . . . . . . . . . $ 0.09 $ 0.22 $ 0.50 $ 0.68
Fully-diluted earnings per common share:
Weighted average common shares
outstanding during period . . . . . . . . . . . . . 6,293,567 6,559,323 6,250,946 6,707,585
Net effect of dilutive stock
options and BIP shares . . . . . . . . . . . . . . 274,840 134,088 298,852 67,290
--------- --------- --------- --------
6,568,407 6,693,411 6,549,798 6,774,875
========= ========= ========= =========
Fully-diluted earnings per common share . . . . . . . $ 0.09 $ 0.22 $ 0.50 $ 0.68
</TABLE>
-6-
<PAGE> 9
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The computation of book value per common share is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Common shares outstanding at
the end of the period (1) . . . . . . . . . . . . . . 6,855,379 6,855,379
Total shareholders' equity at the end of the period . . . $ 97,828 $ 95,362
Book value per common share . . . . . . . . . . . . . . . $ 14.27 $ 13.91
- -------------------------------------
</TABLE>
(1) Includes as outstanding all shares owned by the First Federal Bank of
Eau Claire, F.S.B. Employee Stock Ownership Plan (the "ESOP") and the
BIP.
4. ACCOUNTING CHANGES
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures." SFAS No. 114 and No. 118 require that
impaired loans be measured at the present value of expected future cash flows
discounted at the loan's initial effective interest rate, or as a practical
expedient, at the loan's observative market price or the fair value of the
collateral if the loan is collateral dependent. Homogeneous loans, such as
one- to four-family residential loans and one- to four-family construction
loans and most categories of consumer loans, are excluded from this
requirement. SFAS No. 118 eliminates the provisions in SFAS No. 114 that
describe how a creditor should report interest income on an impaired loan and
allows a creditor to use existing methods to recognize, measure and display
interest income on an impaired loan. The effect of the adoption of SFAS No.
114 and No. 118 as of January 1, 1995, was not material to the financial
statements and, as such, has not been separately disclosed. The evaluation of
collateral values and expected cash flows is inherently subjective as it
requires material estimates involving the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change.
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets
To Be Disposed of." SFAS No. 121 addresses the accounting for the impairment
of long-lived assets, identifiable intangibles and goodwill related to those
assets. The effect of the adoption of SFAS No. 121 as of January 1, 1996 was
not material to the financial statements and, as such, has not been separately
disclosed.
Effective January 1, 1996, the Company adopted SFAS No. 122,
"Accounting For Mortgage Servicing Rights, an Amendment of SFAS No. 65." SFAS
No. 122 requires the cost of originating mortgage servicing rights to be
capitalized separately from the cost of originating a loan when a definitive
plan to sell or securitize mortgage loans and retain the mortgage servicing
rights exists. Once recorded, mortgage servicing rights are amortized in
proportion to expected net servicing income. As a result of the adoption of
SFAS No. 122, during the three months and nine months ended September 30, 1996,
the Company capitalized mortgage servicing rights of $23,000 and $187,000,
respectively, upon the sale or recognition of a definitive plan to sell or
securitize mortgage loans with mortgage servicing rights retained.
-7-
<PAGE> 10
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting For Stock-Based Compensation." The statement encourages, but does
not require, companies to recognize compensation cost related to stock
compensation such as stock options and awards based on the fair value of the
award at the date of grant and amortize this amount to expense over the service
period, which is usually the vesting period. The Company currently recognizes
compensation expense under the intrinsic value method, whereby compensation
expense is determined as the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. The statement requires that the financial
statements include certain disclosures about stock-based employee compensation
arrangements. The Company chose not to adopt the fair value method of expense
recognition for stock-based compensation awards. As such, SFAS No. 123 will
have no effect on current or future reported earnings of the Company. Rather,
the effects of the fair value method on the Company's earnings will be
disclosed on a pro forma basis, as permitted by SFAS No. 123.
5. SECURITIES
The amortized cost and estimated fair values of the Company's
available-for-sale securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------------- FAIR
COST GAINS LOSSES VALUE
------------ --------- ---------- ---------
(IN THOUSANDS)
AT SEPTEMBER 30, 1996:
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency securities . . . . . . . $ 5,810 $ 61 $ -- $ 5,871
FHLMC preferred stock . . . . . . . . . . . . . . . 1,000 15 -- 1,015
----- ----- ----- -----
Total investment securities . . . . . . . . . . . 6,810 76 -- 6,886
Mortgage-related securities:
Mortgage-backed securities . . . . . . . . . . . . 14,506 242 37 14,711
Adjustable rate mortgage loan mutual fund . . . . . 12,011 -- 296 11,715
Collateralized mortgage obligations and REMICs . . 120,445 1,161 1,534 120,072
Collateralized mortgage obligation
residual interest . . . . . . . . . . . . . . . . 50 -- -- 50
-------- ------- ------ -------
Total mortgage-related securities . . . . . . . 147,012 1,403 1,867 146,548
------- ----- ----- -------
$153,822 $1,479 $1,867 $153,434
======== ====== ====== ========
AT DECEMBER 31, 1995:
Investment securities:
U.S. Government and agency securities . . . . . . . $ 5,826 $ 146 $ -- $ 5,972
FHLMC preferred stock . . . . . . . . . . . . . . . 1,000 35 -- 1,035
------ ----- ----- --------
Total investment securities . . . . . . . . . . . 6,826 181 -- 7,007
Mortgage-related securities:
Mortgage-backed securities . . . . . . . . . . . 16,614 459 37 17,036
Adjustable rate mortgage loan mutual fund . . . . 11,506 -- 273 11,233
Collateralized mortgage obligations and REMICs . 86,732 1,362 147 87,947
Collateralized mortgage obligation
residual interest . . . . . . . . . . . . . . . 61 -- -- 61
-------- ------ ----- --------
Total mortgage-related securities . . . . . . . 114,913 1,821 457 116,277
------- ----- ---- -------
$121,739 $2,002 $ 457 $123,284
======== ====== ===== ========
</TABLE>
-8-
<PAGE> 11
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ---------------
(IN THOUSANDS)
RESIDENTIAL REAL ESTATE LOANS:
<S> <C> <C>
One- to four-family . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 401,111 $ 360,169
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,783 21,784
---------- ----------
Total residential real estate loans . . . . . . . . . . . . . . . . . 425,894 381,953
NON-RESIDENTIAL AND OTHER REAL ESTATE LOANS:
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,918 5,937
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,918 3,654
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,144 2,388
Construction and development . . . . . . . . . . . . . . . . . . . . . . 7,133 7,263
---------- ----------
Total non-residential and other real estate loans . . . . . . . . . . 19,113 19,242
CONSUMER LOANS:
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,423 28,321
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,282 19,014
Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,412 15,855
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,816 5,105
---------- ----------
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . 76,933 68,295
---------- ----------
Gross loans receivable . . . . . . . . . . . . . . . . . . . . . . . . 521,940 469,490
LESS:
Undisbursed loan proceeds . . . . . . . . . . . . . . . . . . . . . . . . 11,135 9,731
Deferred loan fees and discounts . . . . . . . . . . . . . . . . . . . . 1,272 1,699
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . 857 782
---------- ----------
13,264 12,212
---------- ----------
$ 508,676 $ 457,278
========== ==========
</TABLE>
7. SHAREHOLDERS' EQUITY
Under federal law and regulations, the Bank is required to meet
certain tangible, core and risk-based capital requirements. Tangible capital
generally consists of shareholders' equity minus certain intangible assets.
Core capital generally consists of tangible capital plus qualifying intangible
assets. The risk-based capital requirements presently address credit risk
related to both recorded and off-balance sheet commitments and obligations and
are a ratio of shareholder's equity plus general allowances for losses as
compared to risk-weighted assets.
-9-
<PAGE> 12
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Bank's capital and ratios and the
capital and ratios required by the Office of Thrift Supervision ("OTS"):
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT SEPTEMBER 30, 1996:
Bank capital . . . . . . . . . . . . . . . . . . . . . $69,977 $69,977 $69,977
Add: Net unrealized holding loss on securities
available-for-sale . . . . . . . . . . . . . 241 241 241
Less: Non-qualifying intangibles . . . . . . . . . . . (3,739) (3,739) (3,739)
Non-qualifying originated mortgage
servicing rights . . . . . . . . . . . . . . (3) (3) (3)
Add: General allowance for losses . . . . . . . . . . -- -- 830
--------- -------- -----
66,476 66,476 67,306
Required regulatory capital . . . . . . . . . . . . . 10,872 21,743 27,326
------- ------- -------
Excess . . . . . . . . . . . . . . . . . . . . . . . $55,604 $44,733 $39,980
======= ======= =======
Bank capital ratios . . . . . . . . . . . . . . . . . 9.17% 9.17% 19.70%
Required regulatory ratios . . . . . . . . . . . . . . 1.50 3.00 8.00
---- ---- ----
Excess . . . . . . . . . . . . . . . . . . . . . . . 7.67% 6.17% 11.70%
==== ==== =====
AT DECEMBER 31, 1995:
Bank capital . . . . . . . . . . . . . . . . . . . . . $67,663 $67,663 $67,663
Less: Net unrealized holding gain on securities
available-for-sale . . . . . . . . . . . . . (1,028) (1,028) (1,028)
Non-qualifying intangibles . . . . . . . . . . (3,999) (3,999) (3,999)
Add: General allowance for losses . . . . . . . . . . -- -- 767
------- ------- ------
62,636 62,636 63,403
Required regulatory capital . . . . . . . . . . . . . 9,249 18,498 23,475
------- ------- -------
Excess . . . . . . . . . . . . . . . . . . . . . . . $53,387 $44,138 $39,928
======= ======= =======
Bank capital ratios . . . . . . . . . . . . . . . . . 10.16% 10.16% 21.61%
Required regulatory ratios . . . . . . . . . . . . . . 1.50 3.00 8.00
----- ----- -----
Excess . . . . . . . . . . . . . . . . . . . . . . . 8.66% 7.16% 13.61%
===== ===== =====
</TABLE>
Under amendments to the risk-based capital requirement adopted by the
OTS in August 1993, the effective date of which still has not yet been
determined, the Bank will be required to deduct from its risk-based capital an
amount equal to 50% of its interest-rate risk exposure, as defined, multiplied
by the market value of its assets. Management believes that even though it
would be classified as an institution with a greater than "normal" level of
interest rate risk under OTS regulations, it presently has sufficient capital
to meet the additional capital requirement.
8. ACQUISITION
In July 1995, the Company acquired certain assets and assumed $55.5
million of deposits of five banking offices (one of which was subsequently
closed) located in west central Wisconsin (the "Branch Acquisitions"). The
assets acquired included the branch real estate, if owned, or the assignment of
the lease, if leased, furniture, fixtures and equipment, cash and a minimal
amount of loans. The fair value of the deposits assumed exceed the fair value
of the assets acquired by $4.2 million. This acquisition has been accounted
for as a purchase and, accordingly, the results of operations of the acquired
branches have been included in the Company's financial statements since the
acquisition date.
9. MERGER
On September 16, 1996, the Company entered into an Agreement and Plan
of Merger (the "Agreement") whereby the Company will be acquired by Mutual
Savings Bank, a Wisconsin chartered mutual savings bank. Under the terms of
the Agreement, the Company's shareholders will receive $18.85 in cash for each
share owned, subject to certain upward price adjustments. Subject to
shareholder and regulatory approvals, as well as various other conditions of
closing, the transaction is expected to be completed in the later part of the
first quarter of 1997.
-10-
<PAGE> 13
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Federal Bancshares of Eau Claire, Inc. (the "Company"), a
Wisconsin corporation, is a holding company which owns all of the issued and
outstanding stock of First Federal Bank of Eau Claire, F.S.B. (the "Bank"), a
federally chartered stock savings bank. In this discussion and analysis,
reference to the operations and financial condition of the Company includes the
operations and financial condition of the Bank.
The Company's business currently consists principally of the business
of the Bank. The Bank's principal business consists of attracting deposits
from the general public, originating mortgage loans principally to finance the
purchase and/or construction of residential dwellings and originating various
types of consumer loans. Through its wholly-owned subsidiary, First Service
Corporation of Eau Claire, Inc. ("FSC"), the Bank offers a wide range of
credit-related life, accident and disability insurance, and also provides
commissioned brokerage services for the sale of stocks, bonds, tax-deferred
annuities, mutual funds and other securities. The Bank derives its income
primarily from interest earned on loans and mortgage-backed and related
securities (collectively, "mortgage-related securities"), and to a lesser
extent, from interest earned on investments, gains on loans held-for-sale and
securities, fees received in connection with the origination of loans, loan
servicing and service charges on deposits, mortgage loans and other services.
Expenses consist primarily of interest paid on deposits and borrowed funds and
non-interest expenses. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC") and
its deposits are issued up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the FDIC. The Bank also is a member of the Federal
Home Loan Bank system.
The earnings of the Company depend primarily on net interest income,
which is the difference between interest earned on interest-earning assets,
consisting primarily of mortgage and consumer loans, mortgage-related
securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits and advances
from the Federal Home Loan Bank of Chicago ("FHLB- Chicago"). Net interest
income is a function of the Company's "interest rate spread," which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest- earning assets as compared to the average balance
of interest-bearing liabilities. The Company's operating results also are
affected by the amount of its non-interest income, including loan servicing and
loan related fees, gains and losses on loans held-for-sale, mortgage-related
securities and other investment securities, as well as transactional and other
fee income. The Company's non-interest expense consists principally of
employee compensation, occupancy expenses and federal deposit insurance
premiums. The Company's operating results are significantly affected by
general economic and competitive conditions, most particularly the changes in
market interest rates, government policies and actions by regulatory
authorities.
FORWARD-LOOKING STATEMENTS
The discussion in this Form 10-Q includes certain forward-looking
statements based upon management expectations. Factors which could cause
future results to differ from these expectations include the following:
general economic conditions; legislative and regulatory initiatives; monetary
and fiscal policies of the federal government; deposit flows; cost of funds;
general market rates of interest; interest rates on competing investments;
demand for loan products; demand for financial services; changes in accounting
policies or guidelines; and changes in the quality or composition of the
Company's loan and investment portfolios.
-11-
<PAGE> 14
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RECENT REGULATORY DEVELOPMENT RELATED TO DEPOSIT INSURANCE
Deposits of the Bank currently are insured to applicable limits by the
FDIC under the Savings Association Insurance Fund ("SAIF"). The FDIC also
insures commercial bank deposits under the Bank Insurance Fund ("BIF").
Premium levels are set to permit the funds to be capitalized at a level equal
to 1.25% of total fund deposits. As the funds reach their designated ratios,
the FDIC has authority to lower fund premium assessments to rates sufficient to
maintain the designated reserve ratio. In May 1995, the BIF achieved its
designated ratio and the FDIC reduced assessment rates by four cents per $100
of deposits for all BIF-insured institutions, producing a premium rate schedule
ranging from zero (i.e. whereby such institutions will be subject only to a
$2,000 minimum annual premium) to 27 cents per $100 of deposits depending on
the institution's risk-based premium category. Based on these assessment rate
modifications, the majority of BIF members now pay only a $2,000 minimum annual
premium. The SAIF has not achieved its designated reserve ratio and is not
anticipated to do so prior to year 2001. Premium rates for SAIF-insured
members are being paid at an average of 23.4 cents per $100 of deposits. The
new assessment rate provisions have placed SAIF member institutions at a
competitive disadvantage based on their higher deposit insurance premium
obligations.
Congress recently addressed the deposit insurance premium disparity
with passage of the "Deposit Insurance Funds Act of 1996" (the "DIF Act") as
part of an Omnibus Appropriations Bill signed into law on September 30, 1996.
Pursuant to the terms of the DIF Act,the FDIC was directed to impose a special
assessment on SAIF-assessable deposits at a rate that would cause the SAIF to
achieve its designated reserve ratio of 1.25% of SAIF-insured deposits as of
October 1, 1996. The DIF Act requires that the special assessment be applied
against the SAIF-assessable deposits held by institutions as of March 31,
1995. Pursuant to a final rule issued by the FDIC on October 16, 1996, the
special assessment rate was determined to be 65.7 basis points. This one-time
special assessment will fully capitalize SAIF, and will be collected on
November 27, 1996.
Based on the special assessment being imposed at 65.7 basis points per
$100 of insurable deposits, the amount of the assessment to the Bank would be
approximately $2.0 million. The special assessment will have the effect of
reducing the Bank's earnings and capital by the after-tax amount of the
assessment as of the date of enactment, which is estimated to be $1.2 million,
or $0.18 per share. As described below, with the recapitalization of the SAIF,
BIF and SAIF premiums are expected to be comparable and it is anticipated that
the Bank's FDIC premium expense will be reduced in future periods.
On October 16, 1996, the FDIC published a proposed rule which would
establish a permanent SAIF base assessment schedule at a range of 4 to 31 basis
points. The proposed rule also called for an adjusted assessment schedule
reducing these rates by 4 basis points to reflect current conditions, producing
an effective SAIF assessment range of 0 to 27 basis points, beginning October
1, 1996. This assessment range is comparable to the current schedule for
BIF-institutions. A special interim rate schedule ranging from 18 to 27 basis
points applies to SAIF- member savings associations for the last quarter of
1996, reflecting that assessments related to certain bond obligations are
included in the SAIF rates for these institutions during that period.
The DIF Act addresses other matters which will affect the Bank.
Certain bond obligations of the Financing Corporation ("FICO"), which were
issued to ameliorate the savings and loan crisis in the 1980's, will be shared
by all insured depository institutions beginning after December 31, 1996. This
obligation had previously been the sole responsibility of SAIF-insured
institutions and had been funded through SAIF assessments. The DIF Act
eliminates the statutory link between FICO's assessments and amounts authorized
to be assessed by the SAIF, effective January 1, 1997. All insured
institutions will pay an annual assessment to fund interest payments on the
FICO bonds. Beginning in 1997, BIF- member institutions will pay one-fifth the
rate to be paid by SAIF members, for the first three years. After January 1,
2000, BIF and SAIF members will share the FICO payments on a pro-rata basis,
which will be assessed at 2.4 basis points, until the bonds mature in 2017.
-12-
<PAGE> 15
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In addition, the DIF Act provides for the merger of BIF and SAIF into
a single Deposit Insurance Fund. This provision will be effective January 1,
1999 assuming that no insured depository institution is a savings association
on that date. This legislation contemplates that the savings association
charter will be phased out over that period of time. The DIF Act also calls
for the Secretary of the Treasury to undertake a study concerning the
development of a common charter for all insured depository institutions and the
abolition of separate and distinct charters for banks and savings associations.
Management anticipates that the Bank, after consideration of the
one-time assessment described above, will continue to exceed all the regulatory
minimum capital levels and that the reduction in the premium rate will result
in the recapture of the special assessment in less than three years. Although
management is unable to predict the ultimate effect on Company operations of
the FICO bond assessments, the merger of the BIF and SAIF, and the potential
abolition of separate and distinct charters for banks and savings associations,
management does not presently anticipate that these provisions will have a
material impact on the financial condition of the Company in future periods.
CHANGES IN FINANCIAL CONDITION
General. The Company's total assets increased $107.2 million, or
17.3%, to $728.8 million at September 30, 1996, compared to $621.6 million at
December 31, 1995. The funds were primarily invested in mortgage-related
securities, which increased by $30.2 million, and loans, including loans
held-for-sale, which increased by $69.6 million during the nine months ended
September 30, 1996. The increase was primarily funded by an increase in
FHLB-Chicago advances of $97.1 million to $248.1 million at September 30, 1996,
from $151.0 million at December 31, 1995.
Cash. Cash decreased by $320,000 to $9.4 million at September 30,
1996 compared to $9.7 million at December 31, 1995. The decrease was due to
fluctuations in cash balances experienced in conducting ordinary banking
activities.
Investment Securities. Investment securities, including securities
available-for-sale, federal funds sold, longer-term interest-bearing deposits
and Federal Home Loan Bank stock, increased $4.9 million to $23.6 million at
September 30, 1996 compared to $18.7 million at December 31, 1995. The
increase was primarily due to the purchase of additional FHLB-Chicago stock of
$4.7 million. The FHLB-Chicago requires members to own FHLB-Chicago stock in
an amount at least equal to 5% of the amount borrowed.
Mortgage-Related Securities. Mortgage-related securities, all of
which were available-for-sale at September 30, 1996 and December 31, 1995,
increased $30.2 million to $146.5 million, or 20.1% of total assets, at
September 30, 1996 compared to $116.3 million, or 18.7% of total assets at
December 31, 1995. The increase in the Company's mortgage-related securities
portfolio was primarily the result of the Company's leveraging strategy whereby
proceeds from additional FHLB-Chicago advances were used to purchase
mortgage-related securities. The Company purchased $44.4 million of
mortgage-related securities during the nine months ended September 30, 1996,
which consisted primarily of collateralized mortgage obligations ("CMOs") and
REMICs. These purchases included $16.7 million of short-to-medium term fixed
rate mortgage-related securities, all of which were private issue securities,
and $27.7 million of such securities with periodic interest rate adjustment
features, of which $24.2 million were private issue securities. When purchased
by the Company, private issue securities have credit ratings of AA or better
and meet the Federal Financial Institution's Examination Council definition of
low-risk securities. At September 30, 1996, none of the credit ratings of any
of the private issue securities in the Company's portfolio had been downgraded
since the date of purchase. These purchases were partially offset by $12.3
million of principal repayments. The increase in mortgage-related securities
was funded by additional short-term FHLB-Chicago advances.
-13-
<PAGE> 16
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Loans Receivable and Loans Held-For-Sale. Total loans, including
loans held-for-sale, increased $69.6 million to $530.2 million at September 30,
1996 compared to $460.6 million at December 31, 1995. One- to four-family
residential real estate loans, which is the Company's primary lending activity,
increased by $59.2 million to $422.6 million at September 30, 1996. Most of
the increase consisted of loan originations, which continued to be strong
during the nine months ended September 30, 1996. This increase reflects the
Company's continued emphasis on this type of lending and an effort to increase
its share of the market. The Company retains in its loan portfolio all
adjustable rate mortgage loans and certain fixed rate mortgage loans. The
Company generally sells longer term fixed rate residential mortgage loans as
part of its overall interest rate risk management strategy.
Deposits. Deposits increased by $5.5 million to $374.0 million at
September 30, 1996 compared to $368.5 million at December 31, 1995. Deposits
are the Company's main source of funds for lending and other investment
purposes. The level of deposits is heavily influenced by factors such as the
general level of short and long-term interest rates as well as alternative
yields that investors may obtain on competing investment securities, such as
money market mutual funds. The weighted average nominal interest rate on
deposits decreased by eleven basis points during the nine months ended
September 30, 1996 to 4.64% at September 30, 1996, compared to 4.75% at
December 31, 1995 as a result of the acquisition of certificates of deposit in
1996 at market interest rates lower than those maturing in 1996, partially
offset by an increase in rates paid on money market accounts. The Company
currently does not solicit brokered deposits as a source of funds; however,
management of the Company may evaluate opportunities to acquire brokered
deposits in the future.
Borrowed Funds. FHLB-Chicago advances increased by $97.1 million to
$248.1 million at September 30, 1996 compared to $151.0 million at December 31,
1995. The increase in the Company's FHLB-Chicago advances was primarily the
result of the Company's strategy to leverage its capital base by using the
proceeds from additional FHLB-Chicago advances to originate and purchase
additional loans and mortgage-related securities. The proceeds from these
short-term advances were used to purchase longer term fixed and adjustable rate
CMOs and REMICs and originate and purchase loans. In a rising rate
environment, such short term borrowings present the risk that upon maturity
dates, the interest rate on these borrowings may increase. The weighted
average interest rate paid on borrowed funds decreased by ten basis points to
5.72% at September 30, 1996, compared to 5.82% at December 31, 1995, as a
result of the decrease in market interest rates on short-term advances.
The Bank is required to maintain unencumbered one- to four-family
first mortgage loans, mortgage-related securities or U.S. Treasury and agency
obligations in its portfolio based on a borrowing to collateral ratio that
ranges from 60% of amortized cost to 90% of fair market value. In addition,
these advances are collateralized by all FHLB stock owned by the Bank. At
September 30, 1996, the Bank's total potential borrowings with the
FHLB-Chicago, which is limited to 35% of the Bank's total assets less
borrowings from other sources, was approximately $255 million, of which the
Bank had used $248.1 million of such borrowing limit at September 30, 1996.
Shareholders' Equity. Shareholders' equity increased by $2.4 million
during the nine months ended September 30, 1996 to $97.8 million at September
30, 1996, compared to $95.4 million at December 31, 1995. The increase in
shareholders' equity was due to the combined effects of $3.3 million of net
income, $952,000 for the amortization of unearned ESOP compensation and
$747,000 for the amortization of unearned BIP compensation, partially offset by
payment of cash dividends of $1.2 million and a $1.3 million increase of net
unrealized holding losses on securities available-for-sale, net of deferred
income tax benefits.
-14-
<PAGE> 17
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Performance Summary. Net income for the three months ended September
30, 1996 decreased $877,000 to $594,000 compared to $1.5 million for the three
months ended September 30, 1995, and net income for the nine months ended
September 30, 1996 decreased $1.3 million to $3.3 million compared to $4.6
million for the nine months ended September 30, 1995. The decrease for the
three month period was due to the combined effects of a $589,000 increase in
net interest income, a $116,000 increase in non-interest income, a $2.3 million
increase in non-interest expense ($2.0 million of which was attributable to the
federal insurance special assessment), a $19,000 decrease in provision for loan
losses and a $666,000 decrease in income taxes. The decrease for the nine
month period was due to the combined effects of a $2.4 million increase in net
interest income, a $1.2 million decrease in non-interest income, a $3.9 million
increase in non-interest expense ($2.0 million of which was attributable to the
federal insurance special assessment), a $58,000 increase in provision for loan
losses and a $1.3 million decrease in income taxes.
The following table sets forth the return on average assets and return
on average equity for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Return on average assets (annualized) . . . . . . . . 0.33% 1.04% 0.63% 1.18%
Return on average equity (annualized) . . . . . . . . 2.42 6.05 4.48 6.32
</TABLE>
Net Interest Income. Net interest income, which is the excess of
interest earned on loans and other interest-earning assets over interest
expense on deposits and borrowed funds, is the major component of earnings for
the Company. The following table sets forth certain information related to net
interest income.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total interest income . . . . . . . . . . . . . . . . $ 13,121 $ 10,719 $ 37,655 $ 28,870
Average interest-earning assets . . . . . . . . . . . 690,154 542,937 658,470 500,557
Average yield on interest-earning assets(1) . . . . . 7.60% 7.90% 7.62% 7.69%
Total interest expense . . . . . . . . . . . . . . . $ 7,619 $ 5,806 $ 21,762 $ 15,380
Average interest-bearing liabilities . . . . . . . . 603,610 457,087 574,568 412,091
Average rate on interest-bearing liabilities(1) . . . 5.05% 5.08% 5.05% 4.98%
Net interest income . . . . . . . . . . . . . . . . . $ 5,502 $ 4,913 $ 15,893 $ 13,490
Average net earning assets . . . . . . . . . . . . . 86,544 85,850 83,902 88,466
Interest rate spread during period(1)(2) . . . . . . 2.55% 2.82% 2.57% 2.71%
Net interest margin(1)(3) . . . . . . . . . . . . . . 3.19 3.62 3.22 3.59
- -----------------------------
</TABLE>
(1) Annualized.
(2) Interest rate spread represents the difference between
the average yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
-15-
<PAGE> 18
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net interest income increased by $589,000 or 12.0% to $5.5 million for
the three months ended September 30, 1996 compared to $4.9 million for the
three months ended September 30, 1995, and increased $2.4 million or 17.8% to
$15.9 million for the nine months ended September 30, 1996 compared to $13.5
million for the nine months ended September 30, 1995. The increase in net
interest income was primarily due to an increase in total average
interest-earning assets. Total average interest-earning assets increased by
$147.3 million to $690.2 million for the three months ended September 30, 1996
compared to $542.9 million for the three months ended September 30, 1995, and
increased $157.9 million to $658.5 million for the nine months ended September
30, 1996 compared to $500.6 million for the nine months ended September 30,
1995. The increase in total average interest-earning assets was primarily the
result of (i) the $51.4 million of deposits, net of the premium paid, assumed
in connection with the Branch Acquisitions and the reinvestment of these net
deposits in interest-earning assets; and (ii) the Company's strategy to
leverage its capital base by using the proceeds from additional FHLB-Chicago
advances to originate and purchase additional loans and mortgage-related
securities. The effects of the increase in average interest-earning assets
during both the three and nine-month periods in 1996 was partially offset by a
modest decrease in the Company's interest rate spread during the periods.
Interest Income. Total interest income increased $2.4 million or 22.4%
to $13.1 million for the three months ended September 30, 1996, compared to
$10.7 million for the three months ended September 30, 1995, and increased $8.8
million or 30.4% to $37.7 million for the nine months ended September 30, 1996
compared to $28.9 million for the nine months ended September 30, 1995. The
increase in interest income was primarily the result of (i) a $1.5 million and
a $5.7 million increase in interest on loans, respectively; and (ii) a $834,000
and a $3.1 million increase in interest on mortgage-related securities,
respectively. The increase in interest income on loans for the three months
ended September 30, 1996 compared to the three months ended September 30, 1995
was due to a $89.6 million increase in the average balance of loans, partially
offset by a 22 basis point decrease in the average yield on the loan portfolio.
The increase in interest income on loans for the nine months ended September
30, 1996, compared to the nine months ended September 30, 1995 was due to a
$92.4 million increase in the average balance of loans, combined with an eight
basis point increase in the average yield on the loan portfolio. The decrease
in average yield on loans for the three months ended September 30, 1996
compared to the three months ended September 30, 1995, was attributable to the
origination of mortgage loans in 1996 at rates lower than the portfolio average
at September 30, 1995. The increase in average yield on loans for the nine
months ended September 30, 1996, compared to the nine months ended September
30, 1995 was attributable to the origination and purchase of loans in 1996 at
rates higher than the portfolio average for the nine months ended September 30,
1995. The increase in interest income on mortgage- related securities for the
three months and nine months ended September 30, 1996 compared to the three
months and nine months ended September 30, 1995 was the result of a $55.7
million and a $65.1 million increase in the average balance of such securities,
respectively, partially offset by a 53 basis point and a 45 basis point
decrease in the average yield, respectively. The decrease in the average yield
on mortgage-related securities was attributable to the purchase of
mortgage-related securities in the most recent four quarters at rates lower
than the portfolio average.
Interest Expense. Total interest expense increased by $1.8 million to
$7.6 million for the three months ended September 30, 1996 compared to $5.8
million for the three months ended September 30, 1995, and increased $6.4
million to $21.8 million for the nine months ended September 30, 1996 compared
to $15.4 million for the nine months ended September 30, 1995. The increase in
interest expense for the three months ended September 30, 1996 was the result
of (i) an increase in average interest-bearing liabilities of $146.5 million or
32.1%, to $603.6 million for the three months ended September 30, 1996 compared
to $457.1 million for the three months ended September 30, 1995; and (ii) a
three basis point decrease in the rate paid on average interest-bearing
liabilities to 5.05% for the three months ended September 30, 1996, compared to
5.08% for the three months ended September 30, 1995. The increase in interest
expense for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995 was the result of (i) an increase in average
interest-bearing liabilities
-16-
<PAGE> 19
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of $162.5 million, or 39.4%, to $574.6 million for the nine months ended
September 30, 1996 compared to $412.1 million for the nine months ended
September 30, 1995; and (ii) a seven basis point increase in the rate paid on
average interest-bearing liabilities to 5.05% for the nine months ended
September 30, 1996, compared to 4.98% for the nine months ended September 30,
1995. The increases in average interest-bearing liabilities were primarily
attributable to (i) the increase in average interest-bearing deposits, which
increased $23.2 million to $367.9 million for the three months ended September
30, 1996 and $53.5 million to $366.9 million for the nine months ended
September 30, 1996; and (ii) the increase in average total borrowings, which
increased $123.3 million to $235.7 million for the three months ended September
30, 1996 and $109.0 million to $207.7 milliion for the nine months ended
September 30, 1996. The increase in average interest-bearing deposits for the
nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995 was primarily the result of the $55.5 million of deposits
assumed in connection with the Branch Acquisitions consummated in July 1995.
The increase in average total borrowings was primarily the result of the
Company's strategy to leverage its capital base by using proceeds from
additional FHLB-Chicago advances to originate and purchase additional loans and
mortgage-related securities. The decrease in rates paid on average
interest-bearing liabilities for the three months ended September 30, 1996
compared to the three months ended September 30, 1995 resulted from (i) a
decrease in the average rates paid on deposits from 4.78% for the three months
ended September 30, 1995, to 4.69% for the three months ended September 30,
1996; and (ii) a decrease in the average rates paid on total borrowings from
6.01% for the three months ended September 30, 1995, to 5.60% for the three
months ended September 30, 1996. The increase in rates paid on average
interest-bearing liabilities for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995 resulted from (i) an
increase in the average rates paid on deposits from 4.63% for the nine months
ended September 30, 1995 to 4.74% for the nine months ended September 30, 1996;
and (ii) a decrease in the average rates paid on total borrowings from 6.09%
for the nine months ended September 30, 1995 to 5.60% for the nine months ended
September 30, 1996. The decrease in the average rate paid on deposits for the
three months ended September 30, 1996, compared to the three months ended
September 30, 1995, was attributable to the acquisition of certificate of
deposits in 1996 at rates lower than those maturing in 1996, partially offset
by an increase in rates paid on money market accounts. The increase in the
average rate paid on deposits for the nine months ended September 30, 1996,
compared to the nine months ended September 30, 1995 resulted primarily from a
decrease in the percentage of lower cost core deposits added to the portfolio
in connection with the Branch Acquisitions. The decreases in the average rates
paid on total borrowings for these same periods resulted from a decrease in the
level of short-term market interest rates.
The following table sets forth certain information relating to the
Company's average unaudited consolidated statements of financial condition and
consolidated statements of income, and reflects the average yield on
interest-earning assets and average cost of interest-bearing liabilities at or
for the periods indicated. Such yields and costs are derived by dividing
income and interest expense by the average monthly balance of such assets or
liabilities, respectively, for the periods presented. The Company's management
does not believe that the use of month-end balances instead of daily balances
has caused a material difference in the information presented. The average
yields include amortization of net deferred loan fees which are considered
adjustments to yield. Interest income on non-accrual loans is reflected in the
period when collected and not in the period when earned.
-17-
<PAGE> 20
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
1996 1995
------------------------ ---------------------------------
INTEREST AVG. INTEREST AVE.
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ------ ----
ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-related securities (1) . . . . . . $147,357 $ 2,531 6.87% $ 91,669 $ 1,697 7.40%
-------- ------- -------- -------
Loans receivable:
First mortgage loans (2)(3) . . . . . . . 446,406 8,602 7.71 366,665 7,211 7.87
Consumer loans (3) . . . . . . . . . . . 74,926 1,626 8.68 65,064 1,500 9.22
-------- ------- -------- -------
Total loans receivable . . . . . . . . 521,332 10,228 7.85 431,729 8,711 8.07
-------- ------- -------- -------
Investments:
Interest-bearing deposits with banks . . 188 3 6.38 348 8 9.20
Federal funds sold . . . . . . . . . . . 2,676 34 5.08 1,134 16 5.64
U.S. Government and other
marketable securities (4) . . . . . . 6,811 125 7.34 11,825 182 6.16
FHLB stock . . . . . . . . . . . . . . . 11,790 200 6.79 6,232 105 6.74
-------- ------- -------- -------
Total investments . . . . . . . . . . . 21,465 362 6.75 19,539 311 6.37
-------- ------- -------- -------
Total interest-earning assets . . . . . . . 690,154 13,121 7.60 542,937 10,719 7.90
-------- ------- -------- ------- ----
Non-interest earning assets . . . . . . . . 26,981 23,655
-------- --------
Total assets . . . . . . . . . . . . . $717,135 $566,592
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits:
NOW accounts . . . . . . . . . . . . . . $ 41,656 210 2.02 $39,084 191 1.95
Money market accounts . . . . . . . . . . 43,325 458 4.23 39,009 390 4.00
Passbook and statement accounts . . . . . 44,300 280 2.53 41,437 270 2.61
Certificates of deposit . . . . . . . . . 238,595 3,368 5.65 225,105 3,266 5.80
-------- ----- ------- -----
Total interest-bearing deposits . . . . 367,876 4,316 4.69 344,635 4,117 4.78
FHLB advances . . . . . . . . . . . . . . . 235,734 3,303 5.60 112,452 1,689 6.01
-------- ----- ------- -----
Total interest-bearing liabilities . . 603,610 7,619 5.05 457,087 5.806 5.08
-------- ----- ------- -----
Non-interest-bearing deposits . . . . . . . 6,277 3,366
Other non-interest bearing liabilities . . 9,261 8,873
-------- -------
Total liabilities . . . . . . . . . . . 619,148 469,326
Shareholders' equity . . . . . . . . . . . 97,987 97,266
-------- -------
Total liabilities and shareholders' equity $717,135 $566,592
======== ========
Net interest income/interest
rate spread (5) . . . . . . . . . . . . $5,502 2.55% $4,913 2.82%
====== ==== ====== ====
Net interest-earning assets/net
interest margin (6) . . . . . . . . . . $ 86,544 3.19% $85,850 3.62%
======== ==== ======= ====
Ratio of average interest-earning assets to
average interest-bearing liabilities . . 114.34% 118.78%
====== ======
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1996 1995
------------------------ ------------------------------
INTEREST AVE. INTEREST AVE.
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ------ ----
ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-related securities (1) . . . . . . $142,689 $7,382 6.90% $ 77,581 $ 4,274 7.35%
-------- ------ -------- -------
Loans receivable:
First mortgage loans (2)(3) . . . . . . . 424,978 24,709 7.75 343,725 19,767 7.67
Consumer loans (3) . . . . . . . . . . . 71,428 4,613 8.61 60,310 3,877 8.57
-------- ------ -------- -------
Total loans receivable . . . . . . . . 496,406 29,322 7.88 404,035 23,644 7.80
-------- ------ -------- -------
Investments:
Interest-bearing deposits with banks . . 240 9 5.00 618 28 6.04
Federal funds sold . . . . . . . . . . . 2,360 91 5.14 592 25 5.63
U.S. Government and other
marketable securities (4) . . . . . . 6,373 333 6.97 12,505 644 6.87
FHLB stock . . . . . . . . . . . . . . . 10,402 518 6.64 5,226 255 6.51
-------- ------ -------- -------
Total investments . . . . . . . . . . . 19,375 951 6.54 18,941 952 6.70
-------- ------ -------- -------
Total interest-earning assets . . . . . . . 658,470 37,655 7.62 500,557 28,870 7.69
Non-interest earning assets . . . . . . . . 26,295 18,507
-------- --------
Total assets . . . . . . . . . . . . . $684,765 $519,064
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits:
NOW accounts . . . . . . . . . . . . . . $40,646 608 1.99 $ 35,928 535 1.99
Money market accounts . . . . . . . . . . 40,637 1,238 4.06 636,511 1,074 3.92
Passbook and statement accounts . . . . . 42,400 804 2.53 39,585 753 2.54
Certificates of deposit . . . . . . . . . 243,207 10,388 5.70 201,411 8,513 5.64
-------- ------ -------- -------
Total interest-bearing deposits . . . . 366,890 13,038 4.74 313,435 10,875 4.63
FHLB advances . . . . . . . . . . . . . . . 207,678 8,724 5.60 98,656 4,505 6.09
-------- ------ -------- -------
Total interest-bearing liabilities . . 574,568 21,762 5.05 412,091 15,380 4.98
------ ---- ------- ----
Non-interest-bearing deposits . . . . . . . 5,273 2,492
Other non-interest bearing liabilities . . 8,117 7,547
-------- --------
Total liabilities . . . . . . . . . . . 587,958 422,130
Shareholders' equity . . . . . . . . . . . 96,807 96,934
-------- --------
Total liabilities and shareholders' equity $684,765 $519,064
======== ========
Net interest income/interest
rate spread (5) . . . . . . . . . . . . $15,893 2.57% $13,490 2.71%
======= ==== ======= ====
Net interest-earning assets/net
interest margin (6) . . . . . . . . . . $83,902 3.22% $ 88,466
======= ==== ======== 3.59%
====
Ratio of average interest-earning assets to
average interest-bearing liabilities . . 114.60% 121.47%
====== ======
</TABLE>
- --------------------------
(1) Includes mortgage-related securities available for sale, excluding fair
value adjustments.
(2) Includes loans held-for-sale, excluding lower of cost or market value
adjustment.
(3) Includes non-accrual loans, excluding allowance for loan losses.
(4) Includes U.S. Government securities and other marketable securities
available-for-sale, excluding fair value adjustments.
(5) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
-18-
<PAGE> 21
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Provision for Loan Losses. Provisions for loan losses are charged to
operations to adjust the total allowance for loan losses to a level considered
appropriate by management. For loans that meet the definition of impaired
under SFAS No. 114, which the Company defines as multi-family residential,
commercial and commercial construction loans for which management does not
anticipate receiving all principal and interest payments when due, an allowance
for loan losses is established primarily based on the difference between the
carrying value of the loans and the fair value of the collateral. Generally,
the Company considers a loan to be impaired when the borrower is 90 days or
more delinquent with respect to principal or interest or management obtains
information which indicates that it is probable that the Company will not
collect principal and interest payments when due. For non-impaired and
homogeneous loan portfolios, which include one-to four family residential,
one-to four family construction, land and consumer loans, management
established loan loss percentages for each component of the Company's asset
classification categories, which consist of non-classified, substandard,
doubtful and loss. These allowance for loan loss percentages have been
established in accordance with management's judgment regarding historical loss
experience, the condition and composition of the Company's loan portfolio,
including the volume and type of lending being conducted, existing and
anticipated economic conditions, findings and evaluations during federal
regulatory examinations, federal regulatory guidelines and general industry
practice. Management periodically reviews the percentages and make adjustments
in accordance with their best judgement as a result of changes in any of the
above-mentioned factors. At the end of each period, management applies the
loan loss percentages to the various categories, in addition to the allowance
estimated on impaired loans, and arrives at the appropriate level of the
allowance for loan losses to be recorded in the Company's statement of
financial condition. Any adjustment to the allowance for loan losses is
accomplished through the provision for loan losses for the period, and
therefore the provision may be a charge or a credit. The Company's allowance
for loan losses was $857,000 or 0.16% of gross loan balances, excluding loans
held-for-sale, at September 30, 1996, compared to $782,000 or 0.17% at
September 30, 1995. To obtain these allowance levels, during the three months
ended September 30, 1996 and 1995, the Company charged $33,000 and $52,000,
respectively, against earnings as a provision for loan losses, and during the
nine months ended September 30, 1996 and 1995, the Company charged $131,000 and
$73,000, respectively, against earnings as a provision for loan losses. The
Company charges off a loan when the collection of the amount due is considered
unlikely. While the Company's management believes that the allowance for loan
losses was adequate at September 30, 1996, future additions to the allowance
may be necessary.
Non-Interest Income. Non-interest income, including gains and losses
on loans held-for-sale and mortgage-related securities and investment
securities, increased $116,000 to $678,000 for the three months ended September
30, 1996 compared to $562,000 for the three months ended September 30, 1995,
and decreased $1.2 million to $1.3 million for the nine months ended September
30, 1996 compared to $2.5 million for the nine months ended September 30, 1995.
The changes in non-interest income were primarily attributable to the effect of
changes in interest rates on mortgage loans held-for-sale and mortgage-related
securities available-for-sale. Loans held-for-sale and commitments to make
future loans are recorded at the lower of aggregate cost or market value.
Unrealized gains and losses to adjust the carrying value of loans held-for-
sale to the lower of their cost or market value and realized gains and losses
on the sales of these loans are reported as net gain or loss on loans
held-for-sale. Mortgage-related securities available-for-sale are recorded at
fair value with unrealized gains and losses credited or charged directly to
equity net of deferred income taxes. Realized gains and losses on the sale of
these securities are reported as net gain or loss on mortgage-related
securities. For the three and nine months ended September 30, 1996, the
Company reported gains of $119,000 and losses of $312,000 on the loans
held-for-sale and mortgage-related securities portfolios, respectively, and for
the three and nine months ended September 30, 1995, the Company reported gains
on these portfolios of $48,000 and $534,000, respectively. These portfolios
tend to perform well in stable or decreasing interest rate environments, such
as that experienced during the three and nine months ended September 30, 1995,
but can experience losses during periods of increasing interest rates such as
that experienced during most of 1996.
-19-
<PAGE> 22
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company faces interest rate risk in its mortgage loans
held-for-sale portfolio to the extent that market interest rates may increase
between the time a loan commitment is issued and the time the resulting loan is
sold. The Company's mortgage loans held-for-sale typically are either sold to
the Federal Home Loan Mortgage Corporation ("FHLMC") or exchanged for
mortgage-related securities (in the form of participation certificates issued
by the FHLMC) and then sold into the secondary market. Gains or losses on
loans held-for-sale and mortgage- related securities classified as trading may
fluctuate significantly from period to period due to changes in interest rates
and the volume of loan originations, and thus the results in any period
relating to those transactions may not be indicative of results which may be
obtained in future periods.
For the three months ended September 30, 1996, the Company recognized
gains of $95,000, and for the nine months ended September 30, 1996, recognized
losses of $336,000, on loans held-for-sale and commitments to make future
loans. These loans are recorded at the lower of cost or market value and at
September 30, 1996 had a carrying value of $21.5 million, or 3.0% of total
assets. The gains for the three months ended September 30, 1996 occurred as
interest rates generally decreased during the period, causing the market value
of the loans held-for-sale and commitments to originate loans to increase above
the market value of the loans held-for-sale portfolio at June 30, 1996. The
losses for the nine months ended September 30, 1996 occurred as interest rates
generally increased during the first six months of the period, causing the
market value of the loans held-for-sale and commitments to originate loans to
decrease below the historical cost of the loans held-for-sale portfolio. For
the three and nine months ended September 30, 1996, $5.4 million and $7.6
million of mortgage loans held-for-sale were sold at losses of $4,000 and
$4,000, respectively. For the three and nine months ended September 30, 1995,
the Company recognized gains of $10,000 and $66,000, respectively, on loans
held-for-sale and commitments to make future loans comprising part of the
pipeline. These loans are recorded at the lower of cost or market. These
gains occurred as interest rates generally decreased during the period, causing
the market value of the loans held-for-sale and commitments to originate loans
to increase above the market value of this portfolio at December 31, 1994, but
remain below the historical cost of the loans held-for-sale portfolio. During
the three and nine months ended September 30, 1995, $10.3 million and $16.1
million of mortgage loans held-for-sale were sold at gains of $10,000 and
$66,000, respectively.
During the nine months ended September 30, 1995, the Company realized
a gain of $301,000 on the sale of $10.7 million of mortgage- related securities
available-for-sale. These securities were formed from mortgage loans
originated by the Company and subsequently transferred from the
mortgage-related securities classified as trading portfolio to the
mortgage-related securities available-for-sale portfolio during 1994. During
the three and nine months ended September 30, 1996 and during the three months
ended September 30, 1995, there were no sales of mortgage-related securities.
At September 30, 1996 and 1995, the Company did not have any securities in its
mortgage-related securities classified as trading portfolio.
The following table sets forth the percentage of non-interest income,
exclusive of net gains or losses on loans held-for-sale, mortgage-related
securities and investment securities, to average assets.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Other non-interest income . . . . . . . . . . . . . . . $ 559 $ 514 $ 1,611 $ 1,650
Other non-interest income to average assets (annualized) 0.31% 0.36% 0.31% 0.42%
</TABLE>
-20-
<PAGE> 23
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The decreases in other non-interest income for the nine months ended
September 30, 1996 were primarily attributable to $186,000 of interest received
during the nine months ended September 30, 1995 in connection with a Federal
income tax refund.
Non-Interest Expense. Non-interest expense increased $2.3 million to
$5.4 million for the three months ended September 30, 1996 compared to $3.1
million for the three months ended September 30, 1995, and increased $3.9
million to $12.3 million for the nine months ended September 30, 1996 compared
to $8.4 million for the nine months ended September 30, 1995. The following
table sets forth the percentage of non-interest expense to average assets.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest expense . . . . . . . . . . . . . . . . . $ 5,375 $ 3,108 $ 12,264 $ 8,411
Non-interest expense to average assets (annualized) . . 3.00% 2.19% 2.39% 2.16%
</TABLE>
The increase in non-interest expense in both periods was primarily
attributable to (i) a $2.0 million federal insurance special assessment in the
three and nine months ended September 30, 1996 to recapitalize the SAIF; (ii) a
$150,000 and a $1.0 million increase in compensation and other employee
benefits to $1.8 million and $5.5 million for the three and nine months ended
September 30, 1996, respectively, compared to $1.6 million and $4.5 million for
the three and nine months ended September 30, 1995, respectively; and (iii) a
$108,000 and a $400,000 increase in other non-interest expense to $856,000 and
$2.5 million for the three and nine months ended September 30, 1996,
respectively, compared to $748,000 and $2.1 million for the three and nine
months ended September 30, 1995, respectively. The $2.0 million federal
insurance special assessment was the result of legislation enacted effective
September 30, 1996 that required SAIF member banks to pay a federal insurance
special assessment of 65.7 cents per $100 of SAIF-assessable deposits as of
March 31, 1995. The increases in compensation and other employee benefits for
the three and nine months ended September 30, 1996 were due to normal salary
increases, additional retirement plan expenses of $49,000 and $176,000,
respectively, associated with the ESOP and the Deferred Compensation Plan, a
decrease of $144,000 and an increase of $198,000, respectively, associated with
the adoption of the BIP, and additional salary and employee benefit expense
required to operate the offices acquired in the Branch Acquisitions consummated
in July 1995. The increases in other non-interest expense included $7,000 and
$180,000 for the amortization of intangibles related to the Branch
Acquisitions, respectively.
Income Taxes. Income taxes decreased $666,000 to $178,000 for the
three months ended September 30, 1996, from $844,000 for the three months ended
September 30, 1995, and decreased $1.3 million to $1.6 million for the nine
months ended September 30, 1996, from $2.9 million for the nine months ended
September 30, 1995. These decreases were primarily due to a decrease in income
before income taxes along with a decrease in the effective income tax rate.
The effective income tax rates for the three months ended September 30, 1996
and 1995 were 23.1% and 36.5%, respectively, and for the nine months ended
September 30, 1996 and 1995 were 32.3% and 38.6%, respectively. The decrease
in the effective income tax rates was due primarily to a greater portion of
interest income not being subject to state income taxes.
-21-
<PAGE> 24
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, repayments on and
sales of loans and mortgage-related securities, interest income and
FHLB-Chicago advances. Although maturity and scheduled amortization of loans
are predictable sources of funds, deposit flows and prepayments on loans and
mortgage-related securities are influenced significantly by general interest
rates, economic conditions and competition.
The Bank is required to maintain minimum levels of liquid assets under
the OTS regulations. Savings institutions are required to maintain an average
daily balance of liquid assets (including cash, certain time deposits, certain
bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United
States government, state or federal agency obligations) of not less than 5.00%
of its average daily balance of net withdrawal accounts plus short-term
borrowings. It is the Bank's policy to maintain its liquidity portfolio in
excess of regulatory requirements. The Bank's liquidity ratios were 7.03% and
7.00% at September 30, 1996 and December 31, 1995, respectively.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At September 30, 1996 and
December 31, 1995, cash and cash equivalents were $13.6 million and $13.5
million, respectively.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds
generally are invested in short-term investments such as federal funds or
overnight deposits at the FHLB-Chicago. Whenever the Company requires funds
beyond its ability to generate them internally, additional sources of funds are
available through FHLB-Chicago advances whereby the Company pledges its
FHLB-Chicago stock, investment and mortgage-related securities and certain
other assets, as well as through reverse repurchase agreements wherein the
Company pledges mortgage-related securities. The Company utilizes its
borrowing capabilities on a regular basis. At September 30, 1996, FHLB-Chicago
advances were $248.1 million or 34.0% of total assets compared to $151.0
million or 24.3% of total assets at December 31, 1995. The $97.1 million
increase in FHLB-Chicago advances during the nine months ended September 30,
1996 was primarily the result of the Company's leveraging strategy whereby
proceeds from the additional FHLB advances were used to originate and purchase
additional loans and mortgage-related securities. The borrowings from the
FHLB-Chicago are generally short-term, with maturities of less than 90 days or
have adjustable interest rate provisions. In a rising interest rate
environment, such borrowings present the risk that upon adjustment or at their
maturity dates, the interest rates on these borrowings may increase. At
September 30, 1996, the Bank's remaining line of credit available with the
FHLB-Chicago, which is limited to 35% of the Bank's total assets, was
approximately $6.8 million. In future periods, the Company anticipates that it
will fund its operating and investing activities primarily by using the
proceeds from the sale of loans held-for-sale and securities
available-for-sale. In addition, management of the Company may evaluate
opportunities to acquire brokered deposits.
The major sources of cash from financing activities for the nine
months ended September 30, 1996 were the increases in deposits and FHLB-Chicago
advances of $5.5 million and $97.1 million, respectively. The major sources of
cash from financing activities for the nine months ended September 30, 1995
were the increase in deposits and FHLB advances of $54.3 million and $92.5
million, respectively. The increase in deposits for the nine months ended
September 30, 1995 was primarily the result of the $55.5 million of deposits
assumed in connection with the July 1995 Branch Acquisitions. The primary use
of cash for the nine months ended September 30, 1996 was to pay cash dividends
of $1.2 million on its shares of outstanding stock. The primary uses of cash
for the nine months ended September 30, 1995, were to fund the purchase of $6.0
million of the Company's outstanding shares of common stock and the $4.2
million premium paid to acquire the $55.5 million of deposits assumed in the
Branch Acquisition.
-22-
<PAGE> 25
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating activities resulted in net cash outflows during the nine
months ended September 30, 1996, of $11.8 million and inflows of $11.1 million
for the nine months ended September 30, 1995. Operating cash inflows included
net income of $3.3 million and $4.6 million for the nine months ended September
30, 1996 and 1995, respectively, and proceeds from sales of loans of $7.6
million and $16.2 million for the nine months ended September 30, 1996 and
1995, respectively. The primary use of operating cash was loans originated for
sale of $26.2 million and $10.6 million for the nine months ended September 30,
1996 and 1995, respectively.
The primary investing activity of the Company was the origination and
purchases of loans to be held-to-maturity and the purchase of mortgage-related
securities. For the nine months ended September 30, 1996 and 1995, the Company
originated loans to be held-to-maturity in the amount of $132.8 million and
$129.1 million, respectively. Purchases of loans and mortgage-related
securities totaled $45.1 million and $94.7 million for the nine months ended
September 30, 1996 and 1995, respectively. Purchases of investment securities
available-for-sale and Federal Home Loan Bank Stock totaled $6.7 million and
$3.7 million for the nine months ended September 30, 1996 and 1995,
respectively. For the nine months ended September 30, 1996 and 1995, these
activities were funded primarily by principal repayments and other reductions
on loans and mortgage-related securities of $94.1 million and $65.2 million,
respectively. Proceeds from calls of investment securities provided $2.0
million of cash inflows during the nine months ended September 30, 1996 and the
sales of mortgage-related securities provided $11.0 million of cash inflows
during the nine months ended September 30, 1995.
At September 30, 1996, the Company had outstanding commitments to
originate loans of $22.9 million, unused equity lines of credit of $3.8 million
and $3.8 million of overdraft lines of credit, credit card lines and
irrevocable letters of credit. The Company anticipates it will have sufficient
funds available to meet its current loan origination and purchase commitments,
including loan applications received and in process prior to the issuance of
firm commitments. Certificates of deposit which are scheduled to mature in one
year or less at September 30, 1996 were $180.3 million. Management believes
that a significant portion of such deposits will remain with the Company.
Shareholders' equity increased $2.4 million or 2.6% during the nine
months ended September 30, 1996 to $97.8 million at September 30, 1996 due to
the combined effects of $3.3 million of net income, $952,000 for the
amortization of unearned ESOP compensation, $747,000 for the amortization of
unearned BIP compensation, partially offset by payment of cash dividends of
$1.2 million and a $1.3 million increase of net unrealized holding losses on
securities available-for-sale, net of deferred income tax benefits. The ratio
of total equity to assets was 13.42% and 15.34% at September 30, 1996 and
December 31, 1995, respectively.
The Board of Directors of the Company declared and paid cash dividends
of $0.05 per share, or a total of $318,000, to shareholders of record on
February 7, 1996, $0.07 per share, or a total of $450,000, to shareholders of
record on May 3, 1996 and $0.07 per share or a total of $451,000, to
shareholders of record on August 1, 1996. This resulted in a dividend payout
ratio of 37.45% for the nine months ended September 30, 1996. Future payments
of dividends will be subject to determination and declaration by the Company's
Board of Directors, which will take into account the Company's financial
condition, results of operations, tax considerations, industry standards,
economic conditions and other factors, including the regulatory restrictions
which affect the payment of dividends by the Bank to the Company. There can be
no assurance that dividends will in fact be paid on the Common Stock or that,
if paid, such dividends will not be reduced or eliminated in future periods.
ASSET QUALITY
Non-Performing Assets. Non-performing assets, which consist of
non-accrual loans, foreclosed properties and repossessed assets, decreased
$556,000 during the nine months ended September 30, 1996 to $215,000 at
September 30, 1996, compared to $771,000 at December 31, 1995. The following
table sets forth information with respect to the Company's non-performing
assets for the periods indicated.
-23-
<PAGE> 26
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
AT AT AT AT AT
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1996 1996 1995 1995 1995
-------- ---------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate . . . . . . . . $ 88 $ 89 $ 396 $ 372 $ 767
Non-residential and
other real estate . . . . . . . . . . -- -- -- -- --
Consumer . . . . . . . . . . . . . . . . 18 39 86 77 74
------ ------ ------ ------- -------
Total non-accrual loans . . . . . . . 106 128 482 449 841
Foreclosed property and
repossessed assets . . . . . . . . . . . 109 147 380 322 499
------ ------ ------ ------- -------
Total non-performing assets . . . . . $ 215 $ 275 $ 862 $ 771 $ 1,340
====== ====== ====== ======= =======
Impaired loans . . . . . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
====== ====== ====== ======= =======
Non-accrual loans as a percentage of
gross loans receivable (1) . . . . . . . 0.02% 0.03% 0.10% 0.10% 0.18%
Non-performing assets as a
percentage of total assets . . . . . . . 0.03 0.04 0.13 0.12 0.23
- -------------------
</TABLE>
(1) Excludes loans held-for-sale.
-24-
<PAGE> 27
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Allowance for Loan Losses. Management evaluates the Company's loan
portfolio on a periodic basis to determine the adequacy of the allowance for
loan losses. These evaluations consider several factors including, but not
limited to, prevailing economic conditions, actual loss experience, loan
portfolio composition, findings and evaluations during federal regulatory
examinations and management's estimation of future potential losses. The
evaluation of the allowance for loan losses includes a review of both known
loan problems and a review of potential problems based upon historical trends
and ratios. The following table sets forth an analysis of the Company's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
----------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period . . . . . . . . . . . . $ 856 $ 748 $ 782 $ 751
Charge-offs:
Residential real estate . . . . . . . . . . . . . . -- -- (3) (5)
Non-residential and other real estate . . . . . . . -- -- -- --
Consumer . . . . . . . . . . . . . . . . . . . . . . (36) (4) (60) (30)
------ ------- ------- ------
Total charge-offs . . . . . . . . . . . . . . . (36) (4) (63) (35)
Recoveries:
Residential real estate . . . . . . . . . . . . . . -- -- -- 3
Non-residential and other real estate . . . . . . . -- -- -- --
Consumer . . . . . . . . . . . . . . . . . . . . . . 4 4 7 8
------ ------- ------- ------
Total recoveries . . . . . . . . . . . . . . . . 4 4 7 11
------ ------- ------- ------
Net charge-offs . . . . . . . . . . . . . . . (32) -- (56) (24)
Provision charged (credited) to operations . . . . . . 33 52 131 73
------ ------- ------- ------
Balance at end of period . . . . . . . . . . . . . . . $ 857 $ 800 $ 857 $ 800
====== ======= ======= ======
Period-end allowance as a percentage
of period-end gross loan balance(1) . . . . . . . . 0.16% 0.18% 0.16% 0.18%
Ratio of allowance to non-accrual loans . . . . . . . . 808.49 95.12 808.49 95.12
Ratio of net charge-offs to average
loans outstanding(1)(2) . . . . . . . . . . . . . . 0.03 -- 0.02 0.01
- -----------------------------------
</TABLE>
(1) Excludes loans held-for-sale.
(2) Annualized.
-25-
<PAGE> 28
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
The Company's profitability, like that of most financial institutions,
depends to a large extent upon its net interest income, which is the difference
between its interest earned on interest-earning assets, such as loans and
securities, and its interest expense paid on interest-bearing liabilities,
such as deposits and borrowings. Generally, the Company's net interest income
improves during periods of relatively stable and declining interest rates and
deteriorates during periods of increasing interest rates.
The interest sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities which mature and/or
reprice within specified intervals of time. The gap is considered to be
positive when repriceable assets exceed repriceable liabilities and negative
when the opposite situation exists. A relative measure of sensitivity is
provided by the cumulative difference between interest-sensitive assets to
interest-sensitive liabilities for a given time interval expressed as a
percentage of total assets. Generally, sensitivity is measured for various
intervals up to a period of ten years.
Having interest-bearing liabilities that mature or reprice more
frequently on average than interest-earning assets may be beneficial in times
of declining interest rates, although such an asset/liability structure may
result in declining net earnings during periods of rising interest rates.
Conversely, having interest-earning assets that mature or reprice more
frequently on average than interest-bearing liabilities may be beneficial in
times of rising interest rates, although this asset/liability structure may
result in declining net earnings during periods of falling interest rates.
In managing its asset/liability mix, the Company has placed somewhat
greater emphasis on maximizing its net interest margin than on matching the
periods to maturity or repricing of its assets and liabilities. The Company
believes that the increased net interest income resulting from a mismatch in
the maturities of its asset and liability portfolios in declining or stable
interest rate environments can provide returns sufficient to justify the
increased exposure to decreased net interest income resulting from such a
mismatch in the event of sudden and significant increases in interest rates.
The Company has adopted an interest rate risk policy statement to
manage its exposure to interest rate risk and to ensure that such exposure is
kept within pre-determined limits. At September 30, 1996, the Company's
cumulative amount of interest-sensitive assets less interest-sensitive
liabilities was a negative 21.18% of total assets for the one-year interval and
a negative 8.10% of total assets for the three-year interval, compared to a
negative gap position of 12.84% and 1.84%, respectively, at December 31, 1995.
The Company recognizes the inherent risk in its interest-sensitive gap
position, particularly in periods of fluctuating interest rates. The Company
has implemented certain asset/liability maturity matching strategies, which
include (i) the origination of mortgage loans with adjustable rate features,
(ii) increased emphasis on short-term consumer loans and equity lines of
credit, and (iii) emphasis on lengthening the maturity of its deposits.
However, during the nine months ended September 30, 1996, as part of its
leveraging strategy, the Company purchased $27.7 million of mortgage-related
securities with periodic interest rate adjustment features and funded these
purchases with short term FHLB-Chicago advances. During the nine months ended
September 30, 1996, the Company's negative gap position increased primarily as
a result of the increase in loans held- for-sale and adjustable rate mortgage
loans with periods to the initial adjustment date of greater than three years
funded primarily with short-term FHLB-Chicago advances.
-26-
<PAGE> 29
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth at September 30, 1996 the amount of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
--------------------------------------------------------------
MORE THAN
WITHIN ONE YEAR MORE THAN
ONE YEAR TO THREE YEARS THREE YEARS TOTAL
------------ ---------------- ------------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C>
Mortgage-related securities (1)(2) . . $ 95,983 $ 22,438 $ 28,591 $ 147,012
First mortgage loans, excluding
loans held-for-sale (1)(3) . . . . . 169,094 136,598 128,180 433,872
Loans held-for-sale (1)(4) . . . . . . 2,386 4,192 15,297 21,875
Other loans (1) . . . . . . . . . . . 45,830 24,435 6,668 76,933
Investment securities(2) . . . . . . . 6,160 2,017 15,394 23,571
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . 319,453 189,680 194,130 703,263
INTEREST-BEARING LIABILITIES:
Deposits (5) . . . . . . . . . . . . . 241,210 79,363 53,409 373,982
FHLB advances . . . . . . . . . . . . 232,600 15,000 450 248,050
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . 473,810 94,363 53,859 622,032
----------- ---------- ---------- ----------
Interest-earning assets over (under)
interest-bearing liabilities . . . . . $ (154,357) $ 95,317 $ 140,271 $ 81,231
========== ========== ========== ==========
Cumulative gap . . . . . . . . . . . . . $ (154,357) $ (59,040) $ 81,231
========== =========== ==========
Cumulative gap as a percentage of
total assets . . . . . . . . . . . . . (21.18)% (8.10)% 11.15%
========== ========== ==========
- ---------------------------------------------
</TABLE>
(1) Based upon contractual maturity, repricing date, if applicable, scheduled
repayments of principal and projected prepayments of principal based upon
historical experience.
(2) Balance excludes fair value adjustments.
(3) Balance has been reduced for undisbursed loan proceeds, which aggregated
$11.1 million at September 30, 1996.
(4) Balance excludes lower of cost or market adjustment of $351,000.
(5) Includes non-interest bearing deposits. The "Within One Year" category
includes 37% of Negotiable Order of Withdrawals, 17% of passbook and
statement accounts and 79% of variable rate insured money market
accounts. The "One Year to Three Years" category includes 35% of
Negotiable Order of Withdrawals, 26% of passbook and statement accounts
and 11% of variable rate insured money market accounts. All remaining
Negotiable Order of Withdrawals, passbook and statement accounts and
variable rate insured money market accounts are assumed to mature in the
"More Than Three Years" category. While management of the Company
believes these assumptions are well based, no assurance can be given that
amounts of deposits in these accounts will not significantly decrease or
be repriced in the event of a general rise in interest rates.
-27-
<PAGE> 30
FIRST FEDERAL BANCSHARES OF EAU CLAIRE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Certain shortcomings are inherent in the method of analysis presented
above. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
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. Additionally, certain assets, such as adjustable rate loans and
mortgage-related securities, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. In addition, the
proportion of adjustable rate loans and mortgage-related securities in the
Company's portfolios could decrease in future periods if market interest rates
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease
in the event of an interest rate increase.
FORWARD COMMITMENTS AND CERTAIN ASPECTS OF FIXED RATE MORTGAGE LOAN ORIGINATION
PIPELINE
The Company engages in certain activities to facilitate the sale of
its originated mortgage loans held-for-sale. These activities are generally
forward commitments to sell at a specified future date, fixed rate
mortgage-related securities which are or will be formed from mortgage loans
originated by the Company. Specifically, the Company originates mortgage loans
which are subsequently delivered to the FHLMC and exchanged for FHLMC
mortgage-related securities representing the mortgage loans which were
delivered, and these securities then generally are used to satisfy the forward
commitments. The use of such forward commitments presents a risk that if the
Company is not able to deliver the mortgage-related securities on the specified
delivery date, it may be required to repurchase the forward commitment at the
then-current market price, which may be at an unfavorable price resulting in a
possible loss. Management has attempted to address this risk by limiting the
aggregate amount of forward commitments utilized at any given time, and
generally limiting the length of time that such forward commitments remain
outstanding to one month or less. Because the securities are formed from
mortgage loans originated by the Company, the Company historically has been
able to deliver mortgage-backed securities pursuant to the forward commitments
and the parties with which the Company contracts have been able to fulfill the
terms of the agreements. Additional risk exists between the time the
mortgage-backed securities are formed and the time they are committed to be
sold, as gains or losses may result during the period the securities are
classified as trading and ultimately from selling the mortgage-backed
securities at favorable or unfavorable prices, depending upon how interest
rates moved during the time between when loans were committed and the time they
were sold. The Company did not have any forward commitments to sell
mortgage-related securities at September 30, 1996 or December 31, 1995, nor did
the Company incur any losses during the nine months ended September 30, 1996 or
1995 as a result of the Company not being able to fulfill any forward
commitments.
-28-
<PAGE> 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management believes are
material to the financial condition and results of operations of the Registrant
and the Bank.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On September 19, 1996, Registrant filed a Form 8-K to report
that it had entered into an Agreement and Plan of Merger, dated
September 16, 1996, with Mutual Savings Bank and First Federal Merger
Corp. A copy of the Agreement and Plan of Merger and a Stock Option
Agreement were filed as exhibits to the Form 8-K.
-29-
<PAGE> 32
SIGNATURES
Pursuant to the requirements 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 BANCSHARES
OF EAU CLAIRE, INC.
<TABLE>
<S> <C> <C> <C>
Dated: November 13, 1996 By: /s/ Donald T. Tietz
--------------------------------------------------------------
Donald T. Tietz, President
(Chief Executive Officer)
Dated: November 13, 1996 By: /s/ Jerome A. Reinecke
---------------------------------------------------------------
Jerome A. Reinecke, Vice President
(Principal Financial and Accounting Officer)
</TABLE>
-30-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,386
<INT-BEARING-DEPOSITS> 188
<FED-FUNDS-SOLD> 4,170
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 153,434
<INVESTMENTS-CARRYING> 153,434
<INVESTMENTS-MARKET> 153,434
<LOANS> 530,200
<ALLOWANCE> 857
<TOTAL-ASSETS> 728,822
<DEPOSITS> 373,982
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,962
<LONG-TERM> 0
0
0
<COMMON> 72
<OTHER-SE> 97,756
<TOTAL-LIABILITIES-AND-EQUITY> 728,822
<INTEREST-LOAN> 29,322
<INTEREST-INVEST> 8,233
<INTEREST-OTHER> 100
<INTEREST-TOTAL> 37,655
<INTEREST-DEPOSIT> 13,038
<INTEREST-EXPENSE> 21,762
<INTEREST-INCOME-NET> 15,893
<LOAN-LOSSES> 131
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 2,503
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</TABLE>
