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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from....................to............................
Commission file number...................................................0-18046
FIRST FEDERAL CAPITAL CORP
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1651288
(State or other jurisdiction of incorporation or (IRS employer
organization) identification no.)
605 STATE STREET
LA CROSSE, WISCONSIN 54601
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (608) 784-8000
Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period as the Registrant
has been subject to such requirements), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate value of the common stock of the Registrant that was held by
non-affiliates as of March 6, 2001, was approximately $192.4 million. This
amount was based on the closing price of $12.75 per share of the Registrant's
common stock as of the same date.
The number of shares of common stock of the Registrant outstanding as of
March 6, 2001, was 18,329,998 (net of 1,611,632 shares held as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are
incorporated into Part III, Items 10 through 13 of this Form 10-K.
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FORM 10-K TABLE OF CONTENTS
PART I Page
Item 1--Business..............................................................................2
Item 2--Properties...........................................................................14
Item 3--Legal Proceedings....................................................................14
Item 4--Submission of Matters to a Vote of Security Holders..................................14
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters................15
Item 6--Selected Financial Data..............................................................16
Item 7--Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................17
Item 7A--Quantitative and Qualitative Disclosures about Market Risk..........................31
Item 8--Financial Statements and Supplementary Data..........................................34
Item 9--Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................61
PART III
Item 10--Directors and Executive Officers of the Registrant..................................62
Item 11--Executive Compensation..............................................................62
Item 12--Security Ownership of Certain Beneficial Owners and Management......................62
Item 13--Certain Relationships and Related Transactions......................................62
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................62
SIGNATURES................................................................................................64
EXHIBITS..................................................................................................66
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FORWARD-LOOKING STATEMENTS
This report includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
include words and phrases such as "will likely result", "are expected to", "will
continue", "is anticipated", "is estimated", "is projected", "intends to", or
similar expressions. Forward-looking statements are based on management's
current expectations. Examples of factors which could cause future results to
differ from management's expectations include, but are not limited to, the
following: general economic and competitive conditions; legislative and
regulatory initiatives; monetary and fiscal policies of the federal government;
general market rates of interest; interest rates on competing investments;
interest rates on funding sources; consumer demand for deposit and loan products
and services; consumer demand for other financial services; changes in
accounting policies or guidelines; and changes in the quality or composition of
the Corporation's loan and investment portfolios. Readers are cautioned that
forward-looking statements are not guarantees of future performance and that
actual results may differ materially from management's current expectations.
Management of the Corporation does not undertake and specifically
disclaims any obligation to update any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
PART I
ITEM 1--BUSINESS
This section of the report contains general information about First
Federal Capital Corp (the "Corporation"), First Federal Saving Bank of La
Crosse-Madison (the "Bank"), and the Bank's wholly-owned subsidiaries (together
"the reporting group"). Included in this section is information regarding the
reporting group's markets and business environments, significant operating and
accounting policies, practices, and procedures, as well as its competitive and
regulatory environments. Information regarding the reporting group's current
financial condition and results of operations is included in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Part II, Item 7a, "Quantitative and Qualitative Disclosures about
Market Risk", and Part II, Item 8, "Financial Statements and Supplementary
Data". This section should be read in conjunction with those sections.
FIRST FEDERAL CAPITAL CORP
The Corporation was incorporated under the laws of the State of
Wisconsin in 1989. In that year the Corporation also became the savings and loan
holding company for the Bank upon its conversion from mutual to stock form. The
Corporation currently owns all of the outstanding capital stock of the Bank,
which is the principal asset of the Corporation. The Corporation's principal
office is located at 605 State Street, La Crosse, Wisconsin, 54601, and its
telephone number is (608) 784-8000.
FIRST FEDERAL SAVINGS BANK LA CROSSE-MADISON
The Bank was founded in 1934 and is a federally-chartered,
federally-insured, savings bank headquartered in La Crosse, Wisconsin. The
Bank's primary business is retail community banking, which includes attracting
deposits from and making loans to the general public. In addition to deposits,
the Bank obtains funds through borrowings from the Federal Home Loan Bank of
Chicago ("FHLB"), as well as through other sources such as securities sold under
agreements to repurchase and purchases of federal funds. These funding sources
are principally used to originate loans, including single-family residential
loans, commercial real estate loans, consumer loans, and education loans. The
Bank also purchases single-family residential and commercial real estate loans
from third-party financial institutions and invests in mortgage-backed and
related securities. The Bank is also an active seller of residential loans in
the secondary market.
The Bank's primary market areas for conducting its activities consist
of communities located in the western, south-central, and eastern portions of
Wisconsin and the northern portion of Illinois, as well as contiguous counties
in Iowa and Minnesota. The Bank maintains 72 banking offices in its market
areas. Twenty-one of these offices are
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located in the Madison metropolitan area, six in the La Crosse metropolitan
area, five in the city of Eau Claire, four in the city of Appleton, three in the
cities of Beloit and Hudson, and two each in the cities of Green Bay, Kenosha,
Janesville, Neenah, and Oshkosh, Wisconsin. The Bank also maintains one retail
banking facility in fourteen other cities located throughout its market area in
Wisconsin, as well as four offices in Rockford, Illinois. The Bank also has
separate residential loan production offices in Appleton and Janesville,
Wisconsin.
The Bank is subject to regulation and examination by the Office of
Thrift Supervision ("OTS"), its chartering authority and primary regulator, and
by the Federal Deposit Insurance Corporation ("FDIC"), which administers the
Savings Association Insurance Fund ("SAIF"), which insures the Bank's deposits
to the maximum extent permitted by law.
The Bank's principal executive offices are located at 605 State Street,
La Crosse, Wisconsin, 54601, and its telephone number is (608) 784-8000.
OPERATING DIVISIONS AND SEGMENT REPORTING
The Bank has five operating divisions: (i) residential lending, (ii)
commercial real estate lending, (iii) retail banking, (iv) finance and
administration, and (v) human resources. Each division is headed by an executive
officer that reports directly to the president of the Bank. The first three
divisions contain all but one of the Bank's profit centers for segment reporting
purposes. The remaining two divisions are considered support departments for
segment reporting purposes, although the finance and administration division
also provides the primary support for the Bank's remaining profit center--the
investment and mortgage-related securities portfolio.
The residential lending division is divided into two profit centers for
segment reporting purposes: (i) a mortgage banking profit center that is
responsible for loan origination, sales of loans in the secondary market, and
servicing of residential loans, and (ii) a residential loan portfolio that
consists of loans held by the Bank for investment purposes (loans held for sale
are included in the mortgage banking profit center). The commercial real estate
lending division is a single profit center for segment reporting purposes. It
consists of the Bank's portfolio of multi-family and non-residential mortgage
loans, as well as functions related to the origination and servicing of such
loans. The retail banking division is divided into two profit centers for
segment reporting purposes: (i) a consumer lending portfolio, which consists of
the Bank's second mortgage, automobile, and other consumer installment loans, as
well as functions related to the origination and servicing of such loans and
(ii) an education loan portfolio, which also includes functions related to the
origination and servicing of the loans. The Bank's retail branch network, which
delivers checking, savings, certificates of deposit, and other financial
products and services to customers, is also part of the retail banking division,
but is considered a support department for segment reporting purposes. Finally,
the Bank's investment and mortgage-related securities portfolio is considered a
profit center for segment reporting purposes. Personnel in the finance and
administration division support this profit center, as previously noted.
For additional discussion regarding the Corporation's reportable
segments, refer to Note 13 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data", as well as Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
LENDING ACTIVITIES
GENERAL The principal categories of loans in the Bank's portfolio are
conventional real estate loans secured by single-family residences, commercial
real estate loans secured by multi-family residential and non-residential real
estate, consumer loans secured primarily by second mortgages on single-family
residences and automobiles, and government-guaranteed education loans. Although
the Bank also originates single-family residential loans that are insured or
partially guaranteed by federal and state agencies, the Bank does not generally
retain such loans in its residential loan portfolio. As of December 31, 2000,
approximately 75% of the Bank's total assets consisted of loans held for
investment purposes.
RESIDENTIAL LENDING Single-family residential loans accounted for
approximately 40% of the Bank's gross loans as of December 31, 2000.
Applications for single-family residential and construction loans are accepted
by
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commission-based employees of the Bank at nineteen locations (seventeen of which
are located with deposit-taking offices) and by salaried employees at certain
other deposit-taking offices that are able to handle such applications.
In general, the Bank retains in its portfolio only single-family
residential mortgage loans that provide for periodic adjustments of the interest
rate ("adjustable-rate mortgage loans"). These loans generally have terms of up
to 30-years and interest rates which adjust every one to two years in accordance
with an index based on the yield on certain U.S. government securities. A
portion of these loans may guarantee borrowers a fixed rate of interest for the
first three to five years of the loan's term. Furthermore, most of these loans
have annual interest rate change limits ranging from 1% to 2% and maximum
lifetime interest rates ranging from 11% to 16%. It is the Bank's normal
practice to discount the interest rate it charges on its adjustable-rate
mortgage loans during the first one to five years of the loan, which has the
effect of reducing a borrower's payment during such years. In addition, most of
the Bank's adjustable-rate mortgage loan agreements permit borrowers to convert
their adjustable-rate loans to fixed-rate loans under certain circumstances in
exchange for a fee. Upon conversion, the Bank generally sells such loans in the
secondary market.
Adjustable-rate mortgage loans decrease the Bank's exposure to risks
associated with changes in interest rates, but involve other risks because as
interest rates increase, borrowers' monthly payments increase, thus increasing
the potential for default. This risk has not had any adverse effect on the Bank
to date, although no assurances can be made with respect to future periods.
The Bank occasionally purchases adjustable-rate single-family
residential loans from third-party financial institutions. In general, such
loans are subject to the same underwriting standards as loans originated
directly by the Bank. However, such loans are usually secured by properties
located outside of the Bank's primary market areas. In addition, the Bank does
not generally service such loans after their acquisition.
Although the Bank generally retains only adjustable-rate mortgage loans
in its portfolio, it continues to originate fixed-rate mortgage loans in order
to provide a full range of products to its customers. In general, such loans are
originated only under terms, conditions, and documentation standards that make
such loans eligible for sale to the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA"), the FHLB, and
other institutional investors. The Bank generally sells these loans at the time
they are originated. In addition, the Bank generally sells any adjustable-rate
mortgage loans that convert to fixed-rate loans in accordance with options
granted to such borrowers in the original loan documents, as previously
described. Sales of mortgage loans provide additional funds for lending and
other business purposes and have generally been under terms that do not provide
for any recourse to the Bank by the purchaser. In the case of sales to the FHLB,
however, the Bank retains a small share of the credit risk on the underlying
loans in exchange for a credit enhancement fee. The Bank on occasion has also
retained the credit risk on certain securitizations of its own loans into
mortgage-backed securities ("MBSs").
The Bank's general policy is to lend up to 80% of the independently
appraised value of the property securing a first mortgage loan (referred to as
the "loan-to-value ratio"). The Bank will occasionally lend in excess of an 80%
loan-to-value ratio on a first mortgage loan, but will generally require the
borrower to obtain mortgage impairment insurance on the portion of the loan that
exceeds 80%. The Bank receives commission revenue from the independent insurance
providers that sell such policies to the Bank's loan customers. Beginning in
2001, a wholly-owned, second-tier subsidiary of the Bank will also receive
premium revenue on the sale of such policies. This revenue will be received in
exchange for the subsidiary's reinsurance of a portion of the mortgage
impairment risk. Refer to "Subsidiaries", below, for additional discussion.
In 2001, the Bank will begin to offer loan programs to qualifying
borrowers with good credit standing which will enable them to obtain a second
mortgage loan from the Bank in conjunction with their first mortgage loan. Under
these programs, the combined principal balance of the loans will not exceed 100%
of the property's value and the Bank will waive the requirement for mortgage
impairment insurance.
The Bank also originates loans to individuals to construct
single-family residences. Such loans accounted for approximately 3% of the
Bank's gross loans as of December 31, 2000. Construction loans may be made
without commitments to purchase the property being constructed and the borrower
may not have take-out commitments for permanent financing on hand at the time of
origination. Construction loans generally have a maturity of 6 to 12
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months and a fixed rate of interest, with payments being made monthly on an
interest-only basis. Construction loans are otherwise underwritten and approved
in the same manner as other single-family residential loans. Construction loans,
however, are generally considered to involve a higher degree of risk than
conventional residential mortgage loans. This is because the risk of loss is
largely dependent on the accuracy of the initial estimate of the property's
value at completion of construction, the estimated cost of construction, and the
borrower's ability to advance additional construction funds, if necessary.
In addition to servicing the loans in its own portfolio, the Bank
continues to service most of the loans that it sells to third-party investors
(commonly referred to as "loans serviced for others"). Servicing mortgage loans,
whether for its own portfolio or for others, includes such functions as
collecting monthly principal and interest payments from borrowers, maintaining
escrow accounts for real estate taxes and insurance, and making such payments on
behalf of borrowers when they are due. When necessary, servicing of mortgage
loans also includes functions related to the collection of delinquent principal
and interest payments, loan foreclosure proceedings, and disposition of
foreclosed real estate.
When the Bank services loans for others, it is compensated for the
aforementioned services through the retention of a servicing fee from borrowers'
monthly payments. The Bank pays the third-party investors an agreed-upon yield
on the loans, which is generally less than the interest agreed to be paid by the
borrowers. The difference, typically 25 basis points or more, is retained by the
Bank and recognized as servicing fee income over the lives of the loans, net of
amortization of capitalized servicing rights. The Bank also receives fees and
interest income from ancillary sources such as delinquency charges and float on
escrow and other funds. The Bank also purchases mortgage servicing rights from
third parties for which it retains an agreed-upon fee from borrowers' monthly
payments, as previously described. The Bank performs substantially the same
services for these loans as it does on its own originations.
Management believes that servicing mortgage loans for third parties
provides a natural hedge against other risks inherent in the Bank's mortgage
banking operations. That is, fluctuations in volumes of mortgage loan
originations and resulting gains on sales of such loans caused by changes in
market interest rates will generally be offset in part by an opposite change in
loan servicing fee income. The latter is generally caused by fluctuations in the
value of servicing rights. These fluctuations are usually the result of actual
loan prepayment activity that is different from that which was anticipated when
the related servicing rights were originally recorded. However, fluctuations in
the value of mortgage servicing rights may also be caused by mark-to-market
adjustments under generally accepted accounting principles ("GAAP"). That is,
the value of servicing rights may fluctuate because of changes in the discount
rates or future prepayment assumptions used to periodically value servicing
rights. Although management believes that most of the Corporation's loans that
prepay are replaced by a new loan to the same customer or even a different
customer (thus preserving the future servicing cash flow), GAAP requires
mark-to-market losses resulting from a change in future prepayment assumptions
to be recorded in the period in which the change occurs. However, the offsetting
gain on the sale of the new loan, if any, cannot be recorded under GAAP until
the customer actually prepays the old loan and the new loan is sold in the
secondary market. Mortgage servicing rights are particularly susceptible to
unfavorable mark-to-market adjustments during periods of declining interest
rates during which prepayment activity typically accelerates to levels above
that which had been anticipated when the servicing rights were originally
recorded. For additional discussion refer to Notes 1 and 4 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data", as well as Part II, Item 7,
"Management Discussion and Analysis of Financial Condition and Results of
Operations".
COMMERCIAL REAL ESTATE LENDING Multi-family residential loans and
non-residential real estate loans (together "commercial real estate loans")
accounted for approximately 13% and 11%, respectively, of the Bank's gross loans
as of December 31, 2000. Applications for commercial real estate loans are
accepted at the Bank's main office in La Crosse, as well as offices in Madison,
Appleton, and Milwaukee, Wisconsin, and Rockford, Illinois. All underwriting and
approval of such loans, however, is performed at the Bank's main office in La
Crosse, as is the servicing of such loans on an on-going basis. It is the Bank's
general policy to restrict its commercial real estate lending to loans secured
by properties located within a 300-mile radius of La Crosse, which includes all
or a portion of the states of Wisconsin, Nebraska, Illinois, Iowa, and
Minnesota.
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The Bank's emphasis in commercial real estate lending is in loans
secured by collateral classified as Type A properties, which are to comprise not
less than 80% of the Bank's total commercial real estate loan portfolio.
Examples of such properties include multi-family residential properties, retail
shopping establishments, office buildings, and multi-tenant industrial
buildings. Not more than 20% of the Bank's commercial real estate loan portfolio
is to include loans secured by collateral classified as Type B properties,
examples of which include nursing homes, single-tenant industrial buildings,
hotels and motels, and churches. The Bank's current policy is to not make any
new loans secured by collateral classified as Type C properties, examples of
which include restaurants, recreation facilities, and other special purpose
facilities, although the Bank has made loans secured by such properties in the
past.
Applications for commercial real estate loans are generally obtained
from existing borrowers, direct contacts by loan officers, and referrals. In
general these loans have amortization periods ranging from 20 to 30 years,
mature in ten years or less, and have interest rates which are fixed for one to
five years--thereafter adjusting in accordance with a designated index that is
generally subject to a floor and a ceiling. Loan-to-value ratios on the Bank's
commercial real estate loans may be as high as 80% for loans secured by Type A
properties and 75% or lower for commercial real estate loans secured by Type B
properties. In addition, as part of the criteria for underwriting commercial
real estate loans, the Bank generally imposes on potential borrowers a "debt
coverage ratio" (the ratio of net cash from operations before payment of debt
service to debt service). This ratio ranges from 115% to 120% for loans secured
by Type A properties and 120% to 150% for loans secured by Type B properties. It
is also the Bank's general policy to obtain personal guarantees on its
commercial real estate loans and, when such guarantees cannot be obtained, to
impose more stringent loan-to-value ratios, debt service ratios, and other
underwriting requirements.
The Bank occasionally purchases commercial real estate loans from
third-party financial institutions. In general, such loans are subject to the
same geographic restrictions and underwriting standards as loans originated
directly by the Bank. The Bank, however, does not generally service such loans
after their acquisition.
From time-to-time the Bank originates loans to construct multi-family
residential and non-residential real estate properties. Such loans accounted for
approximately 1% of the Bank's gross loans as of December 31, 2000. Construction
loans are generally considered to involve a higher degree of risk than mortgage
loans on completed properties. The Bank's risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction, the estimated cost of construction, and the
borrower's ability to advance additional construction funds if such should
become necessary. The Bank's construction lending activities are generally
limited to an area within a 150-mile radius of each of Madison, La Crosse,
Appleton, and Milwaukee, Wisconsin.
Commercial real estate lending is generally considered to involve a
higher level of risk than single-family residential lending. This is due to the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on real estate developers and managers
and on income producing properties, and the increased difficulty of evaluating
and monitoring these types of loans. Moreover, a construction loan can involve
additional risks because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. In addition, loans secured by properties located outside of the Bank's
immediate market area may involve a higher degree of risk. This is because the
Bank may not be as familiar with market conditions and other relevant factors as
it would be in the case of loans secured by properties located within its market
areas. The Bank does not have a material concentration of commercial real estate
loans outside of its immediate market area.
The Bank has attempted to minimize the foregoing risks by adopting what
management believes are conservative underwriting guidelines that impose more
stringent loan-to-value ratios, debt service ratios, and other requirements on
loans which are believed to involve higher elements of risk. The Bank also
requires independent appraisals on all loans, requires personal guarantees where
appropriate, limits the geographic area in which the Bank will make construction
loans, and limits the types of loans in its portfolio, as previously described.
CONSUMER LENDING The Bank offers consumer loans in order to provide a
full range of financial services to its retail customers. Such loans accounted
for approximately 19% of the Bank's gross loans as of December 31, 2000.
Applications for consumer loans are taken at the Bank's retail banking offices,
as well as over the phone at
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the Bank's headquarters in La Crosse. The majority of such loans, however, are
underwritten, approved, and serviced on an on-going basis at the Bank's
headquarters. Most of the Bank's consumer loan portfolio consists of second
mortgage loans, but also includes automobile loans, home equity lines of credit,
recreational vehicle and mobile home loans, deposit account secured loans, and
unsecured lines of credit or signature loans. The Bank services all of its own
consumer loans.
Consumer loans generally have shorter terms and higher rates of
interest than conventional mortgage loans, but typically involve more credit
risk than such loans because of the nature of the collateral and, in some
instances, the absence of collateral. In general, consumer loans are more
dependent upon the borrower's continuing financial stability, are more likely to
be affected by adverse personal circumstances, and are often secured by rapidly
depreciating personal property such as automobiles. In addition, various laws,
including bankruptcy and insolvency laws, may limit the amount that may be
recovered from a borrower. However, such risks are mitigated to some extent in
the case of second mortgage loans and home-equity lines of credit. These types
of loans are secured by a second mortgage on the borrower's residence for which
the total principal balance outstanding (including the first mortgage) does not
generally exceed 100% of the property's value. Second mortgage loans are
generally fixed-rate and have terms of up to ten years.
The Bank believes that the higher yields earned on consumer loans
compensate for the increased risk associated with such loans and that consumer
loans are important to the Bank's efforts to increase the interest rate
sensitivity and shorten the average maturity of its loan portfolio. Furthermore,
the Bank's net charge-offs on consumer loans as a percentage of gross loans have
not been significant in recent years, despite the risks inherent in consumer
lending.
In conjunction with its consumer lending activities, the Bank also
offers customers credit life and disability insurance products underwritten and
administered by an independent insurance provider. The Bank receives commission
revenue related to the sales of these products. In addition, a wholly-owned
subsidiary of the Bank receives premium revenue in exchange for the portion of
the insurance risk it has reinsured on these sales. Refer to "Subsidiaries",
below, for additional discussion.
EDUCATION LENDING The Bank offers education loans through programs
sponsored by the federal government. As such, the federal government guarantees
most of the principal and interest on such loans. A third party services the
loans for the Bank after they are originated. Education loans accounted for
approximately 11% of the Bank's gross loans as of December 31, 2000.
Education loans generally carry a floating-rate of interest and have
terms of up to fifteen years. Legislation enacted in late 1999 changed the
interest rate earned by lenders on education loans from the three-month U.S.
Treasury bill plus 220 basis points (280 basis points for borrowers no longer in
school) to a commercial paper rate plus 174 basis points (234 basis points for
borrowers no longer in school). This change was effective for loans originated
after January 1, 2000. A separate law, enacted in 1993, further changes the rate
in 2003 to a long-term U.S. Treasury bond rate plus 100 basis points. Management
is not certain at this time what impact these changes may have on the Bank's
willingness to originate education loans, although no changes are contemplated
at this time. During the twelve months ended December 31, 2000, 1999, and 1998,
the Bank originated $33.9 million, $29.5 million, and $37.7 million in education
loans, respectively.
NON-PERFORMING AND OTHER CLASSIFIED ASSETS Loans are generally placed
on non-accrual status and considered "non-performing" when, in the judgement of
management, the probability of collection of principal or interest is deemed to
be insufficient to warrant further accrual of interest. When a loan is placed on
non-accrual and/or non-performing status, previously accrued but unpaid interest
is deducted from interest income. In general, the Bank does not record accrued
interest on loans 90 or more days past due. Refer to Notes 1 and 3 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
When a loan is placed on non-accrual and/or non-performing status, the
Bank generally institutes foreclosure or other collection proceedings. Real
estate property acquired by the Bank as a result of foreclosure or deed-in-lieu
of foreclosure is classified as "real estate" and is considered "non-performing"
until it is sold. Other
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property acquired through adverse judgement, such as automobiles, is generally
classified as an "other asset". The amount of foreclosed real estate and other
repossessed property has not been material to the Bank in recent years.
Federal regulations require thrift institutions to classify their
assets on a regular basis. In addition, in connection with examinations of
thrift institutions, federal examiners have authority to classify problem assets
as "Substandard", "Doubtful", or "Loss". An asset is classified as "Substandard"
if it is determined to involve a distinct possibility that the Bank could
sustain some loss if deficiencies associated with the loan are not corrected. An
asset is classified as "Doubtful" if full collection is highly questionable or
improbable. An asset is classified as "Loss" if it is considered uncollectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a "Special Mention" designation, described as assets which do not
currently expose the Bank to a sufficient degree of risk to warrant adverse
classification, but which possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the Bank to establish a general allowance for loan losses. If
an asset or portion thereof is classified as Loss, the Bank must either
establish a specific allowance for the portion of the asset classified as Loss,
or charge off such amount. Refer to Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", for additional
discussion.
ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE The Bank's policy is to
establish allowances for estimated losses on specific loans and real estate when
it determines that losses are expected to be incurred. In addition, the Bank
maintains a general loss allowance against its loan and real estate portfolios
that is based on its own loss experience, management's ongoing assessment of
current economic conditions, the credit risk inherent in the portfolios, and the
experience of the financial services industry. For additional information, refer
to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes 1 and 3 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
Management of the Bank believes that the current allowances established
by the Bank are adequate to cover any potential losses in the Bank's loan and
real estate portfolios. However, future adjustments to these allowances may be
necessary and the Bank's results of operations could be adversely affected if
circumstances differ substantially from the assumptions used by management in
making its determinations in this regard.
INVESTMENT AND MORTGAGE-RELATED SECURITIES
The Bank periodically invests in collateralized mortgage obligations
("CMOs") and MBSs (collectively "mortgage-backed and related securities"). As of
December 31, 2000, such investments accounted for approximately 17% of the
Bank's total assets.
Management believes CMOs represent attractive investment alternatives
relative to other investment vehicles, due to the variety of maturity and
repayment options available through such investments and due to the limited
credit risk associated with such securities. CMOs purchased by the Bank
represent a participation interest in a pool of single-family residential
mortgage loans and are generally rated "AAA" by independent credit-rating
agencies. In addition, such investments are secured by credit enhancements
and/or subordinated tranches or are collateralized by U.S. government agency
MBSs. The Bank generally invests only in sequential-pay, planned amortization
class ("PAC"), and targeted amortization class ("TAC") tranches that, at the
time of their purchase, are not considered to be high-risk derivative
securities, as defined in applicable regulations. The Bank does not invest in
support-, companion-, or residual-type tranches. Furthermore, the Bank does not
invest in interest-only, principal-only, inverse-floating-rate CMO tranches, or
similar complex securities.
The Bank also invests in MBSs that are guaranteed by FHLMC, FNMA, or
the Government National Mortgage Association ("GNMA"). In addition, the Bank
periodically securitizes or "swaps" mortgage loans in its own portfolio into
FHLMC or FNMA MBSs and continues to hold such securities. MBSs enhance the
quality of the Bank's assets by virtue of the guarantees that back them,
although the Bank at times has relinquished such guarantee on loans it has
swapped into MBSs (for additional discussion, refer to Note 2 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data"). In addition,
MBSs are more liquid than individual mortgage loans and receive treatment that
is more favorable when used to collateralize certain borrowings of the Bank.
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In addition to MBSs and CMOs, federally-chartered savings institutions
such as the Bank have authority to invest in various other types of investment
securities, including U.S. government obligations, securities of various federal
agencies, certificates of deposit issued by insured banks and savings
institutions, and federal funds. Subject to various restrictions,
federally-chartered savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities, and mutual funds whose
assets conform to the investments that a federally-chartered savings institution
is authorized to make directly. In general, investments in these types of
securities are limited to the four highest credit categories as established by
the major independent credit-rating agencies. Excluding U.S. government and
federal agency securities and mutual funds that invest exclusively in such
securities, the Bank does not invest in individual securities that exceed 10% of
its stockholder's equity. As of December 31, 2000, the Bank held only $817,000
in other investment securities.
The Bank classifies its mortgage-backed and related securities and its
other investment securities as either available for sale or held for investment.
For additional discussion, refer to Part II, Item 7, "Management Discussion and
Analysis of Financial Condition and Results of Operations" and Note 1 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
SOURCES OF FUNDS
DEPOSIT LIABILITIES The Bank's current deposit products include regular
savings accounts, checking accounts, money market deposit accounts, individual
retirement accounts, and certificates of deposit ranging in terms from three
months to five years. Substantially all of the Bank's deposits are obtained from
individuals and businesses located in Wisconsin and the northern portion of
Illinois. As of December 31, 2000, deposit liabilities accounted for
approximately 72% of the Bank's total liabilities and equity.
In addition to serving as the Bank's primary source of funds, deposit
liabilities (especially checking accounts) are a substantial source of
non-interest income. This income is generally received in the form of overdraft
fees, periodic service charges, automated teller machine ("ATM") and debit card
fees, and other transaction charges. The Bank's extensive retail branch network
also creates opportunities for sales of non-deposit products such as
tax-deferred annuities, mutual funds, and other investment products. In exchange
for these sales, the Bank receives commission revenue from the third-party
providers of the financial products and/or services.
The principal methods used by the Bank to attract deposit accounts
include offering a variety of products and services, competitive interest rates,
and convenient office locations and hours. Most of the Bank's free-standing
retail banking offices have drive-up facilities and 36 of the Bank's retail
banking facilities are located in supermarkets. The Bank also owns 91 ATM
machines, all of which are located in Wisconsin and the northern portion of
Illinois. Depositors may also obtain a VISA "debit card" from the Bank, which
allows them to purchase goods and services directly from any merchant that
accepts VISA credit cards. The same debit card also provides access to the ATM
network.
From time-to-time, the Bank has also used certificates of deposit sold
through third-party brokers ("brokered deposits") as an alternative to
borrowings from the FHLB. FDIC regulations govern the acceptance of brokered
deposits by insured depository institutions such as the Bank. At December 31,
2000, the Bank had $40.3 million in brokered deposits outstanding.
FEDERAL HOME LOAN BANK ADVANCES The Bank obtains advances from the FHLB
secured by certain of its home mortgage loans and mortgage-related securities,
as well as stock in the FHLB that the Bank is required to own. Such advances may
be made pursuant to several different credit programs, each with its own
interest rate and range of maturity dates. As of December 31, 2000, FHLB
advances accounted for approximately 16% of the Bank's total liabilities and
equity.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Bank occasionally
enters into sales of securities under agreements to repurchase (commonly
referred to as "reverse-repurchase agreements"). In form, these transactions are
an arrangement in which the sale of securities is accompanied by a simultaneous
agreement to repurchase the identical securities (or substantially the same
securities) at a future date. In substance, however,
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these arrangements are borrowings secured by high-quality, highly-liquid
securities such as FNMA or FHLMC MBSs. Accordingly, these arrangements are
accounted for as borrowings in the Bank's financial statements.
Securities sold under repurchase agreements are physically delivered to
the broker-dealers that arranged the transactions. The broker-dealers may sell,
loan, or otherwise dispose of such securities to other parties in the normal
course of their operations. The Bank is exposed to risk in these types of
transactions in that changes in market prices, economic losses, or other factors
could prevent or delay the counter-parties in the transaction from returning the
securities at the maturity of the agreement. The Bank limits its exposure to
such risk by utilizing standard industry agreements, limiting transactions to
large, reputable broker-dealers, limiting the amount that can be borrowed from
an individual broker-dealer, and limiting the duration of such agreements
(typically one to six months). As of December 31, 2000, securities sold under
agreements to repurchase accounted for approximately 4% of the Bank's total
liabilities and equity.
FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS The Bank has lines of
credit with three financial institutions. These lines, which amount to $45.0
million in the aggregate, permit the overnight purchase of federal funds. The
Corporation also has a $15.0 million line of credit with a fourth financial
institution. The interest rate on borrowings under this line is determined on a
periodic basis using an index based on the London Inter-Bank Offered Rate
("LIBOR"). As of December 31, 2000, $22.6 million was outstanding under these
lines of credit.
SUBSIDIARIES
The Bank has a number of subsidiaries that engage in certain activities
that management believes are more appropriately conducted in a subsidiary of the
Bank. Following is a brief description of each subsidiary.
FIRST CAPITAL HOLDINGS, INC. The Bank formed a wholly-owned subsidiary
in the State of Nevada in 1993. The subsidiary, First Capital Holdings, Inc.
("FCHI"), was formed to consolidate and improve the efficiency, management,
safekeeping, and operations of the Bank's investment securities portfolio and
certain other holdings. In addition, the formation of FCHI has resulted in a
lower effective income tax rate for the Bank because the State of Nevada does
not currently impose a corporate income tax. As of December 31, 2000, FCHI was
managing $407.8 million in mortgage-backed and related securities and $168.3
million in purchased single-family residential loans for the Bank. FCHI's net
income was $27.7 million $24.6 million, and $15.8 million during the years ended
December 31, 2000, 1999, and 1998, respectively. The Bank's net investment in
FCHI as of December 31, 2000, was $585.9 million, which was eliminated in
consolidation in accordance with GAAP.
FIRST REINSURANCE, INC. The Bank formed a wholly-owned subsidiary in
the State of Arizona in 1998. The subsidiary, First Reinsurance, Inc. ("FRI"),
was formed to reinsure or "underwrite" credit life and disability insurance
policies sold to the Bank's consumer loan customers. FRI assumes the first level
of risk on these policies and a third-party insurer assumes the remaining risk.
The third-party insurer is also responsible for performing most of the
administrative functions of the subsidiary on a contract basis. FRI's net income
was $163,000, $140,000, and $265,000 during the years ended December 31, 2000,
1999, and 1998, respectively. Results for 1998 included a $416,000 pre-tax
underwriting gain recorded upon the formation of FRI. Of this amount, all but
$149,000 was eliminated in consolidation in accordance with GAAP. At December
31, 2000, the Bank's net investment in FRI was $863,000, which was also
eliminated in consolidation.
TURTLE CREEK CORPORATION The Bank acquired Turtle Creek Corporation
("Turtle Creek") in 1995 as a result of its acquisition of another financial
institution. Turtle Creek, a Wisconsin corporation, holds a 40% limited
partnership interest in an apartment complex providing housing for
low-to-moderate income and elderly persons. Turtle Creek's aggregate investment
in this project was $97,000 at December 31, 2000. Turtle Creek had net income
(loss) of $(10,000), $66,000, and $(25,000) during the years ended December 31,
2000, 1999, and 1998, respectively. Results for 1999 included a $107,000 gain on
the sale of Turtle Creek's remaining interest in a land development project. The
Bank's net investment in Turtle Creek as of December 31, 2000, was $109,000,
which was eliminated in consolidation in accordance with GAAP.
FIRST ENTERPRISES, INC. The Bank's wholly-owned subsidiary, First
Enterprises, Inc. ("FEI"), was incorporated in 1971 in the State of Wisconsin.
During the period from the late-1970s to the mid-1980s, FEI was primarily
involved in the acquisition and development of hotels. Except for the
maintenance of its two remaining
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hotel investments, however, FEI is no longer involved in these types of
activities. FEI's investment in its remaining hotels was $140,000 as of December
31, 2000. FEI had net income of $30,000, $84,000, and $636,000 during the years
ended December 31, 2000, 1999, and 1998, respectively. Results for 1998 included
a $965,000 pre-tax gain related to the settlement of a lawsuit against another
financial institution. At December 31, 2000, the Bank's net investment in FEI
was $513,000, which was eliminated in consolidation in accordance with GAAP. In
December 2000, FEI capitalized a new subsidiary as described in the following
paragraph.
FF MORTAGE REINSURANCE, INC. In December 2000, the Bank completed the
formation of FF Mortgage Reinsurance, Inc. ("FFMR"), as a wholly-owned
subsidiary of FEI. FFMR was formed to reinsure or "underwrite" a portion of the
mortgage impairment insurance policies purchased by its loan customers (refer to
"Lending Activities--Residential Lending"). FFMR assumes a second level of risk
on these policies, which is capped at a certain level. Third-party insurers
assume the first level of risk, as well as any risk above the capped amount. A
third-party management company is responsible for performing most of the
administrative functions of the subsidiary on a contract basis. FFMR had no
results of operations in 2000. The initial capitalization of FFMR was $310,000,
which was eliminated in consolidation in accordance with GAAP.
COMPETITION
The Bank faces significant competition in attracting deposits through
its retail branch network. Its most direct competition has historically come
from commercial banks, credit unions, and other savings institutions located in
its market area. In addition, the Bank faces significant competition from mutual
fund and insurance companies, as well as primary financial markets such as the
stock and bond markets. The Bank competes for deposits principally by offering
customers a variety of deposit products, convenient branch locations, operating
hours, and other services. The Bank does not rely upon any individual group or
entity for a material portion of its deposits.
The Bank's competition for loans comes principally from mortgage
banking companies, other savings institutions, commercial banks, finance
companies, and credit unions. The Bank competes for loan originations primarily
through the interest rates and loan fees it charges, the efficiency and quality
of services it provides borrowers, referrals from real estate brokers and
builders, and the variety of its products. Factors that affect competition
include the general and local economic conditions, current interest rate levels,
and volatility in the secondary market for residential mortgage loans.
REGULATION OF THE CORPORATION
The Corporation is a savings and loan holding company within the
meaning of Section 10 of the Home Owners' Loan Act ("HOLA"). As such, the
Corporation is registered with and subject to OTS examination and supervision as
well as to certain OTS reporting requirements. The Corporation is also required
to file certain reports and otherwise comply with the rules and regulations of
the Securities and Exchange Commission ("SEC"). Furthermore, the Corporation is
limited with respect to the transactions it can execute with its affiliates
(including the Bank), and its ability to acquire control of another insured
financial institution, as specified more fully in the applicable regulations.
There generally are no restrictions as to activities of a unitary savings and
loan holding company such as the Corporation as long as its sole insured
subsidiary, the Bank, continues to meet certain regulatory requirements, which
management believes it did as of December 31, 2000.
REGULATION OF THE BANK
The Bank, as a federally-chartered savings bank, is subject to federal
regulation and oversight by the OTS extending to all aspects of its operations.
The Bank also is subject to regulation and examination by the FDIC, which
insures the deposits of the Bank to the maximum extent permitted by law, and to
certain requirements established by the Federal Reserve Board. The laws and
regulations governing the Bank generally have been promulgated to protect
depositors and not for the purpose of protecting stockholders of financial
institutions or their holding companies.
The investment and lending authority of a federally-chartered savings
bank is prescribed by federal laws and regulations. The Bank is also subject to
regulatory provisions affecting a wide variety of matters including, but
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not limited to, branching, loans to one borrower, investment restrictions,
activities of subsidiaries, loans to "insiders", and transactions with
affiliates. Certain of the regulatory requirements applicable to the Bank and
the Corporation are described in more detail in the following paragraphs.
INSURANCE OF DEPOSITS The Bank's savings deposits are insured by SAIF,
which is administered by the FDIC, up to the maximum extent provided by law,
currently $100,000 for each depositor. The Bank is subject to a risk-based
insurance assessment system under which higher insurance assessment rates are
charged to those thrift institutions that are deemed to pose greater risk to the
deposit insurance fund. Under this system, insurance assessments range from 0%
of deposits for the healthiest financial institutions to 0.27% of deposits for
the weakest. This risk-based assessment schedule is identical to that for
institutions insured by the Bank Insurance Fund ("BIF"), which is also
administered by the FDIC. Under both funds, the insurance assessment paid by a
particular institution will depend on the "supervisory rating" it receives from
the FDIC ("A", "B", or "C") and on its regulatory capital level ("well
capitalized", "adequately capitalized", or "undercapitalized"). Based upon its
current supervisory rating and regulatory capital level, and assuming no change
in the Bank's risk classification or in overall premium assessment levels, the
Bank anticipates that its insurance assessment for 2001 will be zero, which is
the same as the Bank's 2000 rate.
Although the Bank's risk-based insurance assessment for 2001 is
expected to be zero, the Bank will still be required to pay 0.0212% of deposits
to cover its pro rata share of the bond obligation of a government agency known
as the Finance Corporation ("FICO"). This rate is not tied to the FDIC's risk
classification; consequently, it is the same for all FDIC-insured institutions.
CAPITAL STANDARDS The Bank is subject to minimum regulatory capital
requirements as specified by OTS regulations. As more fully described in such
regulations, the Bank is subject to a leverage limit of at least 3% of total
assets, a tangible capital limit of at least 1.5% of total assets, and a
risk-based capital limit of at least 8% of risk-weighted assets. As of December
31, 2000, the Bank exceeded all minimum regulatory capital requirements as
specified by the OTS.
The Bank is also subject to minimum regulatory capital requirements as
specified by FDIC regulations. As more fully described in such regulations, the
Bank must meet the following capital standards to be classified as "adequately
capitalized" under FDIC guidelines: (1) Tier 1 capital in an amount not less
than 4% of adjusted total assets, (ii) Tier 1 capital in an amount not less than
4% of risk-weighted assets, and (iii) total capital in an amount not less than
8% of risk-weighted assets. As of December 31, 2000, the Bank exceeded all
minimum regulatory capital requirements as specified by the FDIC. For additional
discussion refer to Note 11 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data".
LIQUIDITY REQUIREMENTS The Bank is required to maintain liquid assets
(generally defined as cash and investment-grade short-term securities, as well
as certain mortgage-related securities and obligations of the United States)
equal to at least 4% of its "liquidity base" (generally defined as short-term
deposit liabilities and other borrowings). The OTS may change this requirement
from time-to-time to any amount within the range of 4% to 10% of the liquidity
base. As of December 31, 2000, the Bank was in compliance with the current
minimum requirements. For additional information refer to Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CLASSIFICATION OF ASSETS As previously described, the Bank's problem
assets are subject to classification according to one of three categories:
Substandard, Doubtful, and Loss. An institution is required to develop its own
program to classify its assets on a regular basis and to set aside appropriate
loss reserves on the basis of such classification. The Bank believes that it is
in compliance with the foregoing requirements.
QUALIFIED THRIFT LENDER TEST A savings association that does not meet
the Qualified Thrift Lender Test ("QTL Test"), as set forth in the HOLA and OTS
regulations, may lose access to FHLB advances and must either convert to a bank
charter or comply with certain restrictions on its operations. Under the QTL
Test, a savings association is required to maintain a certain percentage of its
assets in qualifying investments, as defined by regulations. In general,
qualifying investments consist of housing-related assets. At December 31, 2000,
the Bank's assets invested in qualifying investments exceeded the percentage
required to qualify the Bank under the QTL Test.
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FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System,
which consists of 12 regional FHLBs, subject to supervision and regulation by
the Federal Housing Finance Board. The FHLBs provide a central credit facility
primarily for member financial institutions. The Bank, as a member of the FHLB
of Chicago, is required to purchase and hold shares of capital stock in the FHLB
of Chicago. The requirement is equal to the greater of 1% of the Bank's
aggregate unpaid residential mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year or 5% of its outstanding
advances from the FHLB of Chicago. At December 31, 2000, the Bank had a $25.6
million investment in the stock of the FHLB of Chicago and was in compliance
with this requirement.
The Bank's investment in FHLB stock, its single-family mortgage loans,
and certain other assets (consisting principally of CMOs and MBSs) are used to
secure advances from the FHLB of Chicago. The interest rates charged on advances
vary with the maturity of the advance and the FHLB's own cost of funds.
FEDERAL RESERVE SYSTEM Regulation D, as promulgated by the Federal
Reserve Board, requires savings institutions to maintain non-interest-earning
reserves against certain transaction deposit accounts and other liabilities. At
December 31, 2000, the Bank's minimum required reserve level was $21.8 million
and it was in compliance with the regulation.
DIVIDEND RESTRICTIONS The payment of dividends by the Bank is subject
to various limitations set forth in federal regulations and as briefly described
in Note 11 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data". The Bank has not paid any dividends in violation of these regulations.
COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act of
1977, as amended (the "CRA"), and as implemented by OTS regulations, a savings
institution has a continuing and affirmative obligation, consistent with its
safe and sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution. The CRA also requires all institutions
to make public disclosure of their CRA ratings. The Bank's latest CRA rating,
received in 2000, was "Outstanding".
FINANCIAL SERVICES MODERNIZATION ACT In November 1999, the Financial
Services Modernization Act of 1999 (also known as the "Gramm-Leach-Bliley Act")
was signed into law. This law repealed the Glass-Steagall Act of 1933 and is
intended to increase competition in financial services so that financial firms,
such as banks, securities firms, and insurance companies can affiliate with each
other through the formation of holding companies. The law also appoints the
Federal Reserve as the overall regulator of such entities and restricts the
chartering and transferring of unitary thrift holding companies. However, it
does not restrict the operations of unitary holding companies in existence prior
to May 1999 that continue to meet the QTL Test and continue to control only a
single savings institution. The Corporation is a unitary thrift holding company
and presently meets these requirements.
The law also adopted a number of consumer protection provisions,
including those aimed at protecting privacy of information and requiring
disclosure of ATM usage charges. Many of the law's provisions require regulatory
action, including the promulgation of certain regulations, some that are yet to
become effective. Management of the Corporation does not believe the law or
resulting regulations have had or will have a significant impact on the
operations of the Corporation or the Bank. However, there can be no assurances.
TAXATION
FEDERAL TAXATION The Bank is subject to those rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code of
1986, as amended ("IRC"). The Corporation, the Bank, and the Bank's wholly-owned
subsidiaries (excluding FRI) file consolidated federal income tax returns, which
has the effect of eliminating or deferring the tax consequences of intercompany
distributions, including dividends, in the
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computation of consolidated taxable income. The consolidated entity pays taxes
at the federal statutory rate of 35% of its taxable income, as defined in the
IRC. Refer to Notes 1 and 8 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data" for additional discussion. As of December 31, 2000, there
were no material disputes outstanding with Internal Revenue Service.
STATE TAXATION The states of Wisconsin, Illinois, and Minnesota impose
a tax on their apportioned shares of the Corporation's taxable income at the
rate of 7.9%, 7.3%, and 9.8%, respectively (all state income taxes are
deductible on the Corporation's federal income tax return). These states'
definitions of taxable income are generally similar to the federal definition,
except that interest from state and municipal obligations is taxable, no
deduction is allowed for state income taxes (except for Illinois, which allows a
deduction for taxes paid to other states), and, in Wisconsin and Minnesota, net
operating losses may be carried forward but not back. Minnesota and Illinois
require the filing of consolidated state income tax returns, whereas Wisconsin
currently requires separate returns for each entity in the consolidated group.
FCHI and FRI are subject to taxation in the states of Nevada and
Arizona, respectively. The State of Nevada does not currently impose a corporate
income tax and the State of Arizona imposes a tax on the premium revenues of
insurance companies rather than taxable income. Although the taxable income of
these subsidiaries is not currently subject to taxation in the State of
Wisconsin, from time-to-time the government of the State of Wisconsin proposes
legislation that would require consolidated income tax returns for entities
headquartered in the state. To date, none of these legislative proposals have
been passed into law. However, if such legislation were to ever be passed into
law, it could result in the taxable income of FCHI, and possibly FRI, being
subject to taxation in the State of Wisconsin. If the Corporation had been
required to file a consolidated state income tax return in Wisconsin for the
year ended December 31, 2000, the Corporation's income tax expense would have
been approximately $1.8 million higher than that which has been reported. This
would have reduced diluted and basic earnings per share by approximately $0.09
per share. At this time, management of the Corporation is not aware of any
legislative proposals that would result in the filing of a consolidated state
income tax return in the State of Wisconsin. However, there can be no assurances
that such legislation will not be introduced and passed into law in the future.
ITEM 2--PROPERTIES
As of December 31, 2000, the Bank conducted its business from its
corporate offices in La Crosse, Wisconsin, 69 other retail banking facilities
located throughout Wisconsin, as previously described, and two separate loan
production offices, also located in Wisconsin. At such date, the Bank leased the
building and/or land for 22 of its offices and leased the building and/or the
land for its remaining 50 properties, including 36 located in supermarkets. The
Bank also owns or leases certain other properties to meet various business
needs. For additional information, refer to Note 5 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
ITEM 3--LEGAL PROCEEDINGS
The information required herein is included in Note 10 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for vote during the
fourth quarter of 2000.
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PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") National Market System under
the symbol FTFC. As of February 16, 2001, the Corporation had 18,379,998 common
shares outstanding (net of 1,561,632 shares of treasury stock), 1,448
stockholders of record, 2,933 estimated beneficial stockholders, and 4,381
estimated total stockholders.
Dividend and stock price information required by this item, as well as
information relating to the Corporation's stock repurchase plans, is included
under the following sections of this report:
(1) "Liquidity and Capital Resources", included herein under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
(2) "Note 11--Stockholder's Equity", included herein under Item 8,
"Financial Statements and Supplementary Data--Audited Consolidated Financial
Statements".
(3) "Quarterly Financial Information", included herein under Item 8,
"Financial Statements and Supplementary Data--Supplementary Data".
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ITEM 6--SELECTED FINANCIAL DATA
The information in the following table contains selected consolidated
financial and other data. This information has been derived in part from the
Audited Consolidated Financial Statements included herein under Item 8,
"Financial Statements and Supplementary Data". Accordingly, the table should be
read in conjunction with such consolidated statements.
Dollars in thousands, except for per share amounts
- ---------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA AS OF DECEMBER 31 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Total assets $2,352,726 $2,084,554 $1,786,504 $1,544,294 $1,515,413
Investment securities available for sale, at fair
value 817 873 - 21,377 74,029
Mortgage-backed and related securities:
Available for sale, at fair value 331,237 252,165 204,109 47,895 61,875
Held for investment, at cost 77,299 103,932 102,500 124,336 147,835
Loans held for investment, net 1,772,477 1,538,595 1,177,526 1,193,893 1,106,040
Allowance for loan losses 8,028 7,624 7,624 7,638 7,888
Mortgage servicing rights, net 23,280 21,728 21,103 16,291 11,887
Intangible assets 11,490 12,463 13,485 5,921 5,221
Deposit liabilities 1,699,252 1,471,259 1,460,136 1,146,534 1,024,093
FHLB advances and other borrowings 490,846 469,580 189,778 275,779 383,593
Stockholders' equity 146,549 127,275 122,685 109,361 95,414
=====================================================================================================================
SELECTED OPERATING DATA FOR YEAR ENDED DECEMBER 31 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Interest income $ 161,436 $ 130,071 $ 118,668 $ 114,976 $ 103,977
Interest expense 101,896 75,953 71,457 70,265 63,684
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 59,540 54,117 47,211 44,711 40,293
Provision for loan losses 1,009 387 293 539 -
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 58,531 53,731 46,918 44,172 40,293
- ---------------------------------------------------------------------------------------------------------------------
Gains from sales of loans 2,736 7,226 16,929 6,374 4,331
Gains (losses) from sales of real estate and 1,189 - 343 (725) (311)
investments
Other non-interest income 31,708 27,952 14,088 18,645 15,811
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 35,633 35,178 31,360 24,294 19,831
- ---------------------------------------------------------------------------------------------------------------------
FDIC special assessment - - - - 5,941
Other non-interest expense 58,250 54,299 47,597 40,197 38,304
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 58,250 54,299 47,597 40,197 44,245
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 35,914 34,609 30,681 28,269 15,880
Income tax expense 12,770 12,167 11,257 10,879 5,806
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 23,144 $22,441 $19,424 $ 17,390 $ 10,074
=====================================================================================================================
SELECTED OTHER DATA AT OR FOR THE YEAR ENDED 2000 1999 1998 1997 1996
DECEMBER 31 (1)
- ---------------------------------------------------------------------------------------------------------------------
Return on average assets 1.04% 1.19% 1.19% 1.13% 0.97%
Return on average equity 17.01 17.63 16.59 17.20 14.21
Average equity to average assets 6.12 6.74 7.16 6.57 6.80
Average interest rate spread 2.34 2.58 2.51 2.63 2.61
Average net interest margin 2.83 3.05 3.07 3.07 3.02
Ratio of allowance for loan losses to total loans
held for investment at end of period 0.45 0.50 0.65 0.64 0.71
Ratio of non-interest expense to average assets (2) 2.62 2.88 2.90 2.62 2.71
Earnings per share: (3)
Diluted earnings per share $ 1.25 $ 1.17 $ 0.98 $ 0.88 $ 0.68
Basic earnings per share 1.26 1.21 1.05 0.95 0.73
Dividends paid per share (3) 0.420 0.340 0.270 0.233 0.207
Stock price at end of period (3) 14.50 14.63 16.38 16.94 7.84
Book value per share at end of period (3) 7.99 6.92 6.68 5.95 5.19
Banking facilities at end of period 72 64 61 50 48
=====================================================================================================================
(1) Selected other data excludes the after-tax impact of the FDIC special
assessment in 1996.
(2) Excludes provision for real estate losses and recoveries, as well as FDIC
special assessment.
(3) Per share data and historical stock prices have been adjusted for a 3-for-2
stock split on June 12, 1997, and a 2-for-1 stock split on June 11, 1998.
16
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ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section should be read in conjunction with Item 8, "Financial
Statements and Supplementary Data", as well as Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk", and Part I, Item 1, "Business".
RESULTS OF OPERATIONS
OVERVIEW The Corporation's earnings for the years ended December 31,
2000, 1999, and 1998, were $23.1 million, $22.4 million, and $19.4 million,
respectively. These amounts represented returns on average assets of 1.04%,
1.19%, and 1.19%, respectively, and returns on average equity of 17.01%, 17.63%,
and 16.59%, respectively. Diluted earnings per share during these periods were
$1.25, $1.17, and $0.98, respectively.
The increase in net income from 1999 to 2000 was principally due to
increases in net interest income, retail banking fees, and loan servicing fees.
Also contributing was a $1.2 million gain on the sale of a piece of real estate.
The Corporation had held this real estate for a number of years, having
originally intended to build a retail office at the location. These developments
were largely offset by a substantial decline in gain on sales of loans, an
increase in non-interest expense, particularly compensation and employee
benefits, and an increase in provision for loan losses.
The increase in net income from 1998 to 1999 was primarily attributable
to increases in loan servicing fees, net interest income, retail banking fees,
and premiums and commissions. These developments were offset in part by a
substantial decline in gain on sales of loans, as well as other non-interest
income. In 1998, the latter included income from a legal settlement, as well as
higher levels of fee income from certain loan originations and conversions. Also
affecting net income in 1999 was an increase in non-interest expense, most
notably compensation and employee benefits, along with smaller increases in
every other non-interest expense category.
The following paragraphs discuss the aforementioned changes in greater
detail along with other changes in the components of net income during the years
ended December 31, 2000, 1999, and 1998.
NET INTEREST INCOME Net interest income increased by $5.4 million or
10.0% and $6.9 million or 14.6% during the years ended December 31, 2000 and
1999, respectively. The improvement in both of these periods was primarily
volume related as the Corporation's average interest-earning assets grew by
$327.7 million or 18.4% in 2000 and by $235.6 million or 15.3% in 1999. The
principal source of growth in both periods occurred in the Corporation's
single-family residential loans and commercial real estate loans and to a lesser
degree in its consumer and education loans. As a result of generally higher
interest rates in both periods, customer demand for adjustable-rate mortgage
loans increased dramatically in 1999 and 2000. Because of this, over 65% of the
Corporation's single-family mortgage loan production in 2000 consisted of
adjustable-rate loans, which the Corporation generally retains in its portfolio
of loans held for investment. Over 50% of single-family loan production
consisted of adjustable-rate loans in 1999. Asset growth in both periods was
principally funded by increases in deposit liabilities, as well as FHLB advances
and other borrowings. Also funding growth in loans in 1999 was a significant
decline in overnight investments, due to a reduced volume of loan sales compared
to 1998. Refer to "Financial Condition" for additional discussion.
The Corporation's interest rate spread declined from 2.58% in 1999 to
2.34% in 2000. Beginning in 1999, market interest rates began to increase
significantly, led generally by short-term interest rates. The yield curve also
flattened substantially, and was even inverted at times during 2000. Although
rising rates resulted in an increase in the average yield on the Corporation's
earning assets in 2000, the Corporation's interest-bearing liabilities tended to
reprice more quickly, which resulted in an overall decline in the Corporation's
average interest rate spread during the year. In recent months, market interest
rates have started to decline, especially on the short end of the yield curve.
Management expects this trend to continue in the near term, although there can
be no assurances. As such, management expects the Corporation's interest rate
spread to begin to improve in 2001. However, management is not certain the
Corporation's average interest rate spread will improve in the first quarter of
2001, as compared to the fourth quarter of 2000, or that the average for the
entire year will exceed the average level experienced for all of 2000.
17
19
Despite a generally rising interest rate environment in 1999, interest
rates in that year were lower on average then they were in 1998. As such, the
average yield on the Corporation's earning assets, as well as the average cost
of its interest-bearing liabilities, declined in 1999 compared to 1998. The
combination of these declines resulted in a seven basis improvement in the
Corporation's interest rate spread in 1999. During the first few months of that
year, a significant portion of the Corporation's certificates of deposits
matured and were replaced by certificates carrying a lower rate of interest. In
addition, the Corporation reduced the rate it pays on its interest-bearing
checking accounts, money market savings accounts, and regular savings accounts
during that timeframe. As a result of these developments, the decline in the
average cost of the Corporation's interest-bearing liabilities in 1999 exceeded
the decline in yield on its earning assets.
The following table sets forth information regarding the average
balances of the Corporation's assets, liabilities, and equity, as well as the
interest earned or paid and the average yield or cost of each. The information
is based on daily average balances for the years ended December 31, 2000, 1999,
and 1998.
Dollars in thousands 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Single-family mortgage loans $ 769,755 $56,637 7.36% $ 588,928 $41,592 7.06% $ 500,772 $38,404 7.67%
Commercial real estate loans 433,580 34,485 7.95 353,040 28,018 7.94 295,533 25,079 8.49
Consumer loans 306,650 26,202 8.54 240,260 19,981 8.32 210,326 18,485 8.79
Education loans 197,415 17,130 8.68 184,896 14,289 7.73 169,360 13,501 7.97
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 1,707,400 134,454 7.87 1,367,124 103,880 7.60 1,175,991 95,469 8.12
Mortgage-backed and
related securities 360,087 24,516 6.81 362,418 23,728 6.55 279,767 18,542 6.63
Investment securities 799 40 5.03 1,019 44 4.37 6,657 407 6.11
Interest-bearing deposits
with banks 10,530 603 5.73 29,932 1,405 4.69 63,596 3,336 5.25
Other earning assets 24,359 1,822 7.48 14,959 1,013 6.78 13,814 913 6.61
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 2,103,175 161,436 7.68 1,775,452 130,071 7.33 1,539,825 118,668 7.71
Non-interest-earning assets:
Office properties and 25,621 24,855 24,745
equipment
Other assets 95,178 87,762 69,464
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $2,223,974 $1,888,069 $1,634,034
================================================================================================================================
Interest-bearing liabilities:
Regular savings accounts $ 108,965 $ 1,619 1.49% $ 109,318 $ 1,741 1.59% $ 94,981 $ 1,843 1.94%
Checking accounts 75,062 571 0.76 70,404 558 0.79 58,126 544 0.94
Money market accounts 160,950 6,578 4.09 177,025 6,587 3.72 150,209 6,381 4.25
Certificates of deposit 1,082,318 64,820 5.99 949,500 51,661 5.44 843,066 50,653 6.01
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,427,295 73,588 5.16 1,306,248 60,547 4.64 1,146,382 59,422 5.18
FHLB advances 380,328 22,078 5.80 281,652 15,060 5.35 220,223 11,851 5.38
Other borrowings 101,317 6,230 6.15 11,025 346 3.14 7,901 185 2.34
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
Liabilities 1,908,940 101,896 5.34 1,598,926 75,953 4.75 1,374,506 71,457 5.20
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 160,963 145,428 126,480
Other liabilities 18,003 16,397 15,997
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,087,906 1,760,751 1,516,983
Stockholders' equity 136,068 127,318 117,052
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,223,974 $1,888,069 $1,634,034
================================================================================================================================
Net interest income $59,540 $54,117 $47,211
================================================================================================================================
Interest rate spread 2.34% 2.58% 2.51%
================================================================================================================================
Net interest income as a percent
of average earning assets 2.83% 3.05% 3.07%
================================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 110.18% 111.04% 112.03%
================================================================================================================================
The following table sets forth the effects of changing rates and
volumes on net interest income of the Corporation for the periods indicated.
Information is provided with respect to (i) effects on net interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) effects on net interest income attributable to changes in rate (changes in
rate multiplied by prior volume); (iii) changes attributable to combined
18
20
effects of rate and volume (changes in rate multiplied by changes in volume);
and (iv) the net change in interest income.
2000 COMPARED TO 1999 1999 COMPARED TO 1998
Dollars in thousands INCREASE (DECREASE) INCREASE (DECREASE)
- --------------------------------------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Single-family mortgage loans $ 1,740 $12,771 $ 535 $15,046 $(3,037) $ 6,761 $ (536) $ 3,188
Commercial real estate loans 61 6,392 14 6,467 (1,626) 4,880 (315) 2,939
Consumer loans 548 5,521 152 6,221 (993) 2,631 (142) 1,496
Education loans 1,755 967 119 2,841 (413) 1,238 (37) 788
- --------------------------------------------------------------------------------------------------------------------------
Total loans 4,104 25,651 820 30,574 (6,069) 15,510 (1,030) 8,411
Mortgage-backed and related securities 947 (153) (6) 788 (225) 5,478 (67) 5,186
Investment securities 7 (10) (1) (4) (116) (345) 98 (363)
Interest-bearing deposits with banks 310 (911) (201) (802) (351) (1,766) 186 (1,931)
Other earning assets 106 636 67 809 22 76 2 100
- --------------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets 5,474 25,213 679 31,366 (6,739) 18,953 (811) 11,403
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits 5,714 6,659 668 13,041 (5,988) 7,927 (814) 1,125
FHLB advances 1,290 5,276 452 7,018 (76) 3,306 (21) 3,209
Other borrowings 332 2,837 2,715 5,884 64 73 24 161
- --------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 7,336 14,772 3,835 25,943 (6,000) 11,306 (811) 4,496
- --------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $(1,862) $10,441 $(3,156) $ 5,423 $ (739) $ 7,647 $ 0 $ 6,906
==========================================================================================================================
PROVISION FOR LOAN LOSSES Provision for loan losses was $1.0 million,
$387,000, and $293,000 during the years ended December 31, 2000, 1999, and 1998,
respectively. In 1999 and 1998, the Corporation's provision for loan losses
approximated its actual net charge-off activity in such years. However, in 2000
the Corporation recorded approximately $400,000 in provision for loan losses
over-and-above its actual net charge-off activity. This additional provision was
recorded to maintain the Corporation's allowance for loan losses at a level
deemed appropriate by management. This addition was considered proper in light
of significant growth in the Corporation's loans held for investment in recent
periods, an increased mix of higher-risk consumer and commercial real estate
loans, and a modest increase in non-performing and classified assets. As of
December 31, 2000, 1999, and 1998, the Corporation's allowance for loan losses
was $8.0 million, $7.6 million, and $7.6 million, respectively, or 0.45%, 0.50%,
and 0.65% of loans held for investment, respectively. The allowance for loan and
real estate losses was 188%, 365%, and 330% of non-performing assets as of the
same dates, respectively. For additional discussion, refer to "Financial
Condition--Non-Performing Assets".
The following table summarizes the activity in the Corporation's
allowance for loan losses during each of years indicated.
Dollars in thousands 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $7,624 $7,624 $7,638 $7,888 $8,186
Provision for losses 1,009 387 293 539 -
- ---------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Single-family mortgage loans - - - 13 -
Consumer loans 632 408 332 530 328
Education loans 33 26 33 272 9
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 665 434 365 815 337
Recoveries (principally consumer loans) 60 47 58 26 39
- ---------------------------------------------------------------------------------------------------------------------------------
Charge-offs net of recoveries 605 387 307 789 298
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $8,028 $7,624 $7,624 $7,638 $7,888
=================================================================================================================================
Net charge-offs as a percentage of average loans outstanding 0.04% 0.03% 0.03% 0.07% 0.03%
=================================================================================================================================
Ratio of allowance to total loans held for investment at end of
period 0.45% 0.50% 0.65% 0.64% 0.71%
=================================================================================================================================
Ratio of allowance to total non-performing assets 188% 365% 330% 159% 331%
=================================================================================================================================
Note: there were no charge-offs of commercial real estate loans during the five
years ended December 31, 2000.
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The following table shows the Corporation's total allowance for loan
losses and the allocation to the various loan categories as of December 31 for
each of the years indicated.
Dollars in thousands 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- -------------------------------------------------------------------------------------------------------------------
Single-family mortgage loans $ 149 0.02% $ 144 0.02% $ 156 0.04% $ 148 0.03% $ 183 0.03%
Commercial real estate loans 7,257 1.65 7,088 2.00 7,017 2.43 7,200 2.90 7,326 3.30
Consumer loans 585 0.17 355 0.13 414 0.19 253 0.12 302 0.18
Commercial business loans 37 18.97 37 12.50 37 9.97 37 6.65 77 6.33
- ------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $8,028 0.45% $7,624 0.50% $7,624 0.65% $7,638 0.64% $7,888 0.71%
==================================================================================================================
The amounts in the preceding table are expressed as a percentage of
gross loans outstanding for each loan category, excluding construction loans.
The total allowance is expressed as a percent of net loans held for investment.
There was no allowance for loan losses allocated to education loans as of
December 31 for any of the years presented.
Although management believes that the Corporation's present level of
allowance for loan losses is adequate, there can be no assurance that future
adjustments to the allowance will not be necessary, which could adversely affect
the Corporation's results of operations.
NON-INTEREST INCOME Non-interest income for the years ended December
31, 2000, 1999, and 1998, was $35.6 million, $35.2 million, and $31.4 million,
respectively. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their changes from 1999 to 2000
and 1998 to 1999.
Retail banking fees and service charges increased by $2.2 million or
11.0% in 2000 and by $5.2 million or approximately 35% in 1999. These increases
were due in part to growth of 8.3% and 9.6% in the number of checking accounts
serviced by the Corporation during 2000 and 1999, respectively. Also
contributing to the increase in 1999 was an increase in the per-item charge for
overdrafts on checking accounts that was instituted early in the year. Finally,
growth in retail banking fees in both periods was also the result of a $905,000
or 16.0% increase and $1.5 million or 35.0% increase in fees from customers' use
of debit cards and ATMs in 2000 and 1999, respectively.
Loan servicing fees were $3.9 million, $2.8 million, and $(6.7) million
in 2000, 1999, and 1998, respectively. The fees for 1999 and 1998 are net of
losses related to the periodic valuation of mortgage servicing rights. In 1998,
interest rates reached historically low levels. As a result, loan prepayment
activity was much higher in 1998 and early 1999 than had originally been
estimated by management upon origination or purchase of the related mortgage
servicing rights. Because of such prepayment activity, the Corporation recorded
$10.2 million in losses in 1998 on mortgage servicing rights over-and-above that
which was considered to be normal periodic amortization. This compared to $1.1
million in such losses in 1999 and zero in 2000, a period during which interest
rates generally increased.
Excluding the effects of the aforementioned losses, but net of normal
periodic amortization, loan servicing fees were essentially unchanged in 2000 as
compared to 1999 and increased by $306,000 or 8.6% in 1999 as compared to 1998.
Because of higher interest rates in 1999 and 2000, customer demand for
fixed-rate mortgage loans declined substantially during these periods, and most
significantly in the most recent year. The Corporation generally sells all of
the fixed-rate mortgage loans it originates in the secondary market, but retains
the servicing. Accordingly, increases in loans serviced for others caused by new
loan sales have been substantially offset in recent years by decreases caused by
normal principal amortization, maturities, and prepayments. Average loans
serviced for others were $1.9 billion, $1.9 billion, and $1.7 billion during the
years ended December 31, 2000, 1999, and 1998, respectively.
In recent months, market interest rates have declined. Although there
can be no assurances, management expects this trend to continue in the near
future. If interest rates continue to decline, the Corporation may be required
to record losses on its mortgage servicing rights related to higher than
anticipated prepayment activity. Such losses, however, may be offset by higher
levels of gains on sales of mortgage loans, as described in a subsequent
paragraph. It should be noted, however, that declines in market interest rates
may also expose the Corporation to unfavorable mark-to-market adjustments
against its portfolio of mortgage servicing rights--primarily
20
22
because of increases in market expectations for future prepayments. Although
management believes that most of the Corporation's loans that prepay are
replaced by a new loan to the same customer or even a different customer (thus
preserving the future servicing cash flow), GAAP requires mark-to-market losses
resulting from increases in market expectations for future prepayments to be
recorded in the current period. However, the offsetting gain on the sale of the
new loan, if any, cannot be recorded until the customer actually prepays the old
loan and the new loan is sold in the secondary market. For additional discussion
relating to mortgage servicing rights, refer to Part I, Item 1,
"Business--Lending Activities", and Notes 1 and 4 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
Premium and commission revenue increased by $170,000 or 6.5% in 2000
and by $833,000 or over 45% in 1999. The Corporation's principal sources of
premium and commission revenue are from sales of tax-deferred annuity contracts,
credit life and disability insurance policies, and mortgage loan insurance
policies. The increase in 2000 was primarily attributable to increased sales of
credit life and disability insurance policies. The increase in 1999 was
principally due to increased sales of tax-deferred annuity contracts. Included
in commission revenue for 1998 was a $149,000 underwriting gain related to the
Corporation's formation of FRI, a wholly-owned reinsurance subsidiary (refer to
Part I, Item 1, "Business--Subsidiaries", for additional discussion).
In the fourth quarter of 2000, the Corporation expanded the services it
offers customers by making available to them the purchase of mutual funds,
variable-annuities, and other equity and debt securities. The Corporation
receives commission revenue on the sales of these investment products from a
third-party broker-dealer. The Corporation has also contracted with this firm to
provide sales and training support, administrative services, and regulatory
compliance and due diligence services related to the sales of its investment
products. The personnel involved in these sales are joint employees of the Bank
and the brokerage firm. This service is currently offered in a limited number of
the Corporation's retail banking offices, but management expects to expand the
number over the next few years.
Gains on sales of loans for the years ended December 31, 2000, 1999,
and 1998, were $2.7 million, $7.2 million, and $16.9 million, respectively. The
decreases in the two most recent years were attributable to a $197.7 million or
approximately 56% decline and a $539.8 million or approximately 60% decline in
the Corporation's mortgage loan sales in 2000 and 1999, respectively. These
declines were due to a rising interest rate environment during most of 1999 and
2000 that slowed originations of fixed-rate mortgage loans, as well as
conversions of adjustable-rate loans into fixed-rate loans, both of which the
Corporation generally sells in the secondary market. In recent months, however,
market interest rates have declined. Although there can be no assurances,
management expects this trend to continue in the near future. If interest rates
continue to decline, management expects customer demand for fixed-rate mortgage
loans to increase, as has been the case during the fourth quarter of 2000. As
such, management expects the Corporation's gain on sales of loans to increase in
2001 from recent levels. These gains, however, may be offset to some degree by
increased losses on mortgage servicing rights, as more fully described in a
previous paragraph.
In the fourth quarter of 2000, the Corporation sold a piece of real
estate it had acquired in the 1980s, having originally intended to build a
retail office at the location. The pretax gain on this sale was $1.2 million.
The estimated after tax gain was $771,000 or $0.04 per diluted share. In 1998,
the Corporation sold FNMA stock it had acquired in the early 1980s at a pretax
gain of $343,000.
The recognition of gains or losses from sales of loans, mortgage-backed
and related securities, and other investments is dependent on market and
economic conditions. Accordingly, there can be no assurance that the gains
reported in prior periods can be achieved in the future or that there will not
be significant inter-period variations in the results from such activities.
Furthermore, the Corporation is subject to accounting principles established by
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which limits
the Corporation's ability to sell investments classified as "held for
investment". For additional discussion refer to Note 1 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
Other income was $2.6 million, $2.4 million, and $4.0 million for the
years ended December 31, 2000, 1999, and 1998, respectively. The results for
1998 included a $965,000 pre-tax gain recorded on the books of FEI, a
wholly-owned subsidiary of the Bank (refer to Part I, Item 1,
"Business--Subsidiaries"). The gain related to FEI's
21
23
settlement of a lawsuit that it had brought against another financial
institution. Also included in the results for 1998 was a significant increase in
fees from customers' conversions of adjustable-rate mortgage loans into fixed
rate loans due to the low interest rate environment, as previously described.
Also contributing were increases in fees received on loans originated as agent
for the Wisconsin State Veterans Administration and the Wisconsin Housing and
Economic Development Authority.
NON-INTEREST EXPENSE Non-interest expense for the years ended December
31, 2000, 1999, and 1998, was $58.3 million, $54.3 million, and $47.6 million,
respectively. Non-interest expense as a percent of average assets during these
periods was 2.62%, 2.88%, and 2.90%, respectively. The following paragraphs
discuss the principal components of non-interest expense and the primary reasons
for their changes from 1999 to 2000 and 1998 to 1999.
Compensation and employee benefits increased by $3.7 million or 11.8%
in 2000 and $4.9 million or 18.2% in 1999. In general, the increase in both
periods was due to growth in the number of banking facilities operated by the
Corporation, as well as normal annual merit increases. Both years were also
impacted by an increase in the cost of employee healthcare benefits. Such costs
rose by $682,000 or 32% in 2000 and $698,000 or almost 50% in 1999. Finally, the
most recent year was also impacted by a $910,000 increase in costs related to a
performance-based, variable stock compensation plan. Although there can be no
assurances, management expects costs related to employee healthcare and its
variable stock compensation plan to be lower in 2001 than they were in 2000.
Since December 31, 1998, the Corporation has opened eleven banking
facilities. In 2001, the Corporation intends to open six retail banking
facilities and one loan production facility, although there can be no
assurances. As of December 31, 2000, the Corporation had 897 full-time
equivalent employees. This compared to 831 and 808 as of December 31, 1999 and
1998, respectively.
Occupancy and equipment expense increased by $446,000 or 6.0% in 2000
and $432,000 or 6.2% in 1999. In addition, communications, postage, and office
supplies expense increased by $285,000 or 7.1% in 2000 and $344,000 or 9.4% in
1999. These increases were primarily attributable to growth in the number of
banking facilities operated by the Corporation, as previously described, as well
as increases in the number of full-time equivalent employees and in the number
of customers served by the Corporation.
ATM and debit card transaction costs increased by $233,000 or 8.7% in
2000 and $358,000 or 15.3% in 1999. The increase in both years was attributable
to increased use by the Corporation's customers of ATM and debit card networks,
as well as an increase in the number of ATMs operated by the Corporation.
Advertising and marketing costs increased by $102,000 or 4.5% in 2000
and $118,000 or 5.5% in 1999. These increases correspond to general increases in
prices for marketing-related products and services, as well as increases in the
number of communities and/or market areas served by the Corporation.
Amortization of intangible assets, which consists primarily of
deposit-based intangibles and purchase accounting goodwill, was substantially
the same in 2000 as it was in 1999. However, amortization increased by $450,000
or over 75% in 1999. This increase was caused by the Corporation's purchase of
deposits from another financial institution in the fourth quarter of 1998.
Other non-interest expenses declined by $846,000 or 15.7% in 2000 and
increased by $148,000 or 2.8% in 1999. The decline in 2000 was due in part to a
$508,000 or over 60% decrease in the cost of FDIC deposit insurance. This
decrease was caused by a reduction in the amount the Bank is required to pay for
its pro rata share of the bond obligation of FICO, a governmental agency, from
0.065% of deposits in 1999 to 0.021% in 2000. Also contributing to the decline
in other non-interest expense in 2000 was a $250,000 or 50% decrease in costs
related to the servicing of loans for FNMA. Under the terms of its servicing
agreement with FNMA, the Corporation is required to pay a full month's interest
to FNMA when certain loans are repaid, regardless of the actual date of the loan
payoff. Higher interest rates in 2000 resulted in lower prepayment and refinance
activity, which reduced the amount of "loan pay-off interest" remitted to FNMA.
Finally, in 1999 the Corporation was able to dispose of foreclosed real estate
at a net gain of $81,000. However, in 2000, disposals of foreclosed real estate
resulted in a net loss of $61,000.
22
24
INCOME TAX EXPENSE Income tax expense for the years ended December 31,
2000, 1999, and 1998, was $12.8 million, $12.2 million, and $11.3 million,
respectively, or 35.6%, 35.2%, and 36.7% of pretax income, respectively. Refer
to Part I, Item 1, "Business--Subsidiaries" and "Business--Taxation", for
additional discussion relating to the Corporation's tax situation.
SEGMENT INFORMATION The following paragraphs contain a discussion of
the financial performance of each of the Corporation's reportable segments
(hereafter referred to as "profit centers") for the years ended December 31,
2000, 1999, and 1998. This section of the report should be read in conjunction
with Note 13 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data". Note 13 contains a description of the Corporation's approach to segment
reporting, to include a discussion of certain non-GAAP adjustments and
reclassifications that are made to the Corporation's results of operations and
financial condition for segment reporting purposes only. In the judgment of
management, such adjustments and reclassifications reflect more fairly the
performance and/or financial condition of certain of the Corporation's profit
centers.
The following table summarizes the after-tax profit (loss) of the
Corporation's profit centers during each of the years ended December 31, 2000,
1999, and 1998 (refer to Note 13 of the Corporation's Audited Consolidated
Financial Statements for a more detailed profit (loss) statement for each profit
center).
PROFIT (LOSS) BY PROFIT CENTER 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Mortgage banking $ 3,630,010 $ 3,663,321 $ 4,909,563
Residential loans 6,767,038 5,548,997 4,124,432
Commercial real estate lending 4,505,490 4,741,426 3,470,227
Consumer lending 3,758,533 3,437,607 2,736,017
Education lending 3,925,613 2,773,665 1,992,461
Investment and mortgage-related securities 3,420,815 4,049,069 2,341,871
Other segments (448,015) (276,073) 324,056
Non-GAAP adjustments (2,415,608) (1,496,802) (474,493)
- -------------------------------------------------------------------------------------------------------------------
Net income $23,143,876 $22,441,210 $19,424,134
===================================================================================================================
MORTGAGE BANKING Profits from the Corporation's mortgage banking
activities declined by $33,000 or less than 1.0% in 2000 and by $1.2 million or
approximately 25% in 1999 compared to the previous year. Loan origination
volumes and mortgage servicing fees are the principal drivers of performance in
this profit center. In 1998, a historically low interest rate environment
resulted in a significant increase in originations of single-family residential
loans. In that year, the Corporation's mortgage banking operation originated
$1.1 billion in single-family loans compared to $628.9 million in 1999 and
$524.0 million in 2000. The unfavorable impact of reduced originations in 1999
and 2000 was offset somewhat by reduced losses on mortgage servicing rights, as
described more fully in a previous paragraph.
RESIDENTIAL LOANS Profits from the Corporation's residential loan
portfolio increased by $1.2 million or approximately 22% in 2000 and by $1.4
million or approximately 35% in 1999 compared to the previous year. Over the
past two years, the performance of this profit center was impacted by a
substantial increase in its assets. As noted in previous paragraphs, interest
rates were generally higher in 1999 and 2000. As a result, assets attributable
to this profit center increased as customer preferences shifted to
adjustable-rate loans, which are generally retained by the Corporation rather
than sold in the secondary market. Also contributing to the growth in this
profit center's average assets in recent periods was the purchase of $13.1
million, $97.2 million, and $165.1 million in adjustable-rate loans in 2000,
1999, and 1998, respectively. The impact of increased loan originations in 2000
was partially offset by the securitization of $132.3 million of the
Corporation's adjustable-rate residential mortgage loans into MBSs. This
transaction resulted in the transfer of these assets to the investment and
mortgage-related securities profit center during the year. A similar transaction
was completed in 1998 for $222.3 million.
Earnings of the residential loan portfolio in 2000 and 1999 also
benefited from a lower effective tax rate as compared to 1998. This development
was caused by the fact that during these years a higher percentage of the
portfolio's assets were held in the State of Nevada, which does not currently
impose a corporate income tax (refer to Part I, Item 1, "Business--Taxation",
for additional discussion). Assets in Nevada increased as a result of the
aforementioned purchases of adjustable-rate loans.
23
25
The favorable developments described in the previous paragraphs were
offset in part by lower interest rate spreads in 2000 and 1999 as compared to
the previous year. In 2000, the increase in the average cost of this profit
center's funding sources exceeded the increase in the average yield on its
assets. In 1999, the decline in the average yield on its earning assets exceeded
the decline in the average cost of its funding sources. For more information
relating to yields and costs on assets and liabilities, refer to "Results of
Operations--Net Interest Income".
COMMERCIAL REAL ESTATE LENDING Profits from commercial real estate
lending decreased by $236,000 or 5.0% in 2000 after increasing by $1.3 million
or approximately 37% in 1999 compared to 1998. The profit center's earnings in
both periods benefited from a substantial increase in its average assets. The
profit center originated $120.5 million, $112.2 million, and $106.1 million in
loans in 2000, 1999, and 1998, respectively. The volume-related improvement for
2000, however, was offset by a narrower interest rate spread. This development
was caused by a higher interest rate environment in 2000, which resulted in a
large increase in the profit center's average cost of funds. In contrast, the
average yield on the commercial real estate loan portfolio did not change
substantially in 2000 due to increased competitive pressures that prevented the
portfolio's yield from increasing along with other interest rate measures.
Although the average yield on commercial real estate loans declined
substantially in 1999, due principally to the same competitive pressures, the
impact of such decline was offset by a lower average cost of funds in the profit
center. This development permitted most of the benefit from increased volume to
favorably impact the profit center's earnings in 1999. For more information
relating to yields and costs on assets and liabilities, refer to "Results of
Operations--Net Interest Income".
In 1998, the commercial real estate profit center's earnings were
negatively impacted by a $203,000 charge-off related to the foreclosure and sale
of a large apartment complex, as well as a high level of real estate operating
expenses related to such property. The profit center did not experience a
similar level of charge-offs or operating expenses in 2000 and 1999.
CONSUMER LENDING Profits from consumer lending increased by $321,000 or
9.3% in 2000 and by $702,000 or approximately 26% in 1999 compared to the
previous year. Consumer lending benefited from a $70.1 million or approximately
27% increase in average assets in 2000 and a $33.9 million or 15.2% increase in
1999. In 2000, the profit center originated $235.8 million in loans compared to
$189.3 million and $176.8 million in 1999 and 1998, respectively.
Similar to the Corporation's other profit centers, a large portion of
the favorable impact increased volume in 2000 had on the earnings of the
consumer lending profit center was offset by a narrower interest rate spread. A
higher interest rate environment in 2000 resulted in a larger increase in the
profit center's average cost of funds than its average yield on assets. In 1999,
a decline in average yield on assets was more than offset by a larger decline in
the profit center's average cost of funds. For more information relating to
yields and costs on assets and liabilities, refer to "Results of Operations--Net
Interest Income".
EDUCATION LENDING Profits from education lending increased by $1.2
million or over 40% in 2000 and by $781,000 or nearly 40% in 1999 compared to
the previous year. Education loans benefited in both years from an improving
interest rate spread. In 2000, higher short-term rates resulted in a significant
increase in the average yield on education loans. In contrast, the average cost
of funds for the profit center did not increase dramatically, because the
primary funding source for education loans is the Corporation's money market
deposit accounts. The average cost on such accounts increased by only 37 basis
points in 2000, compared to a 95 basis point increase in the average yield on
education loans. The interest rate spread on education loans also improved in
1999, despite a 24 basis point decline in average yield in that period compared
to 1998. This occurred because the average cost of money market deposit accounts
declined by 53 basis points in 1999 compared to 1998. For more information
relating to yields and costs on assets and liabilities, refer to "Results of
Operations--Net Interest Income".
Also contributing to the increase in earnings in this profit center in
both periods was an increase in average assets. Average assets of this profit
center increased by $13.4 million or 6.9% in 2000 and $16.6 million or 9.4% in
1999. Finally, the profit center realized a $197,000 gain on the sale of $4.8
million in loans in 2000 and a gain of $89,000 on the sale of $2.2 million in
loans in 1999.
24
26
INVESTMENT AND MORTGAGE-RELATED SECURITIES Profits from securities
declined by $628,000 or 15.5% in 2000 and increased by $1.7 million or over 70%
in 1999 compared to the previous year. These changes were partly volume related
as the profit center's average assets decreased by $8.7 million or 2.1% in 2000
and increased by $45.6 million or 12.2% in 1999 compared to the previous year.
In 2000 the Corporation did not purchase any securities, but did complete the
securitization of $132.3 million in adjustable-rate loans, as previously
described. In 1999, the Corporation purchased $206.3 million in securities,
although the impact of such purchases was offset somewhat by a $78.8 million
decline in overnight investments.
In 2000, the profitability of this profit center was also negatively
impacted by a narrower interest rate spread. A higher interest rate environment
in 2000 resulted in a larger increase in the profit center's average cost of
funds than its average yield on assets. In contrast, a decline in average yield
on assets in 1999 was more than offset by a larger decline in the profit
center's average cost of funds, contributing further to increased profits in
that year. For more information relating to yields and costs on assets and
liabilities, refer to "Results of Operations--Net Interest Income".
Most of the assets of the investment and mortgage-related securities
portfolio are located in Nevada. As such, this profit center experiences a
substantial tax advantage because Nevada does not currently impose a corporate
tax, as previously described. However, most of the liabilities that fund this
profit center's operations are maintained in Wisconsin, which preserves the
tax-deductibility of the interest expense in that state. This situation results
in a very low effective tax rate, or at times a negative effective tax rate, for
this profit center.
OTHER SEGMENTS Other segments consist principally of FEI and Turtle
Creek, wholly-owned subsidiaries of the Bank, and the Bank's parent company. The
profit (loss) from other segments was $(448,000), $(276,000), and $324,000 in
2000, 1999, and 1998, respectively. The increased loss in 2000 was caused by
increased borrowings at the parent company, which resulted in increased interest
expense compared to 1999. The results for 1998 included a $965,000 pre-tax gain
that was recorded on the books of FEI (refer to Part I, Item 1,
"Business--Subsidiaries").
NON-GAAP ADJUSTMENTS A variety of developments explain the increase in
non-GAAP adjustments from 1999 to 2000, as well as from 1998 to 1999. The most
significant development was the fact that the mortgage banking profit center
originated more loans for the Corporation's residential loan profit center in
2000 than it did in 1999, which in turn was more than it originated in 1998. In
general, this resulted in successively larger internal adjustments to compensate
the mortgage banking profit center for its efforts related to such originations.
Also contributing to the increase in non-GAAP adjustments in the most recent
year was the fact that the Corporation's profitability model disregards
provisions for loan and real estate losses as determined under GAAP; rather, it
uses actual charge-off and/or recovery activity. The impact of these adjustments
was partially offset in 2000 by the fact that the profitability model
disregarded the $1.2 million pre-tax gain on the sale of real estate. Management
made this adjustment because it did not feel such gain fairly reflected the
performance of any of its profit centers.
Also contributing to the increase in non-GAAP adjustments in 1999 was
the fact that the profitability model disregards the amortization of goodwill
and certain other intangible assets. In 1999, amortization of intangibles was
$1.0 million compared to only $582,000 in 1998.
NET COST TO ACQUIRE AND MAINTAIN DEPOSIT LIABILITIES In addition to the
after-tax performance of the aforementioned profit centers, management of the
Corporation closely monitors the net cost to acquire and maintain deposit
liabilities (as defined in Note 13 of the Corporation's Audited Consolidated
Financial). The net cost to acquire and maintain deposit liabilities during the
years ended December 31, 2000, 1999, and 1998, was 1.15%, 1.13%, and 1.32% of
average deposit liabilities outstanding, respectively. The decline in net cost
to acquire and maintain deposit liabilities from 1998 to 1999 was principally
due to an increase in the per-item charge for overdrafts on checking accounts
that was instituted in the second quarter of that year, as previously described.
The Corporation's profit centers are allocated a share of the net cost
to acquire and maintain deposit liabilities according to their proportionate use
of such deposits as a funding source. As such, the changes in the net cost to
acquire and maintain deposit liabilities impact all of the Corporation's profit
centers.
25
27
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $268.2 million or
12.9% during the twelve months ended December 31, 2000. This increase was the
result of a $233.9 million or 15.2% increase in loans held for investment and a
$52.4 million or 14.7% aggregate increase in mortgage-backed and related
securities. These increases were primarily funded by a $228.0 million or 15.5%
increase in deposit liabilities. Contributing to a lesser degree was a $21.3
million or 4.5% aggregate increase in FHLB advances and other wholesale
borrowings and a $19.3 million or 15.1% increase in stockholders' equity.
Finally, a $40.1 million or over 60% decline in cash and due from banks also
helped fund the aforementioned increase in loans held for investment and
mortgage-backed and related securities.
CASH AND DUE FROM BANKS The Corporation's cash and due from banks,
which consists primarily of vault and teller cash, as well as correspondent bank
balances, decreased by $40.1 million or over 60% during the twelve months ended
December 31, 2000. Most of this decrease was caused by the build-up of cash
reserves at the end of 1999 in anticipation of customer demand prior to the year
2000 change-over. Such cash reserves proved unnecessary, however, and were
promptly returned to the Federal Reserve System in January 2000.
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios increased by
$52.4 million or 14.7% during the twelve months ended December 31, 2000. This
increase was caused by the transfer of $132.3 million in adjustable-rate
residential mortgage loans from loans held for investment to mortgage-backed and
related securities, as a result of the securitization of such loans into MBSs.
The increase caused by this transaction was offset in part by the normal
periodic amortization of the mortgage loans that support the Corporation's
portfolio of mortgage-backed and related securities.
The securitization of adjustable-rate residential mortgage loans into
MBSs improves the liquidity of the related assets and increases the
Corporation's borrowing capacity by making such assets acceptable as collateral
for borrowings under securities sold under agreements to repurchase. MBSs also
receive better treatment under the FHLB's current collateralization guidelines.
In addition, the Corporation has transferred the credit risk associated with the
underlying loans to the issuer of the MBSs, FHLMC, through the payment of a
standard guarantee fee. As a result of this risk transfer, the MBSs receive
better treatment under current regulatory risk-based capital guidelines.
The following table sets forth the composition of the Corporation's
mortgage-backed and related securities portfolios as of December 31 for each of
the years indicated.
Dollars in thousands 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------
Available for sale:
Collateralized mortgage obligations $120,538 $119,026 $148,311 $143,790 $33,871 $33,787
Mortgage-backed securities 207,052 212,211 105,651 108,376 165,872 170,322
- ------------------------------------------------------------------------------------------------------------------------
Total available for sale 327,591 331,237 253,963 252,165 199,743 204,109
- ------------------------------------------------------------------------------------------------------------------------
Held for investment:
Collateralized mortgage obligations 75,532 74,708 100,522 97,733 97,251 97,608
Mortgage-backed securities 1,767 1,749 3,410 3,335 5,249 5,300
- ------------------------------------------------------------------------------------------------------------------------
Total held for investment: 77,299 76,457 103,932 101,068 102,500 102,908
- ------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and related securities $404,889 $407,694 $357,895 $353,234 $302,243 $307,017
========================================================================================================================
Weighted-average yield 7.00% 6.82% 6.95%
========================================================================================================================
LOANS HELD FOR SALE The Corporation's loans held for sale increased by
$16.6 million or over 250% during the year ended December 31, 2000. This
increase was due to a declining interest rate environment during the last few
months of 2000 that increased consumer demand for fixed-rate residential
mortgage loans, which the Corporation generally sells in the secondary market.
The following table sets forth the activity in the Corporation's
portfolio of loans held for sale during each of the years indicated.
26
28
Dollars in thousands 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 6,346 $ 72,002 $ 45,577 $ 20,339 $ 23,976
Single-family mortgage loans originated for 142,985 305,345 818,292 258,818 237,592
sale (1)
Loans transferred from held for investment (2) 23,743 21,283 98,718 92,573 15,659
Loans transferred to held for investment (3) - (43,554) - - -
Principal balance of loans sold (150,100) (348,730) (890,585) (326,153) (256,888)
- --------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 22,974 $ 6,346 $ 72,002 $ 45,577 $ 20,339
====================================================================================================================
(1) Net of monthly principal payments received from borrowers during the period
held for sale.
(2) Consists of single-family adjustable-rate mortgage loans originated for
investment that converted to fixed-rate loans. The Corporation generally
sells such loans in the secondary market.
(3) Consists of fixed-rate mortgage loans transferred to loans held for
investment at the lower of cost or market to maintain growth in the
Corporation's earning assets.
In the fourth quarter of 1999, the Corporation transferred $43.6
million in fixed-rate mortgage loans that had been originated for sale to its
portfolio of loans held for investment. In accordance with GAAP, these loans
were transferred at the lower of cost or market, which resulted in a $152,000
loss in that period. The loss reduced the amount reported as gain on sales of
loans in 1999.
LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
increased by $233.9 million or 15.2% during the twelve months ended December 31,
2000. Excluding the impact of the securitization discussed in a previous
paragraph, this increase would have been $362.3 million or 23.5%. During the
twelve months ended December 31, 2000, the Corporation originated $337.4 million
in adjustable-rate single-family mortgage loans, $235.8 million in consumer
loans (consisting mostly of second mortgages), $120.5 million in commercial real
estate loans, and $33.9 million in education loans. During the same period, the
Corporation experienced a reduced level of loan prepayment and refinance
activity, due to generally higher interest rates, as previously described. As a
result of these factors, the Corporation experienced strong growth in its loans
held for investment in 2000. In 2001, however, management believes growth in
loans held for investment may slow. Management expects a lower interest rate
environment to motivate borrowers to choose fixed-rate single-family loans over
adjustable-rate loans. In addition, existing borrowers with adjustable-rate
single-family mortgage loans are expected to convert or refinance into
fixed-rate loans in increasing numbers. As previously noted, the Corporation
generally sells all fixed-rate single-family mortgage loans in the secondary
market.
The following table sets forth the composition of the Corporation's
portfolio of loans held for investment as of December 31 for each of the years
indicated.
Dollars in thousands 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- -------------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Single-family mortgage loans $ 719,671 40% $ 652,883 42% $ 426,603 36% $ 537,722 45% $ 543,109 49%
Multi-family residential loans 236,003 13 186,591 12 148,060 13 140,589 12 127,334 11
Non-residential real estate loans 203,842 11 168,453 11 141,046 12 107,315 9 94,401 8
Construction loans (1) 77,216 4 80,563 5 63,035 5 51,319 4 46,641 4
- -------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 1,236,732 70 1,088,490 70 778,744 66 836,945 70 811,485 73
===============================================================================================================================
Consumer loans:
Second mortgage and home
equity loans 253,866 14 204,806 13 175,541 15 163,231 14 119,645 11
Automobile loans 64,841 4 46,956 3 37,558 3 31,182 3 36,831 3
Other consumer loans (2) 25,262 1 14,239 1 9,006 1 9,149 1 10,724 1
- -------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 343,969 19 266,001 17 222,105 19 203,562 17 167,200 15
===============================================================================================================================
Education loans 197,579 11 190,170 12 182,380 15 159,893 13 134,094 12
Commercial business loans 195 - 296 - 371 - 557 - 1,217 -
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,778,475 100% 1,544,958 100% 1,183,600 100% 1,200,957 100% 1,113,996 100%
Unearned discounts, premiums,
and net deferred loan fee/costs 2,029 1,260 1,549 574 (68)
Allowance for loan losses (8,028) (7,624) (7,624) (7,638) (7,888)
- -------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment $1,772,477 $1,538,595 $1,177,526 $1,193,893 $1,106,040
===============================================================================================================================
Weighted average contractual rate 8.00% 7.58% 7.80% 8.22% 8.16%
===============================================================================================================================
(1) At December 31, 2000, construction loans consisted of $48.7 million in
single-family residences, $15.9 million in non-residential real estate, and
$12.6 million in multi-family residences.
(2) At December 31, 2000, other consumer loans included $19.1 million of
unsecured loans, $3.4 million of recreational and household good loans,
$1.7 million of deposit account-secured loans, and $1.1 million of mobile
home loans.
27
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The following table sets forth the activity in the Corporation's
portfolio of loans held for investment during each of the years indicated.
Dollars in thousands 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 1,538,595 $1,177,526 $1,193,893 $1,106,040 $932,084
- ------------------------------------------------------------------------------------------------------------------------
Real estate loan originations:
Single-family mortgage loans (1) 354,734 293,227 212,964 243,694 247,362
Commercial real estate loans 120,459 112,180 106,146 71,554 65,384
Decrease (increase) in loans in process (2) (13,546) (7,086) 1,654 (13,081) (3,277)
- ------------------------------------------------------------------------------------------------------------------------
Total real estate loans originated 461,647 398,321 320,764 302,167 309,469
- ------------------------------------------------------------------------------------------------------------------------
Consumer loan originations:
Second mortgage and home equity loans 160,386 137,459 136,659 120,809 89,115
Automobile loans 52,967 39,635 33,729 23,923 29,377
Other consumer loans (3) 22,490 12,168 6,461 7,004 8,675
- ------------------------------------------------------------------------------------------------------------------------
Total consumer loans originated 235,843 189,262 176,849 151,736 127,167
- ------------------------------------------------------------------------------------------------------------------------
Education loan originations 33,859 29,521 37,692 38,422 36,176
- ------------------------------------------------------------------------------------------------------------------------
Total loans originated for investment 731,350 617,103 535,305 492,325 472,812
- ------------------------------------------------------------------------------------------------------------------------
Loans purchased for investment:
Single-family residential loans 13,051 97,238 165,140 - -
Commercial real estate loans 8,625 798 - 6,373 9,692
Consumer loans - - 377 - -
- ------------------------------------------------------------------------------------------------------------------------
Total loans purchased for investment 21,676 98,036 165,517 6,373 9,692
- ------------------------------------------------------------------------------------------------------------------------
Loan principal repayments (356,507) (371,999) (389,935) (317,291) (292,199)
Loans swapped into mortgage-backed securities (132,280) - (222,260) - -
Education loans sold (4,800) (2,165) - - -
Loans transferred to held for sale portfolio (4) (23,743) (21,283) (98,718) (92,573) (15,659)
Loans transferred from held for sale portfolio (5) - 43,554 - - -
Other changes in loans held for investment (6) (1,813) (2,178) (6,276) (981) (690)
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 1,772,477 $1,538,595 $1,177,526 $1,193,893 $1,106,040
========================================================================================================================
(1) Excludes loans originated for sale and loans originated on an agency basis
for WHEDA and State VA. The latter amounted to $26.3 million, $30.3
million, $38.8 million, $23.1 million, and $20.9 million in 2000, 1999,
1998, 1997, and 1996, respectively.
(2) Consists of changes in loans in process on single-family, multi-family, and
non-residential real estate construction loans.
(3) Consists principally of loans secured by mobile homes, recreational and
household goods, and deposit accounts, as well as unsecured loans.
(4) Consists of single-family adjustable-rate mortgage loans that converted to
fixed-rate and were sold by the Corporation in the secondary market.
(5) Consists of fixed-rate mortgage loans transferred from loans held for sale
at the lower of cost or market to maintain growth in the Corporation's
earning assets.
(6) Consists principally of real estate foreclosures and changes in allowance
for loan losses, discounts, premiums, and deferred fees.
DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$228.0 million or 15.5% during the twelve months ended December 31, 2000.
Management attributes this growth to higher short-term rates and recent
volatility in other financial markets, which has made traditional bank financial
offerings more attractive to consumers. As of December 31, 2000, the Corporation
had $40.3 million in certificates of deposit outstanding that were obtained
through third-party broker-dealers. This compares to zero at December 31, 1999.
These deposits were acquired at terms substantially the same as borrowings from
the FHLB, except that such deposits do not require the posting of collateral, as
is the case with borrowings from the FHLB. The terms to maturity of all of the
brokered certificates of deposits outstanding as of December 31, 2000, were less
than six months.
The following table sets forth the composition of the Corporation's
deposit liabilities as of December 31 for each of the years indicated.
Dollars in thousands 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ---------------------------------------------------------------------------------------------------------------------
Regular savings accounts $ 103,662 1.49% $ 104,511 1.49% $ 103,467 1.98%
Interest-bearing checking accounts 80,594 0.85 72,913 0.75 83,260 0.86
Non-interest bearing checking accounts 161,602 - 136,700 - 144,731 -
Money market accounts 154,399 4.22 173,596 3.76 166,801 4.03
Variable-rate IRA accounts 2,827 3.94 3,610 3.63 3,215 4.11
Certificates of deposit 1,196,168 6.45 979,930 5.41 958,662 5.83
- --------------------------------------------------------------------------------------------------------------------
Total $ 1,699,252 5.06% $ 1,471,259 4.20% $ 1,460,136 4.49%
====================================================================================================================
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30
At December 31, 2000, certificates of deposit in denominations of
$100,000 or more amounted to $120.1 million and mature as follows: $18.6 million
within three months, $19.4 million over three through six months, $48.0 million
over six through 12 months, $33.3 million over 12 through 24 months, and $0.8
million over 24 months. These amounts do not include certificates of deposits
issued through third-party broker-dealers.
FHLB ADVANCES AND ALL OTHER BORROWINGS The Corporation's FHLB advances
declined by $76.1 million or 17.1% during the year ended December 31, 2000.
These borrowings were replaced by $100.0 million in borrowings under securities
sold under agreements to repurchase.
The following table presents certain information regarding the
Corporation's short-term borrowings (original maturity of less than one year) at
or for the years ended December 31, 2000, 1999, and 1998.
Dollars in thousands 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
FHLB advances:
Average balance outstanding (1) $ 51,828 $ 84,482 $ 89,832
Maximum amount outstanding at any month-end during the period 201,273 204,215 211,300
Balance outstanding at end of period 10,545 201,273 3,000
Average interest rate during the period (2) 6.42% 5.32% 5.65%
Weighted-average interest rate at the end of period 6.74% 5.66% 5.76%
Securities sold under agreements to repurchase:
Average balance outstanding (1) $ 71,154 - -
Maximum amount outstanding at any month-end during the period 100,000 - -
Balance outstanding at end of period 100,000 - -
Average interest rate during the period (2) 6.45% - -
Weighted-average interest rate at the end of period 6.68% - -
Federal funds purchased:
Average balance outstanding (1) $ 15,385 $ 2,308 $ 769
Maximum amount outstanding at any month-end during the period 20,000 20,000 10,000
Balance outstanding at end of period 20,000 20,000 -
Average interest rate during the period (2) 6.72% 5.74% 4.81%
Weighted-average interest rate at the end of period 6.77% 5.79% -
Total short-term borrowings:
Average balance outstanding (1) $ 138,367 $ 86,790 $ 90,601
Maximum amount outstanding at any month-end during the period 221,273 221,273 221,300
Balance outstanding at end of period 130,545 221,273 3,000
Average interest rate during the period (2) 6.47% 5.33% 5.64%
Weighted-average interest rate at the end of period 6.70% 5.67% 5.76%
====================================================================================================================
(1) Calculated using month-end balances.
(2) Calculated using month-end average interest rates.
NON-PERFORMING ASSETS The Corporation's non-performing assets
(consisting of non-accrual loans, real estate acquired through foreclosure or
deed-in-lieu thereof, and real estate in judgement) amounted to $4.4 million or
0.19% of total assets at December 31, 2000, compared to $2.1 million or 0.10% at
December 31, 1999. The increase in non-performing assets in 2000 was principally
caused by a small number of independent builders that are experiencing problems
with a number of small single-family projects. Although foreclosure on some or
all of the loans may be necessary, management does not expect to incur a
significant loss at this time, if any. However, there can be no assurances.
29
31
The following table contains information regarding the Corporation's
non-performing assets during the five year period ended December 31, 2000.
Dollars in thousands 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Single-family mortgage loans $ 2,065 $ 862 $ 770 $ 738 $1,003
Commercial real estate loans - - - 3,000 -
- --------------------------------------------------------------------------------------------------------------------
Total real estate loans 2,065 862 770 3,738 1,003
Consumer loans 1,069 191 341 672 973
- --------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 3,134 1,053 1,111 4,410 1,976
Real estate owned and in judgement 1,222 1,091 1,264 492 460
- --------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 4,356 $2,144 $2,375 $4,902 $2,436
====================================================================================================================
Ratio of non-accrual loans to loans held for investment 0.18% 0.07% 0.09% 0.37% 0.18%
- --------------------------------------------------------------------------------------------------------------------
Ratio of total non-performing assets to total assets 0.19% 0.10% 0.13% 0.32% 0.16%
====================================================================================================================
Ratio of total allowance for loan and real estate losses to total
Non-performing assets 188% 365% 330% 159% 331%
====================================================================================================================
Note: there were no non-performing education loans as of December 31 for any of
the years presented.
In addition to non-performing assets, at December 31, 2000, management
was closely monitoring $2.8 million in assets which it had classified as
doubtful, substandard, or special mention, but which were performing in
accordance with their terms. This compares to $3.3 million in such assets at
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits obtained
through its retail branch offices, borrowings from the FHLB and other sources,
amortization, maturity, and prepayment of outstanding loans and investments, and
sales of loans and other assets. During 2000, 1999, and 1998, the Corporation
used these sources of funds to fund loan commitments, purchase investment
mortgage-related securities, and cover maturing liabilities and deposit
withdrawals. At December 31, 2000, the Corporation had approved real estate loan
commitments of $15.1 million outstanding, undisbursed commitments on
construction loans of $55.2 million, and mortgage loan sale commitments of $40.2
million outstanding. In addition, the Corporation had $848.9 million in time
deposits, $88.8 million in FHLB advances, $100.0 million in securities sold
under agreements to repurchase, and $20.0 million in purchased fed funds that
were scheduled to mature within one year. Management believes that the
Corporation has adequate resources to fund all of these commitments, that all of
these commitments will be funded by the required date, and that the Corporation
can adjust the rates it offers on certificates of deposit to retain such
deposits in changing interest rate environments. Under FHLB lending and
collateralization guidelines, the Corporation had approximately $330 million in
unused borrowing capacity at the FHLB as of December 31, 2000.
The Corporation's stockholders' equity ratio as of December 31, 2000,
was 6.23% of total assets. The Corporation's long-term objective is to maintain
its equity ratio in a range of approximately 6.5% to 7.0%, which is consistent
with return on asset and return on equity goals of at least 1.10% and 16.5%,
respectively. The Corporation is below its target range as of December 31, 2000,
primarily as a result of significant growth in its loans held for investment
during the year, as well as significant stock repurchases during the fourth
quarter of 1999. The Corporation expects its equity ratio to return to its
target range during the next 12 to 24 months, although there can be no
assurances.
The Bank is also required to maintain specified amounts of capital
pursuant to regulations promulgated by the OTS and the FDIC. The Bank's
objective is to maintain its regulatory capital in an amount sufficient to be
classified in the highest regulatory capital category (i.e., as a "well
capitalized" institution). At December 31, 2000, the Bank's regulatory capital
exceeded all regulatory minimum requirements, as well as the amount required to
be classified as a "well capitalized" institution. For additional discussion,
refer to Note 11 of the Corporation's Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data".
The Corporation paid cash dividends of $7.7 million, $6.3 million, and
$5.0 million during the years ended December 31, 2000, 1999, and 1998,
respectively. These amounts equated to dividend payout ratios of 33.3%, 28.0%,
and 25.7% of the net income in such periods, respectively. It is the
Corporation's objective to maintain its dividend payout ratio in a range of 25%
to 35% of net income. However, the Corporation's dividend policy and/or
30
32
dividend payout ratio will be impacted by considerations which include, but are
not limited to, the level of stockholders' equity in relation to the
Corporation's stated goal, as previously described, regulatory capital
requirements for the Bank, as previously described, and certain dividend
restrictions in effect for the Bank (for additional discussion refer to Note 11
of the Corporation's Audited Consolidated Financial Statements, included herein
under Part II, Item 8, "Financial Statements and Supplementary Data").
Furthermore, unanticipated or non-recurring fluctuations in earnings may impact
the Corporation's ability to pay dividends and/or maintain a given dividend
payout ratio.
On January 23, 2001, the Corporation's Board of Directors approved a
regular quarterly dividend of $0.11 per share payable on March 8, 2001, to
shareholders of record on February 15, 2001.
During 2000, the Corporation repurchased 143,904 shares of common stock
at a cost of $1.7 million under its 1999 stock repurchase plans (the "1999
Plan"). As of December 31, 2000, 219,506 remained to be purchased under the 1999
Plan. In April 2000, the Corporation's Board of Directors extended the 1999 Plan
for another twelve months and approved a new plan to repurchase up to 913,554
shares of the Corporation's outstanding common stock (the "2000 Plan"). The
shares may be repurchased from time to time in open-market transactions during
the next twelve months as, in the opinion of management, market conditions
warrant. The repurchased shares will be held as treasury stock and will be
available for general corporate purposes. For additional discussion, refer to
Note 11 of the Corporation's Audited Consolidated Financial Statements, included
herein under Part II, Item 8, "Financial Statements and Supplementary Data".
During 2000, the Corporation reissued 85,807 shares of common stock out
of its inventory of treasury stock with a cost basis of $970,000. In general,
these shares were issued upon the exercise of stock options by, or the issuance
of restricted stock to, employees and directors of the Corporation.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk" or "market risk") by monitoring its ratios
of interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates (i.e., its one- and three-year
"gaps"). Management has sought to control the Corporation's one- and three-year
gaps, thereby limiting the affects of changes in interest rates on its future
earnings, by selling substantially all of its long-term, fixed-rate,
single-family mortgage loan production, investing in adjustable-rate
single-family mortgage loans, investing in consumer and education loans, which
generally have shorter terms to maturity and/or floating rates of interest, and
investing in commercial real estate loans, which also tend to have shorter terms
to maturity and/or floating rates of interest. The Corporation also invests from
time-to-time in adjustable-rate and short- and medium-term fixed-rate CMOs and
MBSs. As a result of this strategy, the Corporation's exposure to interest rate
risk is significantly impacted by its funding of the aforementioned asset groups
with deposit liabilities and FHLB advances that tend to have average terms to
maturity of less than one year or carry floating rates of interest.
In general, it is management's goal to maintain the Corporation's
one-year gap in a range between 0% and -30% and its three-year gap in a range
between 0% and -10%. Management believes this strategy takes advantage of the
fact that market yield curves tend to be upward sloping, which increases the
spread between the Corporation's earning assets and interest-bearing
liabilities. Furthermore, management of the Corporation does not believe that
this strategy exposes the Corporation to unacceptable levels of interest rate
risk as evidenced by the fact that the Corporation's three-year gap is generally
maintained in a narrow band around zero, which implies that the Corporation is
exposed to little interest rate risk over a three-year horizon. In addition, it
should be noted that for purposes of its gap analysis, the Corporation
classifies its interest-bearing checking, savings, and money market deposits in
the shortest category, due to their potential to reprice. However, it is the
Corporation's experience that these deposits do not reprice as quickly or to the
same extent as other financial instruments, especially in a rising rate
environment. In addition, the Corporation classifies certain FHLB advances that
are redeemable prior to maturity (at the option of the FHLB) according to their
redemption dates, which are earlier than their maturity dates. These advances
may not be redeemed by the FHLB prior to maturity.
31
33
The following table summarizes the Corporation's gap as of December 31,
2000.
MORE THAN MORE THAN MORE THAN
6 MONTHS 6 MONTHS 1 YEAR TO 3 YEARS TO OVER
Dollars in thousands OR LESS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
Fixed $ 96,162 $ 22,829 $ 36,626 $ 21,114 $ 18,074 $ 194,805
Adjustable 220,894 232,360 455,003 141,356 13,421 1,063,034
Consumer and education loans 314,680 65,402 129,475 24,556 6,365 540,478
Mortgage-backed and related securities 85,736 88,037 141,154 40,547 50,974 406,448
Investment securities and other
earning assets 13,154 - 200 200 25,868 39,422
- --------------------------------------------------------------------------------------------------------------------
Total $ 730,626 $ 408,628 $ 762,458 $227,773 $114,702 $2,244,187
====================================================================================================================
Interest-bearing liabilities:
Deposits liabilities:
Regular savings and checking accounts $ 184,256 - - - - $ 184,256
Money market deposit accounts 154,399 - - - - 154,399
Variable-rate IRA accounts 2,827 - - - - 2,827
Time deposits 379,024 $ 468,164 $ 346,753 $ 2,227 - 1,196,168
FHLB advances and other borrowings 402,151 34,249 54,432 14 - 490,846
- --------------------------------------------------------------------------------------------------------------------
Total $1,122,657 $ 502,413 $ 401,185 $ 2,241 - $2,028,496
====================================================================================================================
Excess (deficiency) of earning assets
over interest-bearing liabilities $ (392,031) $ (93,785) $ 361,273 $225,532 $114,702
====================================================================================================================
Cumulative excess (deficiency) of
earning assets over
interest-bearing liabilities $ (392,031) $(485,816) $(124,543) $100,989 $215,691
====================================================================================================================
Cumulative excess (deficiency) of
earning assets over
interest-bearing liabilities as a
percent of total assets -16.66% -20.65% -5.29% 4.29% 9.17%
====================================================================================================================
Cumulative earning assets as a
percentage of
interest-bearing liabilities 65.08% 70.10% 93.85% 104.98% 110.63%
====================================================================================================================
Note: If redeemable FHLB advances, interest-bearing checking, and regular
savings deposits were deemed to reprice after one year, the Corporation's
one-year funding gap would have been -3.25% as of December 31, 2000, which
compares to -8.58% and 2.86% as of December 31, 1999 and 1998, respectively.
The Corporation's one-year gap was -20.65% at December 31, 2000,
compared to -21.89% and -11.77% at December 31, 1999 and 1998, respectively. The
Corporation's one-year negative gap widened from 1998 to 1999 principally
because of the Corporation's strategy of funding originations and purchases of
adjustable-rate loans with terms to initial reprice of greater than one year
with liabilities that had terms to maturity or redemption of less than one year.
Also contributing was the Corporation's purchase in 1999 of medium-term CMOs,
also with the funding sources that generally had terms to maturity or redemption
of less than one year. Refer to "Financial Condition--Loans Held for Investment"
and "Financial Condition--Mortgage-Backed and Related Securities" for additional
discussion.
Certain shortcomings are inherent in using gap to quantify exposure to
interest rate risk. For example, although certain assets and liabilities may
have similar maturities or repricings in the table, they may react differently
to actual changes in market interest rates. This is especially true for assets
such as mortgage loans that have embedded prepayment options and liabilities
that have early redemption features. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. This is especially true in circumstances where management has a certain
amount of control over interest rates, as it does in the case of deposit
liabilities. Additionally, certain assets such as adjustable-rate mortgage loans
have features that restrict changes in interest rates on a short-term basis and
over the life of the asset. Furthermore, the proportion of adjustable-rate loans
in the Corporation's portfolio may change as interest rates change. For example,
if current market interest rates remain at or above current levels the
proportion of adjustable-rates loans in the Corporation's portfolio may increase
for reasons described elsewhere in this report.
Although management believes that its asset/liability management
strategies reduce the potential effects of changes in interest rates on the
Corporation's operations, material and prolonged increases in interest rates may
adversely affect the Corporation's operations because the Corporation's
interest-bearing liabilities which mature or reprice within one year are greater
than the Corporation's interest-earning assets which mature or reprice within
the
32
34
same period. Alternatively, material and prolonged decreases in interest rates
may benefit the Corporation's operations.
The Corporation does not use derivative financial instruments such as
futures, swaps, caps, floors, options, interest- or principal-only strips, or
similar financial instruments to manage its interest rate risk. However, the
Corporation does use forward sales of mortgage-backed securities and other
commitments of a similar nature to manage exposure to market risk in its
"pipeline" of single-family residential loans intended for sale. This pipeline
consists of mortgage loans that are held for sale as of the balance sheet date
as well as commitments to originate mortgage loans that are intended for sale,
but are not closed as of the balance sheet date. Loans held for sale are
generally matched against forward sales that require delivery within 30 to 60
days of the balance sheet date. The Corporation's policy is to cover its
commitments to originate loans intended for sale with forward sales that have a
value of 40% to 130% of the value of such commitments, depending on management's
expectations for near-term changes in interest rates and anticipated
cancellations by borrowers. These forward sales generally require delivery
within 60 to 90 days. Given these policies, as well as the short-term nature of
the Corporation's pipeline and its related forward sales, management believes
these financial instruments pose little market risk to the Corporation.
The Bank is required by the OTS to estimate the sensitivity of its net
portfolio value of equity ("NPV") to immediate and sustained changes in interest
rates and to measure such sensitivity on at least a quarterly basis. NPV is
defined as the estimated net present value of an institution's existing assets,
liabilities, and off-balance sheet instruments at a given level of market
interest rates. Computation of the estimated net present value of assets,
liabilities, and off-balance sheet instruments requires management to make
numerous assumptions with respect to such items. These assumptions include, but
are not limited to, appropriate discount rates, loan prepayment rates, deposit
decay rates, etc., for each interest rate scenario. In general, the Bank has
used substantially the same assumptions for computing the net present value of
financial assets and liabilities in the base scenario as it uses in preparing
the fair value disclosures required under GAAP (refer to Notes 1 and 12 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data"). Computations of
net present values for other interest rate scenarios follow the same basic
approach except that discount rates, loan prepayment rates, and other
assumptions are adjusted accordingly. The net present values of non-financial
assets and liabilities are generally estimated to be equal to their carrying
values under all interest rate scenarios as permitted by OTS regulations. With
respect to off-balance sheet items, the Bank generally relies on estimates of
value provided by the OTS. The same is true for certain other financial assets
such as mortgage servicing rights and deposit-based intangibles.
The following table summarizes as of December 31, 2000 and 1999, the
sensitivity of the Bank's NPV and net interest income to immediate and sustained
changes in interest rates, as shown (parallel shifts in the term structure of
interest rates are assumed as permitted by OTS regulations; dollars are
presented in millions).
Estimated NPV
Change in Interest Rates 12/31/00 12/31/99
------------------------ -------- --------
200 basis point increase $171.7 $172.3
Base scenario 186.6 185.1
200 basis point decline 173.0 176.6
Certain shortcomings are inherent in using NPV to quantify exposure to
market risk. For example, actual and future values of assets, liabilities, and
off-balance sheet items will differ from those determined by the model for a
variety of reasons to include, but not limited to, differences in actual market
discount rates, differences in actual loan prepayment activity, and differences
in deposit customers' responses to changes in interest rates and the resulting
impact on the Bank's offering rates. Furthermore, the analysis does not
contemplate future shifts in asset or liability mix or any actions management
may take in response to changes in interest rates. As a result of these
shortcomings, it is unlikely that actual or future values of the Bank's assets,
liabilities, and off-balance sheet items are or will be equal to those presented
in the NPV analysis.
33
35
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
ASSETS 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 25,445,819 $ 65,566,021
Interest-bearing deposits with banks 13,054,493 17,790,262
Investment securities available for sale, at fair value 817,141 872,844
Mortgage-backed and related securities:
Available for sale, at fair value 331,236,909 252,165,351
Held for investment, at cost (fair value of $76,456,829 and $101,068,308,
respectively) 77,298,853 103,932,229
Loans held for sale 22,973,887 6,345,624
Loans held for investment, net 1,772,476,651 1,538,594,590
Federal Home Loan Bank stock 25,568,100 22,511,300
Accrued interest receivable, net 19,701,004 15,420,837
Office properties and equipment 26,781,010 24,620,596
Mortgage servicing rights, net 23,280,472 21,727,981
Intangible assets 11,490,392 12,463,373
Other assets 2,600,835 2,543,147
- ----------------------------------------------------------------------------------------------------------------------
Total assets $2,352,725,566 $2,084,554,155
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Deposit liabilities $1,699,252,162 $1,471,259,473
Federal funds purchased 20,000,000 20,000,000
Securities sold under agreements to repurchase 100,000,000 -
Federal Home Loan Bank advances 368,205,000 444,333,000
Other borrowings 2,641,370 5,246,701
Advance payments by borrowers for taxes and insurance 1,023,712 5,407,816
Accrued interest payable 4,047,875 2,516,280
Other liabilities 11,005,952 8,515,659
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 2,206,176,071 1,957,278,929
======================================================================================================================
Preferred stock, $0.10 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $0.10 par value, 100,000,000 shares authorized, 19,941,630 shares
issued and outstanding, including 1,596,332 and 1,538,235 shares of treasury stock,
respectively 1,994,163 1,994,163
Additional paid-in capital 34,540,064 34,540,064
Retained earnings 122,921,606 106,929,097
Treasury stock, at cost (15,127,142) (14,388,670)
Unearned restricted stock (142,083) (591,183)
Accumulated non-owner adjustments to equity, net 2,362,887 (1,208,245)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 146,549,495 127,275,226
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,352,725,566 $2,084,554,155
======================================================================================================================
Refer to accompanying Notes to Consolidated Financial Statements.
34
36
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Interest on loans $134,454,432 $103,880,028 $ 95,469,420
Interest on mortgage-backed and related securities 24,516,300 23,728,297 18,542,233
Interest and dividends on investments 2,465,456 2,462,273 4,656,215
- ------------------------------------------------------------------------------------------------------------------
Total interest income 161,436,188 130,070,598 118,667,868
- ------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 73,587,725 60,547,033 59,421,641
Interest on FHLB advances and other borrowings 28,308,198 15,406,359 12,035,553
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 101,895,922 75,953,392 71,457,194
- ------------------------------------------------------------------------------------------------------------------
Net interest income 59,540,265 54,117,206 47,210,674
Provision for loan losses 1,008,780 387,021 293,112
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 58,531,486 53,730,185 46,917,562
- ------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 22,460,778 20,229,612 15,025,325
Loan servicing fees, net 3,874,210 2,758,148 (6,673,635)
Premiums and commissions 2,782,982 2,612,694 1,780,045
Gain on sales of loans 2,736,467 7,225,815 16,928,546
Gain on sale of real estate investments 1,188,863 - -
Gain on sale of investment securities - - 342,803
Other income 2,589,250 2,351,585 3,956,985
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income 35,632,550 35,177,854 31,360,070
- ------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 35,246,002 31,512,342 26,659,541
Occupancy and equipment 7,827,333 7,381,256 6,949,198
Communications, postage, and office supplies 4,304,790 4,019,411 3,675,696
ATM and debit card transaction costs 2,927,597 2,694,203 2,335,872
Advertising and marketing 2,377,953 2,275,502 2,157,076
Amortization of intangible assets 1,027,761 1,031,774 582,159
Other expenses 4,538,896 5,384,961 5,236,981
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense 58,250,331 54,299,449 47,596,523
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,913,705 34,608,590 30,681,109
Income tax expense 12,769,829 12,167,380 11,256,975
- ------------------------------------------------------------------------------------------------------------------
Net income $ 23,143,876 $ 22,441,210 $ 19,424,134
==================================================================================================================
PER SHARE INFORMATION 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $1.25 $1.17 $0.98
Basic earnings per share 1.26 1.21 1.05
Dividends paid per share 0.42 0.34 0.27
==================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
35
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999, and 1998
COMMON
STOCK AND ACCUMULATED
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $36,534,227 $84,548,291 ($10,845,168) ($211,006) ($664,998) $109,361,346
-------------
Net income 19,424,134 19,424,134
Securities valuation
adjustment, net of income taxes 3,706,543 3,706,543
Reclassification adjustment
for gain on securities
included in income, net of income taxes (203,831) (203,831)
-------------
Net income and non-owner
adjustments to equity 22,926,846
-------------
Dividends paid (5,001,135) (5,001,135)
Exercise of stock options (2,443,580) 4,509,897 2,066,317
Restricted stock award 764,096 969,312 (1,733,408) -
Purchase of treasury stock (7,356,875) (7,356,875)
Amortization of restricted
stock 688,148 688,148
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 36,534,227 97,291,806 (12,722,834) (1,256,266) 2,837,714 122,684,647
Net income 22,441,210 22,441,210
Securities valuation
adjustment, net of income taxes (4,045,959) (4,045,959)
-------------
Net income and non-owner
adjustments to equity 18,395,251
-------------
Dividends paid (6,287,822) (6,287,822)
Exercise of stock options (6,516,097) 14,264,500 7,748,403
Purchase of treasury stock (15,930,336) (15,930,336)
Amortization of restricted
stock 665,083 665,083
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 36,534,227 106,929,097 (14,388,670) (591,183) (1,208,245) 127,275,226
Net income 23,143,876 23,143,876
Securities valuation
adjustment, net of income taxes 3,571,132 3,571,132
-------------
Net income and non-owner
adjustments to equity 26,715,008
-------------
Dividends paid (7,699,035) (7,699,035)
Exercise of stock options (417,520) 809,879 392,359
Restricted stock award 4,688 160,312 (165,000) -
Purchase of treasury stock (1,708,663) (1,708,663)
Amortization of restricted
stock 960,500 614,100 1,574,600
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $36,534,227 $122,921,606 ($15,127,142) ($142,083) $2,362,887 $146,549,495
==================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
36
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $23,143,876 $22,441,210 $19,424,134
Adjustments to reconcile net income to net cash provided (used) by operations:
Provision for loan and real estate losses, net 1,069,996 305,852 548,573
Net loan costs deferred (1,349,652) (586,949) (1,162,077)
Amortization (including mortgage servicing rights) 6,184,715 7,137,777 14,414,636
Depreciation 2,573,353 2,521,592 2,472,324
Gains on sales of loans and other investments (3,925,330) (7,225,815) (17,271,349)
Increase in accrued interest receivable (4,280,167) (1,532,299) (2,340,781)
Increase (decrease) in accrued interest payable 1,531,595 568,457 (82,330)
Increase in current and deferred income taxes 351,772 5,678,518 2,093,042
Other accruals and prepaids, net (663,059) 356,321 (407,797)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan originations and sales 24,637,099 29,664,664 17,688,375
Loans originated for sale (142,985,217) (305,345,488) (818,292,296)
Sales of loans originated for sale or transferred from held for investment 150,876,533 351,254,560 893,350,918
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 32,528,415 75,573,736 92,746,997
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with banks 4,735,769 78,759,513 (89,436,019)
Purchases of investment securities - (941,254) -
Sales of investment securities - - 351,483
Maturities of investment securities 100,000 - 21,318,517
Purchases of mortgage-backed and related securities available for sales - (144,155,260) -
Purchases of mortgage-backed and related securities held for investment - (51,163,258) (20,355,825)
Principal repayments on mortgage-backed and related securities available for sales 8,228,257 90,384,796 69,972,407
Principal repayments on mortgage-backed and related securities held for investment 26,567,249 49,632,447 42,177,481
Loans originated for investment (731,349,977) (617,103,300) (535,305,071)
Loans purchased for investment (21,675,836) (98,035,581) (165,517,368)
Loan principal repayments 356,507,215 371,997,482 389,935,430
Sales of education loans 4,996,708 2,254,103 -
Sales of real estate 2,780,175 1,710,646 5,593,229
Purchases of office properties and equipment (4,931,478) (2,173,855) (3,671,180)
Purchases of mortgage servicing rights (1,865,307) - (454,774)
Other, net (2,594,536) (9,589,230) (6,982,877)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (308,501,761) (328,422,751) (292,374,567)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in deposit liabilities 227,992,689 11,123,813 236,668,976
Deposits purchased - - 76,932,788
Long-term advances from Federal Home Loan Bank 185,000,000 142,000,000 150,660,000
Repayment of long-term Federal Home Loan Bank advances (95,400,000) (82,715,000) (18,305,000)
Increase (decrease) in short-term Federal Home Loan Bank borrowings (165,728,000) 198,273,000 (208,300,000)
Increase in securities sold under agreements to repurchase 100,000,000 - -
Increase in federal funds purchased - 20,000,000 -
Increase (decrease) in other borrowings (2,605,331) 2,243,717 (10,055,786)
Increase (decrease) in advance payments by borrowers for taxes and insurance (4,384,104) 3,645,626 (2,110,574)
Purchase of treasury stock (1,708,663) (15,930,336) (7,356,875)
Dividends paid (7,699,035) (6,287,822) (5,001,135)
Other, net 385,588 2,419,333 198,397
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 235,853,144 274,772,331 213,330,791
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (40,120,202) 21,923,316 13,703,221
Cash and due from banks at beginning of period 65,566,021 43,642,705 29,939,484
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $25,445,819 $ 65,566,021 $43,642,705
==================================================================================================================================
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $157,156,021 $128,538,299 $116,327,087
Interest paid on deposits and borrowings 100,364,327 75,384,935 71,539,524
Income taxes paid 12,559,751 6,685,320 10,010,000
Income taxes refunded 141,693 196,429 1,273,063
Mortgage-backed securities swaps 132,280,050 - 222,259,814
Transfer of loans from held for investment to held for sale 23,743,254 21,283,119 98,717,833
Transfer of loans from held for sale to held for investment - 43,553,563 -
==================================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
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NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Corporation provides a wide range of financial services to
individuals and businesses in Wisconsin and the northern portion of Illinois
through its wholly-owned subsidiary bank. The Corporation is subject to
competition from other financial institutions and markets. The Corporation, the
Bank, and the Bank's subsidiaries are also subject to the regulations of certain
governmental agencies and undergo periodic examinations by those regulatory
authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting
policies of the Corporation, the Bank, and the Bank's subsidiaries conform to
GAAP and to general practices within the financial services industry. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts and balances of the Corporation, the Bank, and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
INVESTMENT SECURITIES, INCLUDING MORTGAGE-BACKED AND RELATED
SECURITIES, AND STOCK HELD FOR REGULATORY PURPOSES Investment securities,
including mortgage-backed and related securities, are classified in one of two
categories and accounted for as follows: (1) securities that the Corporation has
the positive intent and ability to hold to maturity are classified as "held for
investment" and reported at amortized cost; (2) securities not classified as
"held for investment" are classified as "available for sale" and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as non-owner adjustments to equity, net of estimated income taxes. Management
determines the appropriate classification for its securities at the time of
purchase. The specific identification method is used to determine the cost of
securities sold. The Corporation does not maintain a trading account for
investment securities or mortgage-backed and related securities. Stock of the
FHLB is owned due to regulatory requirements and is carried at cost.
INTEREST ON LOANS Interest income is accrued on loan balances
outstanding. Accrued interest on impaired loans is reversed when management
determines that the collection of interest or principal is considered unlikely.
In general, this occurs when a loan is 90 days past due. Interest income is
subsequently recognized only to the extent cash payments are received. Loans are
restored to accrual status when the obligation is brought current and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
DISCOUNTS, PREMIUMS, AND DEFERRED LOAN FEES AND COSTS Discounts and
premiums on loans are amortized over the life of the related loans using a
method that approximates the level-yield method. Loan origination fees and
certain direct loan origination costs are deferred and amortized over the life
of the related loans as an adjustment of yield. Such fees and costs are
amortized using a method that approximates the level-yield method.
LOANS HELD FOR SALE Loans originated and held for sale are carried at
the lower of aggregate cost or market. Net unrealized losses are recognized
through a valuation allowance and a charge to income.
SECURITIZATIONS AND SALES OF MORTGAGE LOANS The Corporation sells
substantially all of the fixed-rate single-family mortgage loans it originates,
including adjustable-rate loans that convert to fixed-rate loans. These sales
are accomplished through cash sales to FHLMC, FNMA, FHLB, and other third-party
investors, as well as through securitizations with FHLMC and FNMA. In general,
MBSs received from FHMLC or FNMA in exchange for fixed-rate mortgage loans are
sold immediately in the securities market. In general, the Corporation continues
to service these mortgage loans after they are sold (refer to "Mortgage
Servicing Rights", below).
From time to time the Corporation also exchanges adjustable-rate
mortgage loans held for investment for FHLMC or FNMA MBSs backed by the same
loans. The resulting MBSs are classified in the Corporation's
38
40
statement of financial condition as "mortgage-backed and related securities
available for sale". The Corporation continues to service the loans underlying
these securities after they are exchanged.
From time to time the Corporation retains an exposure to all or a
portion of the credit risk associated with loans it sells or securitizes into
MBSs. In such instances, the Corporation records a recourse liability to cover
potential credit losses. Because the loans involved in these transactions are
similar to those in the Corporation's loans held for investment, the review of
the adequacy of the recourse liability is similar to the review of the adequacy
of the allowance for loan losses (refer to "Allowance for Loan Losses", below).
MORTGAGE SERVICING RIGHTS Servicing mortgage loans includes such
functions as collecting monthly payments of principal and interest from
borrowers, passing such payments through to third-party investors, maintaining
escrow accounts for taxes and insurance, and making such payments when they are
due. When necessary, servicing mortgage loans also includes functions related to
the collection of delinquent principal and interest payments, loan foreclosure
proceedings, and disposition of foreclosed real estate. The Corporation
generally earns a fee of 25 basis points or more on the outstanding loan balance
for performing these services as well as fees and interest income from ancillary
sources such as delinquency charges and float.
The Corporation records originated mortgage servicing rights ("OMSR")
as a component of gain on sale of mortgage loans when the obligation to service
such loans has been retained by the Corporation. The value recorded for OMSR is
based on the relative values of the servicing rights and the underlying loans
without the servicing rights. This value approximates the present value of the
servicing fee (typically 25 basis points or more) adjusted for expected future
costs to service the loans, as well as income and fees expected to be received
from ancillary sources, as previously described. The carrying value of OMSR is
amortized against service fee income over the estimated lives of the loans using
the income-forecast method. The Corporation also purchases mortgage servicing
rights ("PMSR") from third-parties. PMSR is recorded at cost and is also
amortized over the estimated lives of the loans using the income-forecast
method. The Corporation purchases or originates mortgage servicing rights on
single-family residential mortgage loans only.
The value of OMSR and PMSR (collectively "mortgage servicing rights" or
"MSRs") is subject to impairment because of changes in loan prepayment
expectations and in market discount rates used to value the future cash flows
associated with such assets. In valuing MSRs, the Corporation stratifies the
loans by type of loan (e.g., fixed-rate versus adjustable-rate,
non-government-guaranteed loans versus government-guaranteed loans), year of
original funding, contractual interest rate, and original term to maturity. If,
based on periodic evaluation, the estimated fair value of the MSRs related to a
particular stratum is determined to be less than its carrying value, a valuation
allowance is recorded against such stratum and against the Corporation's loan
servicing fee income. A valuation allowance is not recorded if the estimated
fair value of a stratum exceeds its carrying value. Because of this inconsistent
treatment, the Corporation may be required to maintain a valuation allowance
against MSRs even though the estimated fair value of the Corporation's total MSR
portfolio exceeds its carrying value in total. The valuation adjustment is
calculated using the current outstanding principal balance of the related loans,
long-term prepayment assumptions as provided by independent sources, an
appropriate discount rate as determined by management, and other management
assumptions related to future costs to service the loans, as well as ancillary
sources of income.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is composed of
specific and general valuation allowances. The Corporation establishes specific
valuation allowances on loans it considers to be impaired. A loan is considered
impaired when the carrying amount of the loan exceeds the present value of the
expected future cash flows, discounted at the loan's original effective interest
rate, or the fair value of the underlying collateral. A specific valuation
allowance established for an amount equal to the impairment. General valuation
allowances are based on an evaluation of the various risk components that are
inherent in the credit portfolio. The risk components that are evaluated include
past loan loss experience; the level of non-performing and classified assets;
current economic conditions; volume, growth, and composition of the loan
portfolio; adverse situations that may affect borrowers' ability to repay; the
estimated value of any underlying collateral; peer group comparisons; regulatory
guidance; and other relevant factors.
The allowance is increased by provisions charged to earnings and
reduced by charge-offs, net of recoveries. Management may transfer amounts
between specific and general valuation allowances as considered necessary. The
39
41
Corporation's Board of Directors reviews the adequacy of the allowance for loan
losses on a quarterly basis. The allowance reflects management's best estimate
of the amount necessary to provide for the impairment of loans, as well as other
credit risks of the Corporation. The allowance is based on a risk model
developed and implemented by management and approved by the Corporation's Board
of Directors.
REAL ESTATE Real estate acquired through foreclosure or deed in lieu of
foreclosure and real estate subject to redemption are recorded at the lower of
cost or estimated fair market value, less estimated costs to sell. Costs
relating to the development and improvement of the property are capitalized.
Income and expenses incurred in connection with holding and operating the
property are included in the Corporation's Consolidated Statements of
Operations.
OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are
recorded at cost less accumulated depreciation which is provided over the
estimated useful lives (five to forty years) of the respective assets on a
straight-line basis. The cost of leasehold improvements is being amortized on
the straight-line basis over the lesser of the term of the respective lease or
the estimated economic life. When properties are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts and the resulting gain or loss is recorded in income.
INTANGIBLE ASSETS From time-to-time the Corporation has acquired all or
a portion of the assets and liabilities of other financial institutions and has
paid or received amounts for such assets and liabilities that are not equal to
their identifiable fair value. A portion of the resulting difference is
amortized to earnings over the estimated remaining lives of the deposit
liabilities acquired in these transactions. The remaining amount (goodwill) is
amortized over periods of up to 20 years. The carrying amount of goodwill is
reviewed when facts and circumstances indicate that it may be impaired. If such
review indicates that goodwill is impaired, the carrying amount of goodwill is
reduced by the estimated amount of the impairment.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Corporation
occasionally enters into sales of securities under agreements to repurchase with
third-party broker-dealers (commonly referred to as "reverse-repurchase
agreements"). These arrangements are treated as a financing, and the obligations
to repurchase securities sold are reflected as a liability in the Corporation's
Consolidated Statement of Financial Condition. The securities underlying the
agreements remain in the asset accounts.
Securities sold under repurchase agreements are physically delivered to
the broker-dealers that arranged the transactions. The broker-dealers may have
sold, loaned, or otherwise disposed of such securities to other parties in the
normal course of their operations. The Bank is exposed to risk in these types of
transactions in that changes in market prices, economic losses, or other factors
could prevent or delay the counter-party in the transaction from returning the
securities at the maturity of the agreement. The Bank limits its exposure to
such risk by utilizing standard industry agreements, limiting counter-parties to
large, reputable broker-dealers, limiting the amount that can be borrowed from
an individual counter-party, and limiting the duration of such agreements
(typically one to six months).
INCOME TAXES The Corporation, the Bank, and all but one of the Bank's
subsidiaries file a consolidated federal income tax return and separate or
consolidated state income tax returns, depending on the state. Income taxes are
accounted for using the "asset and liability" method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
that will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Corporation's income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date of the change. A valuation allowance is provided for
any deferred tax asset for which it is more likely than not that the asset will
not be realized. Changes in valuation allowances are recorded as a component of
income.
PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS The Corporation's net
periodic pension cost consists of the expected cost of benefits earned by
employees during the current period and an interest cost on the projected
benefit obligation, reduced by the earnings on assets held by the retirement
plan, by amortization of transitional assets over a period of 15 years
(beginning in 1987), and by amortization of any actuarial gains and losses over
the estimated future service period of existing plan participants. The projected
unit credit actuarial cost method is used
40
42
to determine expected pension costs. The Corporation's funding policy is to
contribute amounts deductible for federal income tax purposes.
The Corporation's cost of postretirement benefits, which consists of
medical reimbursements for retirees, is recognized during the years that the
employees render the necessary service, adjusted for interest costs on the
projected benefit obligation and for the amortization of a transitional
obligation over 20 years (beginning in 1993). The projected unit credit
actuarial cost method is used to determine expected postretirement benefit
costs. The Corporation's postretirement benefit plan is not currently funded.
FAIR VALUES OF FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS The following methods and assumptions were used by the Corporation
in estimating fair value disclosures for financial instruments (refer to Note 12
for actual fair value amounts):
CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS WITH
BANKS The face amounts presented in the Corporation's Consolidated Statements of
Financial Condition for cash and interest-bearing deposits approximates fair
value for such assets.
INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED
SECURITIES Fair values for this group of financial instruments are based on
average quoted market prices obtained from one or more independent pricing
sources. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
LOANS HELD FOR SALE The fair value of loans held for sale is
estimated by matching such loans against outstanding commitments to sell such
loans. The method used for unmatched commitments is discussed under "Off-Balance
Sheet Financial Instruments", below.
LOANS HELD FOR INVESTMENT The estimated fair value of loans
held for investment is determined using discounted cash flow techniques.
Scheduled principal and interest payments are adjusted for estimated future
prepayments as provided by third-party market sources or as estimated by
management using historical prepayment experience. Discount rates used in the
fair value computations are generally based on interest rates offered by the
Corporation on similar loans as of December 31, 2000 and 1999, adjusted for
management's estimate of differences in liquidity, credit risk, remaining term
to maturity, etc.
FEDERAL HOME LOAN BANK STOCK FHLB stock held in excess of
minimum requirements can be returned to the FHLB for face value. Accordingly,
the fair value of all FHLB stock is estimated to be equal to the face amount
presented in the Corporation's Consolidated Statements of Financial Condition.
ACCRUED INTEREST RECEIVABLE AND PAYABLE The fair value of
accrued interest is equal to the face amount presented in the Corporation's
Consolidated Statement of Financial Condition.
MORTGAGE SERVICING RIGHTS The fair value of MSRs is estimated
using a discounted cash flow calculation that applies discount rates considered
reasonable by management to a schedule of both contractual and estimated cash
flows. Such cash flows are adjusted for loan prepayment rates deemed appropriate
by management.
DEPOSIT LIABILITIES The fair values of demand deposit accounts
(i.e., interest-bearing and non-interest-bearing checking accounts and money
market and regular savings accounts) are equal to the face amount presented in
Note 6. The fair value of fixed-rate time deposits is estimated using a
discounted cash flow calculation that applies interest rates offered by the
Corporation as of the measurement date to a schedule of aggregate contractual
maturities of such deposits as of the same dates.
FEDERAL HOME LOAN BANK ADVANCES The fair value of FHLB
advances is estimated using a discounted cash flow calculation that applies
interest rates quoted by the FHLB as of the measurement date to a schedule of
aggregate contractual maturities of such liabilities as of the same date. The
fair value of FHLB advances excludes the effect of any prepayment penalties that
may be incurred if the Corporation were to prepay any of its term advances.
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SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, FEDERAL FUNDS
PURCHASED, AND OTHER BORROWINGS These funding sources consist principally of
short-term or variable rate borrowings. As such, the Corporation has estimated
the fair value of these funding sources to approximate carrying value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE The fair
value of advance payments by borrowers for taxes and insurance is equal to the
face amount presented in the Corporation's Consolidated Statement of Financial
Condition.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. The Corporation has
become a party to financial instruments with off-balance-sheet risk in the
normal course of its business in order to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, lines of credit, commitments to sell loans, and financial
guarantees.
Off-balance-sheet financial instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statement of financial condition. In the event of
non-performance by the other party to a financial instrument, the Corporation's
exposure to credit loss is represented by the contractual amount of the
instrument. The Corporation uses the same credit policies in granting
commitments, letters and lines of credit, and financial guarantees as it does
for on-balance-sheet financial instruments.
The fair values of commitments to extend credit and unmatched
commitments to sell loans, both which are generally short-term in nature, are
estimated to be equal to their respective face values.
Home equity lines of credit carry floating market rates of
interest. Accordingly, the fair value of outstanding home equity lines of credit
is estimated to be equal to the face value of such commitments.
Other than credit enhancements on loans sold to the FHLB, the
Corporation does not issue material amounts of financial guarantees or stand-by
letters of credit. Management believes that the Corporation's exposure to loss
on such instruments is insignificant, including its credit enhancements with the
FHLB. Accordingly, management believes the fair value of such financial
instruments approximates zero.
STOCK-BASED COMPENSATION The Corporation records expense relative to
stock-based compensation using the "intrinsic value method". Since the intrinsic
value of the Corporation's stock options is generally "zero" at the time of the
award, no expense is recorded. With respect to restricted stock awards, the
intrinsic value is generally equal to the fair value of the Corporation's common
stock on the date of the initial contingent award, adjusted retroactively for
any changes in the value of the stock between the initial award date and the
final measurement date. Such value is amortized as expense over the three-year
measurement period of the award.
As permitted by GAAP, the Corporation has not adopted the "fair value
method" of expense recognition for stock-based compensation awards. Rather, the
effects of the fair value method on the Corporation's earnings have been
disclosed on a pro forma basis. Refer to Note 9 for the appropriate disclosures.
EARNINGS PER SHARE Basic and diluted earnings per share data are based
on the weighted-average number of common shares outstanding during each period.
Diluted earnings per share is further adjusted for potential common shares that
were dilutive and outstanding during the period. Potential common shares
generally consist of stock options outstanding under the incentive plans
described in Note 9. The dilutive effect of potential common shares is computed
using the treasury stock method. All stock options are assumed to be 100% vested
for purposes of the earnings per share computations. The computation of earnings
per share for the years ended December 31, 2000, 1999, and 1998, is as follows:
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2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
- -------------------------------------------------------------------------------------------------------------------------------
Net income $23,143,876 $23,143,876 $22,441,210 $22,441,210 $19,424,134 $19,424,134
- -------------------------------------------------------------------------------------------------------------------------------
Average common shares issued,
net of actual treasury shares 18,318,197 18,318,197 18,541,464 18,541,464 18,479,178 18,479,178
Potential common shares issued
under stock options (treasury stock method) - 153,888 - 596,458 - 1,384,968
- -------------------------------------------------------------------------------------------------------------------------------
Average common shares and
potential common shares 18,318,197 18,472,085 18,541,464 19,137,922 18,479,178 19,864,146
- -------------------------------------------------------------------------------------------------------------------------------
Earnings per share $1.26 $1.25 $1.21 $1.17 $1.05 $0.98
===============================================================================================================================
PENDING ACCOUNTING CHANGES In 1998 the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and for Hedging Activities" ("SFAS 133").
This standard establishes new rules for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. However, SFAS 133 establishes special
accounting rules for certain derivatives that meet the definition of a hedge.
Changes in the fair value of derivatives that do not meet this definition are
required to be included in earnings in the period of the change. The new
standard is effective for fiscal years beginning after June 15, 2000, although
earlier adoption is permitted. The Corporation adopted SFAS 133 on January 1,
2001.
The Corporation does not use derivative financial instruments such as
futures, swaps, caps, floors, options, interest- or principal-only strips, or
similar financial instruments to manage its operations. However, the Corporation
does use forward sales of mortgage-backed securities and other commitments of a
similar nature to manage exposure to market risk in its "pipeline" of
single-family residential loans intended for sale. Forward sales are derivative
securities and are subject to the rules established by SFAS 133. In addition,
commitments to extend credit that relate to loans that the Corporation intends
to sell are also considered to be derivative financial instruments under SFAS
133. The Corporation does not expect the adoption of SFAS 133 to have a material
impact on its operations or financial condition, although there can be no
assurances.
In 2000 the FASB issued Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 140"). This standard established new rules
for companies that engage in securitization transactions. In particular, the
standard establishes rules for when a transfer qualifies as a sale. The new
standard is effective for transactions occurring after March 31, 2001, but
certain expanded financial disclosures are required for fiscal years ending
after December 15, 2000. The Corporation does not expect the adoption of SFAS
140 to have a material impact on its operations or financial condition, although
there can be no assurances.
CASH AND CASH EQUIVALENTS For purposes of the Corporation's
Consolidated Statements of Cash Flows, cash and cash equivalents consists solely
of cash on hand and non-interest-bearing deposits in banks ("cash and due from
banks"). The Bank is required to maintain a certain amount of cash on hand and
non-interest-bearing account balances at the Federal Reserve Bank of Minneapolis
to meet specific reserve requirements. These requirements approximated $21.8
million at December 31, 2000.
RECLASSIFICATION Certain 1999 and 1998 balances have been reclassified
to conform with the 2000 presentation.
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NOTE 2--MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities at December 31, 2000 and 1999,
are summarized as follows:
2000
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
Available for sale:
Collateralized mortgage obligations $120,538,485 $183,445 ($1,695,739) $119,026,191
Mortgage-backed securities 80,703,979 1,905,436 - 82,609,415
Mortgage-backed securities pledged against
reverse-repurchase agreements 126,348,194 3,253,109 - 129,601,303
- --------------------------------------------------------------------------------------------------------------------
Total available for sale 327,590,658 5,341,990 (1,695,739) 331,236,909
- --------------------------------------------------------------------------------------------------------------------
Held for investment:
Collateralized mortgage obligations 75,532,013 24,243 (847,973) 74,708,283
Mortgage-backed securities 1,766,840 11,862 (30,156) 1,748,546
- --------------------------------------------------------------------------------------------------------------------
Total held for investment 77,298,853 36,105 (878,129) 76,456,829
- --------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and related securities $404,889,511 $5,378,095 ($2,573,868) $407,693,738
====================================================================================================================
1999
- --------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
Available for sale:
Collateralized mortgage obligations $148,311,198 $3,252 ($4,524,895) $143,789,555
Mortgage-backed securities 105,651,320 2,724,476 - 108,375,796
- --------------------------------------------------------------------------------------------------------------------
Total available for sale 253,962,518 2,727,728 (4,524,895) 252,165,351
- --------------------------------------------------------------------------------------------------------------------
Held for investment:
Collateralized mortgage obligations 100,522,117 - (2,789,059) 97,733,058
Mortgage-backed securities 3,410,112 11,934 (86,796) 3,335,250
- --------------------------------------------------------------------------------------------------------------------
Total held for investment 103,932,229 11,934 (2,875,855) 101,068,308
- --------------------------------------------------------------------------------------------------------------------
Total mortgage-backed and related securities $357,894,747 $2,739,662 ($7,400,750) $353,233,659
====================================================================================================================
Accrued interest receivable on mortgage-backed and related securities
was $3,542,405 and $2,639,477 at December 31, 2000 and 1999, respectively.
Mortgage-backed securities consist of FHLMC and FNMA securities. As of
December 31, 2000, the Corporation had retained the credit risk on $78.6 million
in FHLMC MBSs. Collateralized mortgage obligations consist of securities backed
by the aforementioned agency-backed securities or by whole-loans. As of December
31, 2000, approximately 86% of the Corporation's CMO portfolio consisted of
securities backed by whole loans--all of which were generally rated triple-A or
its equivalent by the major credit-rating agencies. Approximately 36% of the
Corporation's whole-loan CMOs consisted of loans on properties located in the
state of California. No other geographical location had a material
concentration.
There were no realized gains or losses on sales of mortgage-backed and
related securities during 2000, 1999, or 1998.
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NOTE 3--LOANS HELD FOR INVESTMENT
Loans held for investment at December 31 are summarized as follows:
2000 1999
- -------------------------------------------------------------------------------------------------------------------
First mortgage loans:
Single-family real estate $719,670,790 $652,883,166
Multi-family real estate 236,003,146 186,591,467
Non-residential real estate 203,842,456 168,453,435
Construction 77,215,742 80,562,997
Second mortgage and home equity loans 253,865,639 204,805,758
Education loans 197,579,143 190,170,252
Automobile and other consumer loans 90,102,719 61,194,825
Commercial business loans 195,266 295,756
- -------------------------------------------------------------------------------------------------------------------
Subtotal 1,778,474,901 1,544,957,656
Unearned discount, premiums, and net deferred loan fees and costs 2,029,276 1,260,460
Allowance for loan losses (8,027,526) (7,623,526)
- -------------------------------------------------------------------------------------------------------------------
Total $1,772,476,651 $1,538,594,590
===================================================================================================================
Accrued interest receivable on loans was $16,080,986 and $12,731,071 at
December 31, 2000 and 1999, respectively.
Loans serviced for investors were $2.1 billion, $1.9 billion, and $1.9
billion at December 31, 2000, 1999, and 1998, respectively. These loans are not
reflected in the Corporation's Consolidated Statements of Financial Condition.
At December 31, 2000, the Corporation had retained a small portion of the credit
risk related to $414.5 million in single-family residential loans sold to the
FHLB in exchange for a monthly credit enhancement fee.
At December 31, 2000 and 1999, loans on non-accrual status were $3.1
million and $1.1 million, respectively. The Corporation has no loans
contractually past due ninety or more days for which interest is being accrued.
With respect to single-family mortgage loans, it is the Corporation's
general policy to restrict lending to its primary market areas in Wisconsin as
well as contiguous counties in Iowa, Illinois, and Minnesota, though from
time-to-time the Corporation will purchase single-family loans originated
outside of its primary market area. It is also the Corporation's general policy
to limit an individual single-family mortgage loan to 80% of the appraised value
of the property securing the loan. The Corporation will occasionally lend more
than 80% of the appraised value of the property, but generally will require the
borrower to obtain private mortgage insurance on the portion of the loan amount
that exceeds 80% of the collateral. Single-family mortgage loans originated or
purchased outside of the Corporation's primary market area were $172.1 million
and $196.9 million at December 31, 2000 and 1999, respectively.
With respect to multi-family and non-residential real estate loans, it
is the Corporation's policy to restrict its lending area to loans secured by
property located within a 300-mile radius of La Crosse, to include all or a
portion of the states of Wisconsin, Nebraska, Illinois, Iowa, and Minnesota,
although in the past the Corporation originated multi-family and non-residential
real estate loans outside of this area. It is also the Corporation's general
policy to limit loans on multi-family residential complexes, retail shopping
centers, office buildings, and multi-tenant industrial buildings to 80% of the
appraised value of the property securing the loan. Loans on other types of
commercial properties, such as nursing homes, hotels/motels, churches, and
single-tenant industrial buildings are limited to 75% or less of the appraised
value of the property securing the loan. In addition, it is the Corporation's
policy that no more than 20% of its multi-family and non-residential real estate
loans consist of this second category of loans. Multi-family and non-residential
real estate loans originated or purchased outside of the Corporation's market
area were $23.1 million and $23.5 million, at December 31, 2000 and 1999,
respectively.
With respect to consumer loans, it is the Corporation's policy that
such loans be supported primarily by the borrower's ability to repay the loan
and secondarily by the value of the collateral securing the loan, if any.
Furthermore, in the case of second mortgages and home equity loans, the
Corporation does not generally allow the sum of the first and second mortgage
amounts to exceed 100% of the appraised value of the property securing the loan.
Education loans are substantially guaranteed by the U.S. government.
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A summary of the activity in the allowance for loan losses is as
follows:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $7,623,526 $7,623,526 $7,637,527
Provision charged to expense 1,008,780 387,021 293,112
- ---------------------------------------------------------------------------------------------------------------------
Loans charged-off (664,765) (433,744) (365,511)
Recoveries 59,985 46,723 58,398
- ---------------------------------------------------------------------------------------------------------------------
Charge-offs, net (604,780) (387,021) (307,113)
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $8,027,526 $7,623,526 $7,623,526
=====================================================================================================================
NOTE 4--MORTGAGE SERVICING RIGHTS
A summary of the activity in mortgage servicing rights is as follows:
PURCHASED ORIGINATED VALUATION
MSR MSR ALLOWANCE TOTAL
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $4,256,519 $12,588,785 ($554,401) $16,290,903
Purchased servicing 454,774 454,774
Originated servicing 17,587,381 17,587,381
Amortization charged to earnings (527,655) (2,468,568) (2,996,223)
Valuation adjustments charged to earnings (10,233,376) (10,233,376)
Charge-offs (864,565) (3,800,276) 4,664,841 -
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 3,319,073 23,907,322 (6,122,936) 21,103,459
Originated servicing 5,333,684 5,333,684
Amortization charged to earnings (368,292) (3,233,691) (3,601,983)
Valuation adjustments charged to earnings (1,107,179) (1,107,179)
Charge-offs (722,157) (3,841,315) 4,563,472 -
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,228,624 22,166,000 (2,666,643) 21,727,981
Purchased servicing 1,865,307 1,865,307
Originated servicing 3,293,776 3,293,776
Amortization charged to earnings (437,834) (3,168,758) (3,606,592)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $3,656,097 $22,291,018 ($2,666,643) $23,280,472
===================================================================================================================
NOTE 5--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31 are summarized as
follows:
2000 1999
- -------------------------------------------------------------------------------------------------------------------
Office buildings and improvements $19,200,399 $19,139,161
Furniture and equipment 20,599,229 18,819,621
Leasehold improvements 5,924,590 5,260,917
Land and improvements 4,359,384 4,355,945
Property acquired for expansion 332,864 332,864
Construction in progress 1,784,016 95,085
- -------------------------------------------------------------------------------------------------------------------
Subtotal 52,200,482 48,003,593
- -------------------------------------------------------------------------------------------------------------------
Less allowances for depreciation and amortization 25,419,472 23,382,997
- -------------------------------------------------------------------------------------------------------------------
Total $26,781,010 $24,620,596
===================================================================================================================
The Corporation rents office space and land under operating leases at
certain of its locations. These leases have terms expiring between 2001 and 2020
and provide for renewals subject to escalation clauses. Rental expense was
$1,862,905, $1,661,345, and $1,455,439 for the years ended December 31, 2000,
1999, and 1998, respectively.
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NOTE 6--DEPOSIT LIABILITIES
Deposit liabilities at December 31 are summarized as follows:
2000 1999
- --------------------------------------------------------------------------------------------------------------------
Checking accounts:
Non-interest-bearing $161,601,896 $136,700,264
Interest-bearing 80,593,590 72,913,112
Money market accounts 154,399,192 173,595,162
Regular savings accounts 103,661,933 104,510,856
Variable-rate IRA accounts 2,827,417 3,610,223
Time deposits maturing within...
Three months 169,512,703 226,970,708
Four to six months 213,218,098 183,720,538
Seven to twelve months 465,163,919 298,701,822
Thirteen to twenty-four months 337,981,625 228,798,930
Twenty-five to thirty-six months 7,770,114 36,969,671
Thirty-seven to forty-eight months 1,562,563 3,422,436
Forty-nine to sixty months 959,115 1,345,750
- --------------------------------------------------------------------------------------------------------------------
Total time deposits 1,196,168,136 979,929,855
- --------------------------------------------------------------------------------------------------------------------
Total $1,699,252,162 $1,471,259,473
====================================================================================================================
Time deposits include $120.1 million and $91.7 million of certificates
in denominations of $100,000 or more at December 31, 2000 and 1999,
respectively. Accrued interest payable on deposit liabilities was $1,198,471 and
$664,844 at December 31, 2000 and 1999, respectively.
Included in non-interest-bearing checking accounts at December 31, 2000
and 1999, were $16.9 million and $17.2 million, respectively, which represented
amounts held in custody for third-party investors in loans serviced by the
Corporation.
Interest expense on deposit liabilities for the year ended December 31
is summarized as follows:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Checking accounts $571,473 $558,393 $543,825
Money market savings accounts 6,577,913 6,586,892 6,381,467
Regular savings 1,619,063 1,740,722 1,842,854
Time deposits 64,819,276 51,661,026 50,653,495
- ---------------------------------------------------------------------------------------------------------------------
Total $73,587,725 $60,547,033 $59,421,641
=====================================================================================================================
NOTE 7--FEDERAL HOME LOAN BANK ADVANCES AND ALL OTHER BORROWINGS
Federal Home Loan Bank advances and all other borrowings at December 31
are summarized as follows:
2000 1999
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
- --------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances maturing in...
2000 - - $45,400,000 5.73%
2001 $78,245,000 5.82% 43,245,000 5.11
2002 13,415,000 5.32 13,415,000 5.32
2003 116,000,000 5.97 41,000,000 5.23
2004 75,000,000 5.60 87,500,000 5.59
2005 50,000,000 6.18 - -
2008 25,000,000 4.95 25,000,000 4.95
2009 - - 12,500,000 5.20
Open line of credit 10,545,000 6.74 176,273,000 5.62
- --------------------------------------------------------------------------------------------------------------------
Total FHLB advances 368,205,000 5.82 444,333,000 5.48
====================================================================================================================
Securities sold under agreements to repurchase 100,000,000 6.68 - -
Federal funds purchased 20,000,000 6.81 20,000,000 5.78
Other borrowings 2,641,370 7.75 5,246,701 6.50
- --------------------------------------------------------------------------------------------------------------------
Total $490,846,370 6.05% $469,579,701 5.51%
====================================================================================================================
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The Corporation's borrowings at the FHLB are limited to the lesser of
35% of total assets or 60% of the book value of certain mortgage loans and 85%
to 90% of the market value of certain mortgage-backed and related securities.
Interest on the open line of credit is paid monthly at approximately 45 basis
points above the FHLB's daily investment deposit rate or approximately 25 basis
points above the federal funds rate. The advances that mature in the years 2004,
2005, and 2008 consist of borrowings that are redeemable quarterly at the option
of the FHLB; $75.0 million of the advances that mature in 2003 have this option.
The Corporation has lines of credit with three financial institutions.
These lines, which amount to $45.0 million in the aggregate, permit the
overnight purchase of federal funds. There was $20.0 million outstanding under
these lines as of December 31, 2000. The Corporation also has a $15.0 million
line of credit with a fourth financial institution under which $2.6 million was
outstanding as of December 31, 2000. The interest rate on borrowings under this
line is determined on a periodic basis using an index based on the London
Inter-Bank Offered Rate ("LIBOR"). The Corporation has pledged all issued and
outstanding capital stock of the Bank as collateral for this line of credit.
Securities sold under agreements to repurchase were delivered to
third-party broker-dealers who arranged the transactions. The broker-dealers
have agreed to resell to the Corporation the identical securities (or
substantially the same securities) at the maturity dates of the agreements. As
of December 31, 2000, $60.0 million of these agreements mature within three
months and $40.0 million mature within four to six months.
Accrued interest payable on FHLB advances and all other borrowings was
$2,849,711 and $1,851,436 at December 31, 2000 and 1999, respectively.
NOTE 8--INCOME TAXES
Federal and state income tax expense for the years ended December 31 is
summarized as follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Current:
Federal $12,689,599 $10,558,903 $10,920,797
State 104,230 159,477 720,178
- --------------------------------------------------------------------------------------------------------------------
Total current 12,793,829 10,718,380 11,640,975
- --------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (24,000) 1,629,000 (307,000)
State - (180,000) (77,000)
- --------------------------------------------------------------------------------------------------------------------
Total deferred (24,000) 1,449,000 (384,000)
- --------------------------------------------------------------------------------------------------------------------
Total $12,769,829 $12,167,380 $11,256,975
====================================================================================================================
The significant components of the Corporation's deferred tax expense
for the years ended December 31 are summarized as follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights $200,744 $1,614,810 $1,003,793
Office properties and equipment depreciation (17,036) (21,606) 679,244
Asset valuation allowances (43,871) 652,459 (249,578)
Deferred loan fees 540,898 139,904 (189,160)
Provision for loan and real estate losses, net (183,455) (259,994) (150,979)
Deferred compensation (789,847) (323,690) (610,536)
FHLB stock dividends 783,665 - (362,877)
Other (515,098) (352,883) (503,907)
- --------------------------------------------------------------------------------------------------------------------
Total deferred ($24,000) $1,449,000 ($384,000)
====================================================================================================================
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The income tax provision differs from the provision computed at the
federal statutory corporate tax rate for the years ended December 31 as follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Income taxes at federal statutory of 35% $12,569,797 $12,113,007 $10,738,388
State income tax (benefit) net of federal income tax effect 67,749 (13,341) 418,066
Other 132,283 67,714 100,521
- --------------------------------------------------------------------------------------------------------------------
Income tax provision $12,769,829 $12,167,380 $11,256,975
===================================================================================================================
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, are summarized as follows:
2000 1999
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loan and real estate loss allowances $3,102,554 $2,929,210
Deferred compensation 2,724,252 1,941,105
Asset valuation allowances 307,205 264,246
State tax loss carryforwards, net 1,618,514 1,216,518
Securities valuation allowance - 650,593
Other 226,744 39,254
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 7,979,269 7,040,926
Valuation allowance (631,843) (298,785)
- -------------------------------------------------------------------------------------------------------------------
Adjusted deferred tax assets 7,347,426 6,742,141
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Mortgage servicing rights 5,294,592 5,111,492
Securities valuation allowance 1,272,324 -
Office properties and equipment depreciation 256,575 274,559
Deferred loan fees 1,041,909 502,747
FHLB stock dividends 1,046,541 263,786
Purchase acquisition adjustments 97,352 144,563
Investment in unconsolidated partnerships 97,474 84,862
Other 295,186 519,257
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 9,401,953 6,901,266
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities ($2,054,527) ($159,125)
===================================================================================================================
The Bank qualifies under provisions of the IRC that prior to 1996
permitted it to deduct from taxable income an allowance for bad debts that
generally exceeded losses charged to income for financial reporting purposes.
Accordingly, no provision for income taxes has been made for $21.1 million of
retained income at December 31, 2000. If in the future the Bank no longer
qualifies as a bank for tax purposes, income taxes may be imposed at the
then-applicable rates. If income taxes had been provided, the deferred tax
liability would have been approximately $8.5 million.
NOTE 9--EMPLOYEE BENEFIT PLANS
PENSION PLAN The Corporation has established a pension plan for the
benefit of full-time employees that have at least one year of service and have
attained the age of 20. Benefits under the plan are based on the employee's
years of service and compensation during the years immediately preceding
retirement. The following table summarizes the components of pension benefit
obligation and plan assets, the funded status of the plan, the amount recognized
in the Corporation's consolidated financial statements, and the weighted-average
assumptions for the years ended December 31, 2000 and 1999.
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51
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $8,663,253 $9,361,621
Service costs 587,669 689,568
Interest costs 696,613 620,001
Actuarial loss 850,200 (1,703,497)
Benefit payments (306,262) (304,440)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $10,491,473 $8,663,253
=====================================================================================================================
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year: $10,188,484 $7,968,383
Actual return on plan assets 781,848 2,035,314
Employer contributions 322,098 489,227
Benefit payments (306,262) (304,440)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $10,986,168 $10,188,484
=====================================================================================================================
Funded status:
Funding shortfall (excess) at end of year ($494,695) ($1,525,231)
Unrecognized transition asset - 15,475
Unrecognized prior service cost 64,913 91,599
Unrecognized net loss 822,106 1,845,803
- ---------------------------------------------------------------------------------------------------------------------
Accrued pension expense $392,324 $427,646
=====================================================================================================================
Components of net periodic benefit cost:
Service costs $587,669 $689,568
Interest costs 696,613 620,001
Expected return on plan assets (921,668) (708,819)
Amortization of transition asset (15,474) (95,452)
Amortization of prior service costs (26,686) (53,927)
Recognized actuarial loss (33,677) 47,618
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $286,777 $498,989
=====================================================================================================================
Weighted-average assumptions:
Discount rate 7.50% 7.75%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.50% 5.50%
=====================================================================================================================
POSTRETIREMENT EMPLOYEE BENEFITS The Corporation provides certain health care
insurance benefits to retired employees. Substantially all of the employees of
the Corporation may become eligible for these benefits if they reach normal
retirement age while working for the Corporation. The following table summarizes
the components of postretirement benefit obligation and funded states, as well
as the amounts recognized in the Corporation's consolidated financial statements
for the years ended December 31, 2000 and 1999.
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $1,930,947 $2,019,976
Service costs 79,158 87,022
Interest costs 156,931 140,194
Actuarial loss 137,279 (243,034)
Benefit payments (112,400) (73,211)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $2,191,915 $1,930,947
=====================================================================================================================
Funded status:
Funding shortfall at end of year $2,191,915 $1,930,947
Unrecognized transition asset (410,759) (444,989)
Unrecognized net loss (362,174) (229,663)
- ---------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit expense $1,418,982 $1,256,295
=====================================================================================================================
Components of net periodic benefit cost:
Service costs $79,158 $87,022
Interest costs 156,931 140,194
Amortization of transition obligation 34,230 34,230
Recognized actuarial loss 4,768 18,252
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $275,087 $279,698
=====================================================================================================================
Weighted-average assumptions:
Discount rate 7.50% 7.75%
Rate of compensation increase 5.50% 5.50%
=====================================================================================================================
The assumed rate of increase in the per capita cost of covered benefits
was approximately 9% for 2000, declining to approximately 5% in 2005 and
thereafter. This assumption has a significant effect on the amounts
50
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reported in the Corporation's consolidated financial statements. For example, a
one percentage point increase in the assumed trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 2000, by
approximately $622,000 and the aggregate service and interest cost components of
postretirement benefit expense for 2000 by approximately $89,000. A one
percentage point decline would decrease these amounts by approximately $352,000
and $47,000, respectively.
SAVINGS PLANS The Corporation maintains a 401(k) savings plan for the
benefit of substantially all of its employees. Employees may contribute up to a
certain percentage of their compensation to the plan and the Corporation will
match their contributions within certain limits. In addition, the employee may
also receive discretionary profit sharing contributions from the Corporation.
The Corporation provided matching and discretionary contributions of
approximately $551,000, $490,000, and $286,000 during the years ended
December 31, 2000, 1999, and 1998, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation makes annual
discretionary contributions to an Employee Stock Ownership Program ("ESOP") for
the benefit of substantially all of its employees. All contributions are
recorded as compensation expense on the books of the Corporation at the time
they are made. The Corporation recorded approximately $373,000, $379,000, and
$286,000 in ESOP-related compensation expense during the years ended
December 31, 2000, 1999, and 1998, respectively.
SUPPLEMENTAL PENSION PLAN The Corporation makes annual contributions to
a supplemental pension plan for certain members of management. All contributions
are recorded as compensation expense on the books of the Corporation at the time
they are made. The Corporation recorded approximately $238,000, $346,000, and
$203,000 during the years ended December 31, 2000, 1999, and 1998, respectively.
STOCK INCENTIVE PLANS The Corporation has adopted a stock incentive
plan designed to attract and retain qualified personnel in key management
positions. The plan provides for the grant of stock options, restricted stock,
and stock appreciation rights. In general, stock options granted under the plan
are exercisable at a price equal to the fair value of the stock on the date of
the grant. Furthermore, the options are subject to three- to five-year graded
vesting requirements and a maximum exercise period of ten years. The plan
currently authorizes the issuance of approximately 4.5 million shares, of which
1.2 million shares were unallocated as of December 31, 2000. Activity in these
stock incentive plans for each of the three years ended December 31, 2000, 1999,
and 1998, is summarized as follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
- --------------------------------------------------------------------------------------------------------------------
Stock options outstanding at beginning of period 734,060 $9.34 1,685,535 $5.42 1,674,056 $3.07
Stock options granted 95,000 11.00 76,000 14.01 309,000 14.77
Stock options exercised (84,290) 3.10 (1,012,475) 3.12 (297,521) 1.92
Stock options forfeited (3,000) 14.75 (15,000) 12.67 - -
- --------------------------------------------------------------------------------------------------------------------
Stock options outstanding at end of period 741,770 $10.24 734,060 $9.34 1,685,535 $5.42
- --------------------------------------------------------------------------------------------------------------------
Fully-vested options outstanding at end of period 569,770 $9.59 457,895 $6.20 1,430,234 $3.81
====================================================================================================================
As of December 31, 2000, the exercise prices of outstanding options
ranged from $1.31 to $15.63 and had a weighted-average remaining life of 6.1
years. Within this range, 141,670 options had a weighted-average exercise price
of $2.58 and a weighted-average remaining life of 1.8 years; 133,100 options had
a weighted-average exercise price of $5.61 and a weighted-average remaining life
of 4.6 years; and 467,000 shares had a weighted-average exercise price of $13.88
and a weighted-average remaining life of 7.8 years.
During the years ended December 31, 2000 and 1998, 15,000 shares and
112,002 shares of restricted stock were granted at weighted-average fair values
of $11.00 and $15.48, respectively. In 1999, no shares of restricted stock were
granted.
The Corporation has also adopted a stock incentive plan designed to
attract and retain qualified non-employee directors for the Corporation and its
subsidiaries. Under the plan each director receives options to purchase 8,800
shares upon election or re-election to the Board of Directors. The stock options
are exercisable at a
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53
price at least equal to the fair value of the stock on the date of grant and are
fully-vested on the date of the grant. These plans have authorized the issuance
of 673,000 shares, of which 171,000 shares were unallocated as of December 31,
2000. Activity in these stock incentive plans for each of the three years ended
December 31, 2000, 1999, and 1998 is summarized as follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
- --------------------------------------------------------------------------------------------------------------------
Stock options outstanding at beginning of period 131,996 $9.09 218,966 $5.95 227,766 $3.89
Stock options granted 26,400 11.75 26,400 14.88 26,400 17.59
Stock options exercised (19,600) 3.25 (113,370) 4.37 (35,200) 1.31
- --------------------------------------------------------------------------------------------------------------------
Stock options outstanding at end of period 138,796 $10.42 131,996 $9.09 218,966 $5.95
====================================================================================================================
These options had a range of exercise prices from $1.36 to $17.59, and
a weighted-average remaining life of 6.2 years. Within this range, 26,396 had a
weighted-average exercise price of $3.64 and a weighted-average remaining life
of 2.0 years; 42,000 options had a weighted-average exercise price of $7.49 and
a weighted-average remaining life of 5.3 years; and 70,400 shares had a
weighted-average exercise price of $14.72 and a weighted average remaining life
of 8.3 years.
As described in Note 1, the Corporation has elected to provide pro
forma disclosure of the effects of its stock incentive plans. If the Corporation
had accounted for its stock incentive plans using the fair value method, the
Corporation's pro forma net income would have been $22.7 million, $21.8 million,
and $18.4 million during the years ended December 31, 2000, 1999, and 1998,
respectively. Pro forma diluted earnings per share would have been $1.23, $1.14,
and $0.93 and pro forma basic earnings per share would have been $1.24, $1.18,
and $1.00 during the same periods, respectively.
The weighted-average fair value of the options granted in 2000, 1999,
and 1998, were $3.91, $5.23, and $5.25, respectively. The fair values of these
options were estimated as of the dates they were granted using a Black-Scholes
option pricing mode. Weighted-average assumptions for 2000 were 6.0% risk-free
interest rate, 3.0% dividend yield, 35% volatility, and a seven-year expected
life. Weighted-average assumptions for 1999 were 5.5% risk-free interest rate,
2.4% dividend yield, 35% volatility, and a seven-year expected life.
Weighted-average assumptions for 1998 were 5.0% risk-free interest rate, 2.0%
dividend yield, 30% volatility, and a seven-year expected life.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS The Corporation and its subsidiaries are engaged in
various routine legal proceedings occurring in the ordinary course of business
which in the aggregate are believed by management to be immaterial to the
consolidated financial condition of the Corporation.
OTHER COMMITMENTS AND CONTINGENCIES At December 31, 2000, the
Corporation had commitments to originate mortgage loans at market terms
aggregating approximately $15.1 million which expire on various dates in 2001.
At December 31, 2000, the Corporation also had commitments to fund $40.2 million
in additional proceeds on construction loans. As of the same date the
Corporation had approximately $6.4 million in commitments outstanding under
standby letters of credit and financial guarantees, as well as $11.9 million in
commitments outstanding under unused home equity lines of credit. Furthermore,
the Corporation had commitments to sell approximately $51.7 million in mortgage
loans to FHLMC, FNMA, and the FHLB at various dates in 2001.
At December 31, 2000, the Corporation had retained a small portion of
the credit risk related to $414.5 million in single-family residential loans
sold to the FHLB in exchange for a monthly credit enhancement fee.
52
54
NOTE 11--STOCKHOLDERS' EQUITY
PREFERRED STOCK The Corporation is authorized to issue up to 5,000,000
shares of preferred stock, $.10 par value per share, although no such stock was
outstanding at December 31, 2000. The Board of Directors of the Corporation is
authorized to establish the voting powers, designations, preferences, or other
special rights of such shares and the qualifications, limitations, and
restrictions thereof. The preferred stock may be issued in distinctly designated
series, may be convertible to common stock, and may rank prior to the common
stock in dividend rights, liquidation preferences, or both.
SHAREHOLDERS' RIGHTS PLAN The Corporation's Board of Directors adopted
a shareholders' rights plan (the "Rights Plan") in 1995. Under the terms of the
Rights Plan, the Board of Directors declared a dividend of one preferred share
purchase right on each outstanding share of common stock of the Corporation.
However, the rights can only be exercised if a person or group acquires 20% or
more of the common stock or announces a tender or exchange offer that would
result in a 20% or greater position in the stock. Initially, each right will
entitle shareholders to buy one one-hundredth share of the Corporation's
preferred stock at a price of $50.00, subject to adjustment. Under certain
circumstances, including the acquisition of beneficial ownership of 25% or more
of the Corporation's common stock, holders of the Corporation's common stock,
other than the acquirer, will be entitled to exercise the rights to purchase
common stock from the Corporation having a value equal to two times the exercise
price of the right. If the Corporation is acquired in a merger, share exchange,
or other business combination in which the Corporation is not the survivor,
after a person or group's acquisition of beneficial ownership of 20% or more of
the common stock, rights holders will be entitled to purchase the acquirer's
shares at a similar discount. Issuance of the rights has no dilutive effect,
will not affect reported earnings per share, is not taxable to the Corporation
or its shareholders, and will not change the way in which the Corporation's
shares are traded. The rights expire ten years for the adoption of the Rights
Plan.
STOCK REPURCHASE PLANS AND TREASURY STOCK In 2000, 1999, and 1997 the
Corporation's Board of Directors authorized the repurchase of up to 913,554,
905,248, and 919,052 shares of the Corporation's outstanding common stock,
respectively. Under the plans, repurchases may be made from time-to-time in the
open market during the ensuing twelve months as conditions permit (the 1997 Plan
was extended for an additional twelve months in January 1998 and again in
January 1999; the 1999 Plan was extended for an additional twelve months in
April 2000). Repurchased shares are held as treasury stock and are available for
general corporate purposes.
During 2000, 1999, and 1998, the Corporation repurchased 143,904,
1,060,990, and 447,000 shares under the 1998 and 1997 Plans at an average cost
of $11.87, $15.01, and $16.46 per share, respectively. As of December 31, 2000,
no shares remained to be purchased under the 1997 Plan, 219,506 shares remained
under the 1999 Plan, and all of the shares remained under the 2000 Plan.
During 2000, 1999, and 1998 the Corporation reissued 85,807, 1,103,550,
and 426,775 shares of common stock out of treasury stock, respectively. These
shares had an average cost basis of $11.31, $12.93, and $12.84 per share,
respectively. In general, these shares were issued upon the exercise of stock
options by, or the issuance of restricted stock to, employees and directors of
the Corporation. The Corporation uses the "last-in/first-out" method to
determine the cost basis of shares removed from treasury stock.
DIVIDEND RESTRICTIONS The ability of the Corporation to pay dividends
will depend primarily upon the receipt of dividends from the Bank. The Bank may
not declare or pay a cash dividend without regulatory approval if such dividend
would cause its net capital to be reduced below either the amount required for
the liquidation account or the current risk-based capital requirements imposed
by the OTS. The Bank is a "Tier 1" association under current OTS regulations. As
such, the Bank's dividend payments are limited to 100% of its net income during
the year plus an amount that would reduce by one-half its excess risk-based
regulatory capital as of the beginning of the year, or 75% of its net income
during the most recent four-quarter period, whichever is greater.
REGULATORY CAPITAL REQUIREMENTS Financial institutions such as the Bank
are subject to minimum regulatory capital requirements as specified in federal
banking law and supporting regulations. Failure of a financial institution to
meet such requirements may subject the institution to certain mandatory--and
possibly discretionary--actions on the part of its regulators (referred to as
"prompt corrective actions"). Such actions, if undertaken, could severely
restrict the activities of the institution. During each of the years ended
December 31, 2000 and 1999, the
53
55
Bank's regulatory capital was sufficient for it to be classified as "adequately
capitalized" under the prompt corrective action provisions of the federal
banking law and supporting regulations. Accordingly, the Bank is not subject to
prompt corrective actions by its regulators.
The following table summarizes the Bank's current regulatory capital in
both percentage and dollar terms as of December 31, 2000 and 1999. It also
summarizes the minimum capital levels that must be maintained by the Bank for it
to be classified as "adequately capitalized" and "well capitalized" under the
prompt corrective action provisions of federal banking law and supporting
regulations. As indicated in the table, the Bank is "well capitalized" for
regulatory capital purposes.
MINIMUM REQUIREMENTS
TO BE CLASSIFIED AS...
-----------------------------------
ADEQUATELY WELL
DECEMBER 31, 2000 CAPITALIZED CAPITALIZED ACTUAL
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 leverage ratio 4.0% 5.0% 5.28%
Tier 1 risk-based capital ratio 4.0% 6.0% 9.71%
Total risk-based capital ratio 8.0% 10.0% 10.29%
Tier 1 leverage ratio capital $95,288,000 $119,111,000 $125,726,000
Tier 1 risk-based capital 51,816,000 77,724,000 125,726,000
Total risk-based capital 103,632,000 129,540,000 133,325,000
=====================================================================================================================
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 leverage ratio 4.0% 5.0% 5.64%
Tier 1 risk-based capital ratio 4.0% 6.0% 10.21%
Total risk-based capital ratio 8.0% 10.0% 10.85%
Tier 1 leverage ratio capital $83,074,000 $103,843,000 $117,177,000
Tier 1 risk-based capital 45,916,000 68,874,000 117,177,000
Total risk-based capital 91,832,000 114,790,000 124,515,000
=====================================================================================================================
NOTE 12--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments as of December 31 are as follows:
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $25,445,819 $25,445,819 $65,566,021 $65,566,021
Interest-bearing deposits with banks 13,054,493 13,054,493 17,790,262 17,790,262
Investment securities available for sale
817,141 817,141 872,844 872,844
Mortgage-backed and related securities:
Available for sale 331,236,909 331,236,909 252,165,351 252,165,351
Held for investment 77,298,853 76,456,829 103,932,229 101,068,308
Loans held for sale 22,973,887 23,400,000 6,345,624 6,400,000
Loans held for investment, gross 1,780,504,177 1,773,300,000 1,546,218,116 1,545,200,000
Federal Home Loan Bank stock 25,568,100 25,568,100 22,511,300 22,511,300
Accrued interest receivable 19,701,004 19,701,004 15,420,837 15,420,837
Mortgage servicing rights 23,280,472 23,280,472 21,727,981 21,727,981
Financial liabilities:
Deposit liabilities $1,699,252,162 $1,707,500,000 $1,471,259,473 $1,474,100,000
Federal Home Loan Bank advances and all other
borrowings 490,846,370 488,800,000 469,579,701 465,200,000
Advance payments by borrowers for taxes and insurance 1,023,712 1,023,712 5,407,816 5,407,816
Accrued interest payable 4,047,875 4,047,875 2,516,280 2,516,280
=====================================================================================================================
Refer to Note 1 for the methods and assumptions used by the Corporation
in estimating the fair value of financial instruments. The carrying value shown
for loans held for investment excludes the impact of the Corporation's allowance
for loan losses.
54
56
NOTE 13--SEGMENT INFORMATION
DIVISIONS AND PROFIT CENTERS The Corporation has five operating
divisions: (i) residential lending, (ii) commercial real estate lending, (iii)
retail banking, (iv) finance and administration, and (v) human resources. Each
division is headed by an executive officer that reports directly to the
president of the Corporation. The first three divisions contain all but one of
the Corporation's profit centers for segment reporting purposes. The remaining
two divisions are considered support departments for segment reporting purposes,
although the finance and administration division also provides the primary
support for the Corporation's remaining profit center--the investment and
mortgage-related securities portfolio.
Residential lending is divided into two profit centers for segment
reporting purposes: (i) a mortgage banking profit center that is responsible for
loan origination, sales of loans in the secondary market, and servicing of
residential loans, and (ii) a residential loan portfolio that consists of loans
held by the Corporation for investment purposes (loans held for sale are
included in the mortgage banking profit center). Commercial real estate lending
is a single profit center for segment reporting purposes. It consists of the
Corporation's portfolio of multi-family and non-residential mortgage loans, as
well as functions related to the origination and servicing of such loans. Retail
banking is divided into two profit centers for segment reporting purposes: (i) a
consumer lending portfolio, which consists of the Corporation's second mortgage,
automobile, and other consumer installment loans, as well as functions related
to the origination and servicing of such loans and (ii) an education loan
portfolio, which also includes functions related to the origination and
servicing of the loans. The Corporation's retail branch network, which delivers
checking, savings, certificates of deposit and other financial products and
services to customers, is also part of retail banking, but is considered a
support department for segment reporting purposes, as more fully described in a
subsequent paragraph. Finally, the Corporation's investment and mortgage-related
securities portfolio is considered a profit center for segment reporting
purposes. Personnel in finance and administration support this profit center, as
previously described.
MEASUREMENT OF SEGMENT PROFIT (LOSS) Management evaluates the after-tax
performance of the Corporation's profit centers as if each center were a
separate entity--each with its own earning assets, actual and/or allocated
non-earning assets, and allocated funding resources. Each profit center has its
own interest income, non-interest income, and non-interest expense as captured
by the Corporation's accounting systems. Interest expense is allocated to each
profit center according to its use of the Corporation's funding sources, which
consist primarily of deposit liabilities, FHLB advances, and equity. In general,
all funding sources are allocated proportionately to each profit center.
However, in certain instances specific liabilities may be matched against
specific assets of profit centers.
The net cost of operating the Corporation's support departments is
allocated to the Corporation's profit centers and to the retail banking network
using a variety of methods deemed appropriate by management. In general, these
net costs are included in the non-interest expense of each profit center, to
include the retail banking network. In addition, certain allocations of revenues
and expenses are made between profit centers when they perform services for each
other. Such amounts, however, are not generally material in nature.
The Corporation's retail branch network is considered a support
department center for segment reporting purposes. Retail banking fees and
revenues are deducted from the non-interest expense of operating the network (to
include an allocation of net costs from the Corporation's other support
departments) to arrive at net cost for the branch network. This net cost is then
allocated to each profit center based on its use of deposit liabilities to fund
its operations. This amount is reported as "net cost to acquire and maintain
deposit liabilities" and is included as an adjustment to the net interest income
of each profit center.
For segment reporting purposes, management makes certain non-GAAP
adjustments and reclassifications to the results of operations and financial
condition of the Corporation that, in management's judgement, more fairly
reflect the performance and/or financial condition of certain of the
Corporation's profit centers. Following is a description of the more significant
adjustments:
INTEREST INCOME AND EXPENSE Interest income is credited to the
mortgage banking profit center for implied earnings on non-interest-bearing
liabilities such as custodial and escrow accounts. The offsetting interest
expense is charged to each profit center according to their use of these funding
sources, as previously
55
57
described. Fee income from customers that make their monthly loan payments late
("late charges") is reclassified from interest income to non-interest income in
the mortgage banking profit center.
LOAN ORIGINATION FEES AND COSTS In accordance with GAAP,
origination fees earned on residential loans held for investment are deferred
and amortized over the expected life of the loans, as are the direct costs to
originate the loans. In general, these deferrals and their subsequent
amortization are disregarded for segment reporting purposes. As a result, the
mortgage banking profit center receives revenue for loans that it originates for
the portfolio of residential loans held for investment, as well as a full charge
for the costs to originate the loans. These fees and costs are in addition to
the fees it receives and the costs it incurs on loans originated for sale in the
secondary market, which are included in current earnings under GAAP.
MORTGAGE SERVICING RIGHTS In accordance with GAAP, mortgage
servicing rights are not recorded on residential loans held for investment.
However, for segment reporting purposes, the mortgage banking profit center
receives an income allocation for the origination of such loans, which
represents the estimated value of the mortgage servicing rights. This allocation
is in addition to the gain from mortgage servicing rights that is recorded on
loans sold in the secondary market, as permitted under GAAP. The amortization of
the mortgage servicing rights created by this allocation is charged-back to the
mortgage banking profit center over the estimated life of the loans.
LOAN SERVICING FEES In accordance with GAAP, loan servicing
fee income is not recorded on loans held for investment. However, for segment
reporting purposes, the mortgage banking profit center receives an income
allocation for the services it performs for the Corporation's residential,
commercial real estate, and consumer loan portfolios. This allocation is in
addition to the service fee income that the profit center receives on loans
serviced for third-parties, as recorded in the Corporation's Consolidated
Statement of Operations. The aforementioned loan portfolios are charged with the
offsetting servicing cost.
PROVISION FOR LOAN AND REAL ESTATE LOSSES For segment
reporting purposes, the Corporation disregards provisions for loan and real
estate losses recorded under GAAP. Rather, actual charge-off (recovery) activity
is charged (credited) to each profit center in the period it occurs.
INTANGIBLE ASSETS The amortization of goodwill and certain
other intangible assets is disregarded for segment reporting purposes.
INCOME TAXES In general, a standard income tax rate of
approximately 41% is used for segment reporting purposes. However, the income
tax benefit associated with assets held in Nevada by FCHI, the Bank's
wholly-owned investment subsidiary, is allocated to the profit centers that own
such assets. This results in a lower effective income tax rate, or even a
negative rate, for such profit centers.
NON-GAAP ADJUSTMENTS TO FINANCIAL CONDITION Allowances for
losses on loans and real estate and security valuation allowances are added to
and/or excluded from assets of the profit centers. In addition, an estimated
value for mortgage servicing rights not recorded under GAAP is estimated and
added to the assets of the mortgage banking profit center. For each of these
adjustments, a corresponding amount is added to or excluded from equity prior to
the proportionate allocation of equity to the profit centers, as previously
described. The amount added to or excluded from equity is net of the estimated
income tax effect.
SEGMENT PROFIT (LOSS) STATEMENTS AND OTHER INFORMATION The following
tables contain profit (loss) statements for each of the Corporation's reportable
segments for the years ended December 31, 2000, 1999, and 1998 (1999 is
presented on both pages to facilitate its comparison with 2000 and 1998). In
addition to the after-tax performance of profit centers, management of the
Corporation closely monitors the net cost to acquire and maintain deposit
liabilities (as defined elsewhere in this footnote). The net cost to acquire and
maintain deposit liabilities was 1.15%, 1.13%, and 1.33% of average deposit
liabilities outstanding during the years ended December 31, 2000, 1999, and
1998, respectively.
56
58
LOANS HELD FOR INVESTMENT
---------------------------------------------------
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL
YEAR ENDED DECEMBER 31, 2000 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION
- --------------------------------------------------------------------------------------------------
Interest income $640,642 $55,557,266 $34,471,809 $26,081,871 $17,129,748
Interest expense 2,092,805 38,933,611 20,929,687 14,991,089 7,730,662
Net cost to acquire and maintain - - - - -
deposit liabilities 384,125 3,530,128 4,771,977 3,421,079 2,173,040
- --------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (1,836,288) 13,093,527 8,770,145 7,669,703 7,226,046
Net loan charge-offs (recoveries) - 52,920 - 598,249 32,827
- --------------------------------------------------------------------------------------------------
Net interest income
(expense) (1,836,288) 13,040,607 8,770,145 7,071,454 7,193,219
Non-interest income 19,735,764 - 52,984 1,614,005 215,988
Non-interest expense 11,794,513 2,720,901 1,245,783 2,364,348 807,099
- --------------------------------------------------------------------------------------------------
Profit (loss) before taxes 6,104,963 10,319,706 7,577,346 6,321,111 6,602,108
Income tax expense (benefit) 2,474,953 3,552,668 3,071,856 2,562,578 2,676,495
- --------------------------------------------------------------------------------------------------
Segment profit (loss) $3,630,010 $6,767,038 $4,505,490 $3,758,533 $3,925,613
==================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- --------------------------------------------------------------------------------------------------
Average assets $44,031 $787,802 $457,302 $327,067 $207,454
==================================================================================================
Total assets at end of period $45,873 $798,635 $488,638 $362,561 $205,246
==================================================================================================
LOANS HELD FOR INVESTMENT
---------------------------------------------------
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL
YEAR ENDED DECEMBER 31, 1999 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION
- --------------------------------------------------------------------------------------------------
Interest income $3,133,892 $38,055,845 $28,001,302 $19,869,080 $14,288,948
Interest expense 3,469,150 23,866,100 15,071,889 10,387,845 6,913,737
Net cost to acquire and
maintain deposit liabilities 438,403 4,132,294 3,757,215 2,593,363 1,958,049
- --------------------------------------------------------------------------------------------------
Net interest income
(expense) before charge-offs (773,661) 10,057,451 9,172,197 6,887,872 5,417,162
Net loan charge-offs (recoveries) - (70,508) - 367,330 26,031
- --------------------------------------------------------------------------------------------------
Net interest income (expense) (773,661) 10,127,959 9,172,197 6,520,542 5,391,131
Non-interest income 19,247,738 - 90,903 1,253,961 103,514
Non-interest expense 12,313,093 1,806,834 1,288,957 1,993,125 829,887
- --------------------------------------------------------------------------------------------------
Profit (loss) before taxes 6,160,984 8,321,125 7,974,144 5,781,378 4,664,758
Income tax expense (benefit) 2,497,663 2,772,128 3,232,718 2,343,771 1,891,093
- --------------------------------------------------------------------------------------------------
Segment profit (loss) $3,663,321 $5,548,997 $4,741,426 $3,437,607 $2,773,665
==================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- --------------------------------------------------------------------------------------------------
Average assets $78,634 $573,994 $372,793 $256,956 $194,008
==================================================================================================
Total assets at end of period $41,090 $729,153 $416,192 $286,969 $202,440
==================================================================================================
INVESTMENT SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS & MORTGAGE OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 2000 SECURITIES SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------
Interest income $26,901,499 - $653,353 (1) $161,436,188
Interest expense 19,693,190 $363,991 (2,839,113) (1) 101,895,922
Net cost to acquire and maintain -
deposit liabilities 3,386,737 3,346 (17,670,432) -
- -----------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs 3,821,572 (367,337) 17,670,432 3,492,466 59,540,265
Net loan charge-offs (recoveries) - - 324,784 (2) 1,008,780
- -----------------------------------------------------------------------------------------------------------
Net interest income
(expense) 3,821,572 (367,337) 17,670,432 3,167,682 58,531,486
Non-interest income - (4,546) 22,953,049 (8,934,693) (3) 35,632,550
Non-interest expense 348,950 294,315 40,623,481 (1,949,058) (3) 58,250,331
- -----------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 3,472,622 (666,198) - (3,817,953) 35,913,705
Income tax expense (benefit) 51,807 (218,183) (1,402,345) 12,769,829
- -----------------------------------------------------------------------------------------------------------
Segment profit (loss) $3,420,815 ($448,015) - ($2,415,608) $23,143,876
===========================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- -----------------------------------------------------------------------------------------------------------
Average assets $411,464 $320 - ($11,466) (4) $2,223,974
===========================================================================================================
Total assets at end of period $456,814 $633 - ($5,674) (4) $2,352,726
===========================================================================================================
INVESTMENT SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS & MORTGAGE OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1999 SECURITIES SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------
Interest income $26,134,167 - $587,365 (1) $130,070,598
Interest expense 18,258,391 $236,384 (2,250,103) (1) 75,953,392
Net cost to acquire and
maintain deposit liabilities 3,071,167 4,489 (15,954,980) -
- -----------------------------------------------------------------------------------------------------------
Net interest income
(expense) before charge-offs 4,804,609 (240,873) 15,954,980 2,837,468 54,117,206
Net loan charge-offs (recoveries) - - 64,168 (2) 387,021
- -----------------------------------------------------------------------------------------------------------
Net interest income (expense) 4,804,609 (240,873) 15,954,980 2,773,300 53,730,185
Non-interest income - 312,958 21,209,088 (7,040,308) (3) 35,177,854
Non-interest expense 164,318 371,693 37,164,068 (1,632,527) (3) 54,299,449
- -----------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 4,640,291 (299,609) - (2,634,481) 34,608,590
Income tax expense (benefit) 591,222 (23,536) (1,137,679) 12,167,380
- -----------------------------------------------------------------------------------------------------------
Segment profit (loss) $4,049,069 ($276,073) - ($1,496,802) $22,441,210
===========================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- -----------------------------------------------------------------------------------------------------------
Average assets $420,172 $446 - ($8,934) (4) $1,888,069
===========================================================================================================
Total assets at end of period $417,218 $308 - ($8,816) (4) $2,084,554
===========================================================================================================
(1) Consists principally of interest income and expense adjustments related to
late charges and implied earnings on custodial and escrow accounts.
(2) In general, the Corporation records actual loan and real estate charge-off
(recovery) activity against each profit center for segment reporting
purposes.
(3) Consists principally of non-GAAP adjustments related to loan origination
fees and costs, mortgage servicing rights, and loan servicing fees. The
offsets for the adjustments described in (1), above, are also included in
non-interest income.
(4) Consists of allowances for loss on loans and real estate and security
valuation allowances that are disregarded for segment reporting purposes.
Also includes mortgage servicing rights that are not recorded under GAAP,
but are recorded for segment reporting purposes.
57
59
LOANS HELD FOR INVESTMENT
---------------------------------------------------
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL
YEAR ENDED DECEMBER 31, 1999 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION
- --------------------------------------------------------------------------------------------------
Interest income $3,133,892 $38,055,845 $28,001,302 $19,869,080 $14,288,948
Interest expense 3,469,150 23,866,100 15,071,889 10,387,845 6,913,737
Net cost to acquire and
maintain deposit liabilities 438,403 4,132,294 3,757,215 2,593,363 1,958,049
- --------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (773,661) 10,057,451 9,172,197 6,887,872 5,417,162
Net loan charge-offs (recoveries) - (70,508) - 367,330 26,031
- --------------------------------------------------------------------------------------------------
Net interest income (expense) (773,661) 10,127,959 9,172,197 6,520,542 5,391,131
Non-interest income 19,247,738 - 90,903 1,253,961 103,514
Non-interest expense 12,313,093 1,806,834 1,288,957 1,993,125 829,887
- --------------------------------------------------------------------------------------------------
Profit (loss) before taxes 6,160,984 8,321,125 7,974,144 5,781,378 4,664,758
Income tax expense (benefit) 2,497,663 2,772,128 3,232,718 2,343,771 1,891,093
- --------------------------------------------------------------------------------------------------
Segment profit (loss) $3,663,321 $5,548,997 $4,741,426 $3,437,607 $2,773,665
==================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- --------------------------------------------------------------------------------------------------
Average assets $78,634 $573,994 $372,793 $256,956 $194,008
==================================================================================================
Total assets at end of period $41,090 $729,153 $416,192 $286,969 $202,440
==================================================================================================
LOANS HELD FOR INVESTMENT
---------------------------------------------------
SEGMENT PROFIT (LOSS) STATEMENTS MORTGAGE COMMERCIAL
YEAR ENDED DECEMBER 31, 1998 BANKING RESIDENTIAL REAL ESTATE CONSUMER EDUCATION
- --------------------------------------------------------------------------------------------------
Interest income $4,503,290 $33,496,128 $25,066,823 $18,321,380 $13,501,027
Interest expense 4,617,955 20,614,365 14,031,760 10,076,044 7,316,551
Net cost to acquire and
maintain deposit liabilities 547,379 4,332,138 3,635,592 2,612,673 2,077,845
- --------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs (662,044) 8,549,625 7,399,471 5,632,663 4,106,631
Net loan charge-offs (recoveries) - 17,082 203,379 274,597 32,515
- --------------------------------------------------------------------------------------------------
Net interest income (expense) (662,044) 8,532,543 7,196,092 5,358,066 4,074,116
Non-interest income 22,060,254 - 55,367 1,036,406 95,122
Non-interest expense 13,141,292 1,877,465 1,415,221 1,793,030 818,311
- --------------------------------------------------------------------------------------------------
Profit (loss) before taxes 8,256,918 6,655,078 5,836,238 4,601,442 3,350,927
Income tax expense (benefit) 3,347,355 2,530,646 2,366,011 1,865,425 1,358,466
- --------------------------------------------------------------------------------------------------
Segment profit (loss) $4,909,563 $4,124,432 $3,470,227 $2,736,017 $1,992,461
==================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- --------------------------------------------------------------------------------------------------
Average assets $98,039 $460,016 $310,633 $223,066 $177,403
==================================================================================================
Total assets at end of period $90,536 $499,930 $342,434 $238,889 $192,224
==================================================================================================
INVESTMENT SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS & MORTGAGE OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1999 SECURITIES SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
Interest income $26,134,167 - $587,365 (1) $130,070,598
Interest expense 18,258,391 $236,384 (2,250,103) (1) 75,953,392
Net cost to acquire and
maintain deposit liabilities 3,071,167 4,489 (15,954,980) -
- ---------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs 4,804,609 (240,873) 15,954,980 2,837,468 54,117,206
Net loan charge-offs (recoveries) - - 64,168 (2) 387,021
- ---------------------------------------------------------------------------------------------------------
Net interest income (expense) 4,804,609 (240,873) 15,954,980 2,773,300 53,730,185
Non-interest income - 312,958 21,209,088 (7,040,308) (3) 35,177,854
Non-interest expense 164,318 371,693 37,164,068 (1,632,527) (3) 54,299,449
- ---------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 4,640,291 (299,609) - (2,634,481) 34,608,590
Income tax expense (benefit) 591,222 23,536) (1,137,679) 12,167,380
- ---------------------------------------------------------------------------------------------------------
Segment profit (loss) $4,049,069 ($276,073) - ($1,496,802) $22,441,210
=========================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------
Average assets $420,172 $446 - ($8,934) (4) $1,888,069
=========================================================================================================
Total assets at end of period $417,218 $308 - ($8,816) (4) $2,084,554
=========================================================================================================
INVESTMENT SUPPORT
SEGMENT PROFIT (LOSS) STATEMENTS & MORTGAGE OTHER DEPARTMENT NON-GAAP
YEAR ENDED DECEMBER 31, 1998 SECURITIES SEGMENTS ALLOCATIONS ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
Interest income $23,198,449 - $580,771 (1) $118,667,868
Interest expense 17,605,864 $75,070 (2,880,415) (1) 71,457,194
Net cost to acquire and
maintain deposit liabilities 3,118,890 8,242 (16,332,759) -
- ---------------------------------------------------------------------------------------------------------
Net interest income (expense)
before charge-offs 2,473,695 (83,312) 16,332,759 3,461,186 47,210,674
Net loan charge-offs (recoveries) - - (234,461) (2) 293,112
- ---------------------------------------------------------------------------------------------------------
Net interest income (expense) 2,473,695 (83,312) 16,332,759 3,695,647 46,917,562
Non-interest income - 1,432,728 15,254,216 (8,574,023) (3) 31,360,070
Non-interest expense 177,015 326,783 31,586,975 (3,539,569) (3) 47,596,523
- ---------------------------------------------------------------------------------------------------------
Profit (loss) before taxes 2,296,680 1,022,633 - (1,338,807) 30,681,109
Income tax expense (benefit) (45,191) 698,577 (864,314) 11,256,975
- ---------------------------------------------------------------------------------------------------------
Segment profit (loss) $2,341,871 $324,056 - ($474,493) $19,424,134
=========================================================================================================
BALANCE SHEET INFORMATION
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------
Average assets $374,527 $704 - ($10,354) (4) $1,634,034
=========================================================================================================
Total assets at end of period $426,793 $1,241 - ($5,543) (4) $1,786,504
=========================================================================================================
(1) Consists principally of interest income and expense adjustments related to
late charges and implied earnings on custodial and escrow accounts.
(2) In general, the Corporation records actual loan and real estate charge-off
(recovery) activity against each profit center for segment reporting
purposes.
(3) Consists principally of non-GAAP adjustments related to loan origination
fees and costs, mortgage servicing rights, and loan servicing fees. The
offsets for the adjustments described in (1), above, are also included in
non-interest income.
(4) Consists of allowances for loss on loans and real estate and security
valuation allowances that are disregarded for segment reporting purposes.
Also includes mortgage servicing rights that are not recorded under GAAP,
but are recorded for segment reporting purposes.
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NOTE 14--PARENT COMPANY ONLY FINANCIAL INFORMATION
DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION: 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Cash in bank $52,943 $12,448
Interest-bearing deposits with subsidiary bank 3,120,979 3,249
Investment in subsidiary 145,763,550 132,226,303
Other assets 248,334 233,226
- ---------------------------------------------------------------------------------------------------------------------
Total assets $149,185,806 $132,475,226
- ---------------------------------------------------------------------------------------------------------------------
Other borrowings $2,601,542 $5,200,000
Other liabilities 34,769 -
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,636,311 5,200,000
- ---------------------------------------------------------------------------------------------------------------------
Common stock 1,994,163 1,994,163
Additional paid-in capital 34,540,064 34,540,064
Retained earnings 122,921,606 106,929,097
Treasury stock, at cost (15,127,142) (14,388,670)
Unearned restricted stock (142,083) (591,183)
Non-owner adjustments to equity, net 2,362,887 (1,208,245)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 146,549,495 127,275,226
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $149,185,806 $132,475,226
=====================================================================================================================
=====================================================================================================================
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS: 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Other income $40,539 $21,815 $78,434
Other expense 750,067 688,173 522,190
- ---------------------------------------------------------------------------------------------------------------------
Loss before income taxes and equity in earnings of subsidiary (709,528) (666,358) (443,756)
Income tax benefit 248,335 233,225 155,314
- ---------------------------------------------------------------------------------------------------------------------
Loss before equity in earnings of subsidiary (461,193) (433,133) (288,442)
Equity in earnings of subsidiary 23,605,069 22,874,343 19,712,576
- ---------------------------------------------------------------------------------------------------------------------
Net income $23,143,876 $22,441,210 $19,424,134
=====================================================================================================================
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS: 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Net income $23,143,876 $22,441,210 $19,424,134
Equity in earnings of subsidiary (23,605,069) (22,874,343) (19,712,576)
Change in income taxes and other accruals and prepaids 19,661 (93,025) 63,957
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by operations (441,532) (526,158) (224,485)
- ---------------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest-bearing deposits with subsidiary bank (3,117,730) 3,000,309 (245,910)
Dividends received from subsidiary 14,600,000 13,500,000 11,500,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 11,482,270 16,500,309 11,254,090
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in other borrowings (2,598,458) 2,250,000 (50,000)
Dividends paid to shareholders (7,699,035) (6,287,822) (5,001,135)
Purchase of treasury stock (1,708,663) (15,930,336) (7,356,875)
Other, net 1,005,913 3,962,487 1,017,106
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (11,000,243) (16,005,671) (11,390,904)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash in bank 40,495 (31,520) (361,299)
Cash at beginning of period 12,448 43,968 405,267
- ---------------------------------------------------------------------------------------------------------------------
Cash in bank at end of period $52,943 $12,448 $43,968
=====================================================================================================================
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REPORT OF MANAGEMENT
The management of First Federal Capital Corp has prepared the
accompanying financial statements and is responsible for their integrity and
objectivity. The statements, which include amounts that are based on
management's best estimates and judgements, have been prepared in conformity
with generally accepted accounting principles and are free of material
misstatement. Management also prepared the other information in the annual
report on Form 10-K and is responsible for its accuracy and consistency with the
financial statements.
The Corporation maintains a system of internal control over financial
reporting, which is designed to provide reasonable assurance to the
Corporation's management and Board of Directors regarding the preparation of
reliable published annual and interim financial statements. The system contains
self-monitoring mechanisms, and actions are taken to correct deficiencies as
they are identified. However, even an effective internal control system, no
matter how well designed, has inherent limitations--including the possibility of
circumvention or overriding of controls--and therefore can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, internal control system effectiveness may vary
over time.
The Corporation assessed its internal control system as of December 31,
2000, in relation to criteria for effective internal control over the
preparation of its published annual and interim financial statements described
in "Internal Control--Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
the Corporation believes that, as of December 31, 2000, its system of internal
control over the preparation of its published annual and interim financial
statements met those criteria.
/s/Thomas W. Schini /s/Jack C. Rusch /s/Michael W. Dosland
Thomas W. Schini Jack C. Rusch Michael W. Dosland
Chairman of the Board President and Chief Senior Vice President and
Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated statements of financial condition
of First Federal Capital Corp as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those statements require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Federal
Capital Corp at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP SIGNATURE
Milwaukee, Wisconsin
January 24, 2001
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62
SUPPLEMENTARY DATA
Quarterly Financial Information (Unaudited)
Dollars in thousands, except for per DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH
share amounts 2000 2000 2000 2000 1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------
Interest on loans $35,518 $35,146 $33,135 $30,656 $28,587 $26,303 $25,073 $23,916
Interest on mortgage-related securities 7,087 6,033 5,548 5,848 5,934 6,049 6,069 5,676
Interest and dividends on investments 687 647 556 576 498 385 439 1,140
- --------------------------------------------------------------------------------------------------------------------
Total interest income 43,292 41,826 39,239 37,079 35,020 32,738 31,581 30,733
- --------------------------------------------------------------------------------------------------------------------
Interest on deposits 20,933 19,686 17,313 15,656 15,237 14,938 14,697 15,675
Interest on borrowings 7,563 7,133 6,926 6,685 5,131 4,021 3,425 2,828
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 28,496 26,819 24,240 22,341 20,368 18,960 18,122 18,503
- --------------------------------------------------------------------------------------------------------------------
Net interest income 14,796 15,007 14,999 14,738 14,652 13,778 13,458 12,229
Provision for loan losses 402 302 112 192 86 68 77 156
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision 14,394 14,704 14,887 14,546 14,565 13,710 13,381 12,074
- --------------------------------------------------------------------------------------------------------------------
Gain on sale of loans 1,129 812 506 290 785 810 2,041 3,590
Gain on sale of real estate investments 1,189 - - - - - - -
Other non-interest income 8,246 8,244 7,961 7,256 7,515 7,610 7,348 5,479
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 10,565 9,056 8,467 7,545 8,300 8,421 9,389 9,069
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 14,991 14,765 14,565 13,930 13,885 13,793 13,184 13,437
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,968 8,996 8,790 8,161 8,979 8,338 9,586 7,705
Income tax expense 3,542 3,205 3,124 2,898 3,140 2,914 3,420 2,694
- --------------------------------------------------------------------------------------------------------------------
Net Income $6,426 $5,790 $5,665 $5,262 $5,840 $5,424 $6,166 $5,011
====================================================================================================================
Diluted earnings per share $0.34 $0.32 $0.30 $0.29 $0.30 $0.29 $0.32 $0.26
====================================================================================================================
Dividends paid per share $0.11 $0.11 $0.11 $0.09 $0.09 $0.09 $0.09 $0.07
====================================================================================================================
Stock price at end of period $14.50 $12.31 $11.06 $11.69 $14.63 $15.50 $14.75 $11.75
====================================================================================================================
High stock price during period $14.88 $12.44 $12.75 $14.63 $16.13 $18.00 $15.88 $16.38
====================================================================================================================
Low stock price during period $10.88 $10.63 $10.13 $10.44 $12.56 $14.75 $11.75 $11.75
====================================================================================================================
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
61
63
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
sections entitled "Matters to be Voted on at the Annual Meeting--Matter 1.
Election of Directors" and "Executive Officers Who Are Not Directors" in the
Proxy Statement of the Corporation dated March 21, 2001.
ITEM 11--EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
section entitled "Compensation of Executive Officers and Directors" in the Proxy
Statement of the Corporation dated March 21, 2001.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
section entitled "Beneficial Ownership of Common Stock by Certain Beneficial
Owners and Management" in the Proxy Statement of the Corporation dated March 21,
2001.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
section entitled "Indebtedness of Management and Certain Transactions" in the
Proxy Statement of the Corporation dated March 21, 2001.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following financial statements are included herein under Part II, Item
8, "Financial Statements and Supplementary Data":
Consolidated Statements of Condition at December 31, 2000 and 1999
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2000
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2000
Notes to Audited Consolidated Financial Statements
Report of Management
Report of Independent Auditors
(2) All financial statement schedules required under this item are omitted
because the required information is either not applicable or the required
information is included in the Audited Consolidated Financial Statements or in
the notes thereto.
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64
(3) Exhibit Index.
No. Exhibit Description
- --- -------------------
3.1 Articles of Incorporation, as amended (7)
3.2 Bylaws, as amended (6)
4.1 Specimen stock certificate (1)
4.2 Rights Agreement, dated as of January 24, 1995 (5)
10.1 1989 Stock Incentive Plan (1)
10.2 1989 Directors' Stock Option Plan, as amended (2)
10.3 1992 Directors' Stock Option Plan, as amended (7)
10.4 1992 Stock Option and Incentive Plan (3)
10.5 Rock Financial Corp. 1992 Stock Option and Incentive Plan (4)
10.6 1997 Stock Option and Incentive Plan (6)
10.7 Employee Stock Ownership Plan (1)
10.8 Employment agreements, as amended, between the Corporation and the Bank
and the following executive officers:
a) Thomas W. Schini--Fiscal 2000 Agreement (7)
b) Thomas W. Schini--Fiscal 2001 Agreement (7)
c) Bradford R. Price (7)
d) Jack C. Rusch (7)
e) Joseph M. Konradt (7)
f) Milne J. Duncan (7)
g) Robert P. Abell (7)
10.9 First Federal of La Crosse Directors' Deferred Compensation Plan (1)
10.10 First Federal of La Crosse Annual Incentive Bonus Plan (1)
10.11 First Federal of La Crosse Incentive Bonus Plan for Group Life
Insurance (1)
10.12 First Federal of Madison Deferred Compensation Plan for Directors (1)
11.1 Computation of Earnings Per Share--Reference is made to Note 1 of the
Corporation's Audited Consolidated Financial Statements, included
herein under Part II, Item 8, "Financial Statements and Supplementary
Data"
13.1 2000 President's Message (8)
21.1 Subsidiaries of the Registrant--Reference is made to Part I, Item 1,
"Business--Subsidiaries"
23.1 Consent of Ernst & Young LLP (7)
99.1 2000 Proxy Statement (7)
(1) Incorporated herein by reference to exhibits filed with the Corporation's
Form S-1 Registration Statement declared effective by the SEC on September
8, 1989 (Registration No. 33-98298-01).
(2) Incorporated herein by reference to exhibits filed with the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1989, filed with
the SEC on March 30, 1990.
(3) Incorporated herein by reference to the Corporation's Proxy Statement dated
March 11, 1992.
(4) Incorporated herein by reference to exhibits filed with the Corporation's
Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration
Statement filed with the SEC on December 26, 1995 (Registration No.
33-98298-01)
(5) Incorporated herein by reference to the Corporation's Registration Statement
on Form 8-A filed with the SEC on January 27, 1995.
(6) Incorporated herein by reference to the exhibits filed with the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1997, filed with the SEC on March 20, 1998.
(7) Filed herewith.
(8) Filed in paper format pursuant to Rule 101(b) of Regulation S-T.
(b) The Corporation filed no reports on Form 8-K during the fourth quarter of
2000.
(c) Refer to item (a)(3) above for all exhibits filed herewith.
(d) Refer to items (a)(1) and (2) above for financial statements required under
this item.
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65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
March 6, 2001 By: /s/Jack C. Rusch
Jack C. Rusch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas W. Schini March 6, 2001
Thomas W. Schini
Chairman of the Board
/s/ Dale A. Nordeen March 6, 2001
Dale A. Nordeen
Vice Chairman of the Board
/s/ Jack C. Rusch March 6, 2001
Jack C. Rusch
President, Chief Executive Officer, and
Director (principal executive officer)
/s/ Marjorie A. Davenport March 6, 2001
Marjorie A. Davenport
Director
/s/ Henry C. Funk March 6, 2001
Henry C. Funk
Director
/s/ John F. Leinfelder March 6, 2001
John F. Leinfelder
Director
/s/ Richard T. Lommen March 6, 2001
Richard T. Lommen
Director
/s/ Patrick J. Luby March 6, 2001
Patrick J. Luby
Director
64
66
/s/ David C. Mebane March 6, 2001
David C. Mebane
Director
/s/ Phillip J. Quillin March 6, 2001
Phillip J. Quillin
Director
/s/ Don P. Rundle March 6, 2001
Don P. Rundle
Director
/s/ Michael W. Dosland March 6, 2001
Michael W. Dosland
Senior Vice president and
Chief Financial Officer
(principal financial and
accounting officer)
65