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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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________________to_______________________
Commission file number 0-18046
FIRST FEDERAL CAPITAL CORP
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1651288
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
605 STATE STREET
LA CROSSE, WISCONSIN 54601
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (608) 784-8000
Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period as the Registrant
has been subject to such requirements), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 25, 1997, the aggregate value of the 6,122,044 shares of Common
Stock of the Registrant that were outstanding on such date was approximately
$180.6 million. Excluding 757,696 shares held by all directors and officers of
the Registrant, the aggregate value of the Common Stock of the Registrant was
approximately $158.2 million. These figures are based on the closing price of
$29.50 per share of the Registrant's Common Stock on February 25, 1997.
Number of shares of Common Stock outstanding as of February 25, 1997: 6,122,044
(excludes 522,300 shares held as treasury stock)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1996 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
Item 1 Business .............................................. 2
Item 2 Properties ............................................ 14
Item 3 Legal Proceedings ..................................... 14
Item 4 Submission of Matters to Vote of Security Holders ..... 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................... 14
Item 6 Selected Financial Data ............................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 16
Item 8 Financial Statements and Supplementary Data ........... 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 53
PART III
Item 10 Directors and Executive Officers of the Registrant .... 53
Item 11 Executive Compensation ................................ 53
Item 12 Security Ownership of Certain Beneficial Owners and
Management ............................................ 53
Item 13 Certain Relationships and Related Transactions ........ 53
PART IV
Item 14 Exhibit Index, Financial Statement Schedules, and
Reports on Form 8-K ................................... 53
SIGNATURES ....................................................... 55
EXHIBITS ....................................................... 57
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The discussion in this report includes certain forward-looking
statements based on current management 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.
PART I
ITEM 1 -- BUSINESS
This section of the report contains general information about the
Corporation, the Bank, and the Bank's wholly-owned subsidiaries (together "the
reporting group"). Included in this section is information regarding the
reporting group's markets and business environments, significant operating and
accounting policies, practices, and procedures, as well as its competitive and
regulatory environments. This section should be read in conjunction with Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and Part II, Item 8, "Financial Statements and
Supplementary Data", as well as other sections of the report.
FIRST FEDERAL CAPITAL CORP
First Federal Capital Corp (the "Corporation") was incorporated under
the laws of the State of Wisconsin in July 1989. In November 1989, the
Corporation became the savings and loan holding company for First Federal
Savings Bank La Crosse-Madison, La Crosse, Wisconsin (the "Bank"), upon the
Bank's conversion from mutual to stock form. The Corporation currently owns
all of the outstanding capital stock of the Bank, which is the principal asset
of the Corporation. The Corporation's principal office is located at 605 State
Street, La Crosse, Wisconsin, 54601, and its telephone number is (608)
784-8000.
FIRST FEDERAL SAVINGS BANK LA CROSSE-MADISON
The Bank was founded in 1934 and is a federally-chartered,
federally-insured, savings bank headquartered in La Crosse, Wisconsin. The
Bank's primary business is attracting deposits from the general public through
46 retail banking facilities, including one that opened in January 1997 and one
that was closed in February 1997. Such deposits are principally used to
originate single-family residential loans from eleven loan production offices
as well as eight retail banking facilities where mortgage applications are
accepted. The Bank also originates consumer, education, and commercial real
estate loans.
The Bank's primary market areas for conducting such activities consist
of the metropolitan areas of La Crosse, Madison, Appleton, Beloit, Eau Claire,
Hudson, Janesville, and Wausau, Wisconsin, and surrounding areas, as well as
contiguous counties in Iowa and Minnesota. The Bank maintains six retail
banking facilities in the La Crosse metropolitan area (including its corporate
headquarters), 13 in the Madison metropolitan area, five in the city of Eau
Claire, and two in the cities of Appleton, Beloit, Hudson, Janesville, and
Neenah, Wisconsin. The Bank also maintains one retail banking facility in the
cities of Fond du Lac, Fort Atkinson, Green Bay, Kimberly, Manitowoc, Monroe,
Oshkosh, Prairie du Chien, Richland Center, River Falls, Sheboygan, and
Viroqua, Wisconsin, as well as separate loan production offices in Janesville
and Wausau, Wisconsin.
The Bank also invests in securities issued by the U.S. government and
its agencies and in other investment securities such as corporate bonds and
notes, collateralized mortgage obligations ("CMOs"), mortgage- backed
securities ("MBSs"), and mutual funds, as permitted by federal laws and
regulations.
The Bank is subject to comprehensive regulation and examination by the
Office of Thrift Supervision ("OTS"), as 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
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the maximum extent permitted by law. The Bank is also a member of the Federal
Home Loan Bank of Chicago ("FHLB"), which is one of the 12 regional banks which
comprise the Federal Home Loan Bank System ("FHLB System").
The Bank's principal executive offices are located at 605 State Street,
La Crosse, Wisconsin, 54601, and its telephone number is (608) 784-8000.
LENDING ACTIVITIES
GENERAL The principal categories of loans in the Bank's portfolio are
residential real estate loans secured by single-family residences, commercial
real estate loans secured by multi-family residential and commercial real
estate, and consumer loans. Substantially all of the Bank's mortgage loan
portfolio consists of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Veterans Administration ("VA").
A federally-chartered savings institution has general authority to
originate and purchase loans secured by real estate located throughout the
United States. In general, however, the Bank's lending activities have
concentrated on real estate loans secured by properties located in its primary
market areas and within a 300-mile radius of the Bank's headquarters in La
Crosse.
The Bank generally may not make loans to one borrower and related
entities in an aggregate amount which exceeds 15% of its unimpaired capital and
surplus (as defined by regulations).
ORIGINATION AND SALE OF LOANS Applications for residential mortgage
loans are obtained by employees whose compensation is primarily
commission-based, who work at eleven loan origination offices of the Bank (nine
of which are co-located with deposit taking offices), as well as commissioned
and non-commissioned employees who work at eight deposit-taking offices of the
Bank at which such an application may be submitted.
Applications for multi-family residential and commercial real estate
loans are accepted at the Bank's main office in La Crosse and at its downtown
Madison and Beloit offices, as well as one of its Appleton offices. All
underwriting of mortgage loans is done at the Bank's main office in La Crosse
or at one of the Bank's offices in the Madison area. Applications for consumer
loans may be taken at all of the deposit-taking offices of the Bank. The
majority of consumer loans are approved in La Crosse.
The Bank is actively involved in securitizing the long-term,
fixed-rate, single-family residential loans it originates through programs
sponsored by the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal National Mortgage Association ("FNMA"). Most of the loans securitized
in this manner are subsequently sold in the secondary market. The Bank
generally sells these loans at the time they are originated in order to
decrease the amount of such loans in its loan portfolio. 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. Sales of loans provide additional funds for lending and other
purposes and generally have been under terms which do not provide any recourse
to the Bank by the purchaser.
In general, the Bank continues to collect principal and interest
payments on loans which it sells to third parties, to inspect the collateral,
to make certain insurance and tax advances on behalf of borrowers, and to
otherwise service such loans. The Bank pays the purchaser of the loans an
agreed-upon yield on the loans, which is generally less than the interest
agreed to be paid by the borrower. The difference is retained by the Bank and
recognized as service fee income over the lives of the loans. The Bank also
purchases mortgage servicing rights from third parties for which it receives an
agreed-upon fee and for which it performs substantially the same services as it
performs on its own originations. For additional discussion refer to Note 1 of
the Corporation's Audited Consolidated Financial Statements, included herein
under Part II, Item 8, "Financial Statements and Supplementary Data".
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SINGLE-FAMILY RESIDENTIAL AND CONSTRUCTION LOANS Historically, savings
institutions such as the Bank have concentrated their lending activities on the
origination of loans secured by first mortgage liens on existing single-family
residences.
Since the early 1980s, the Bank has emphasized the retention of only
single-family residential mortgage loans which provide for periodic adjustments
to the interest rate ("adjustable-rate mortgage loans"). The adjustable-rate
mortgage loans originated by the Bank 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 U.S. government securities adjusted to a constant
maturity of one or two years, as appropriate. A portion of these loans may
guarantee the borrower a fixed rate for the first three years of the loan's
term. Furthermore, most of these loans have annual interest rate change limits
ranging from 1% to 2% and maximum lifetime interest rates ranging from 11% to
16%. The Bank has not engaged in the practice of using a cap on loan payments,
which would allow a borrower's loan balance to increase rather than decrease,
resulting in negative amortization. The Bank occasionally offers discounts on
the interest rates it offers on its adjustable-rate mortgage loans during the
first one to three years of the loan, which has the effect of reducing a
borrower's payment during such years. However, the Bank complies with FNMA and
FHLMC guidelines in determining a borrower's ability to repay such loans.
The Bank's adjustable-rate mortgage loan agreements permit some
borrowers to convert their adjustable-rate loans to fixed-rate loans under
certain circumstances in exchange for a modest fee. Upon conversion, such
loans are generally sold in the secondary market.
Adjustable-rate mortgage loans decrease the Bank's exposure to the
risks associated with changes in interest rates, but involve other risks
because as interest rates increase the underlying payments by the borrower
increase, thus increasing the potential for default. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. These risks have not had any adverse effect on the Bank to
date, although no assurances can be made with respect to future periods.
The Bank continues to originate long-term, fixed-rate mortgage loans in
order to provide a full range of products to its customers, but only under
terms, conditions and documentation which make such loans eligible for sale to
the FHLMC, the FNMA, and other institutional investors. Although these loans
generally provide for repayments of principal over a fixed period of 15 to 30
years, it is the Bank's experience that because of prepayments and due-on-sale
clauses, such loans generally remain outstanding for a substantially shorter
period of time.
Single-family residential loans with principal amounts up to $214,600
may generally be approved by the Bank's staff loan underwriters. The Bank's
underwriting supervisor may approve single-family residential loans with
principal amounts up to $250,000. Loans between $250,000 and $500,000 must be
approved by either the Vice President responsible for mortgage loan processing,
closing, and underwriting, the Executive Vice President of the residential
lending division, or the President of the Bank. All loans greater than
$500,000 must receive final approval from the Bank's Board of Directors.
The Bank's general policy is to lend up to 80% of the appraised value
of the property securing a loan (referred to as the loan-to-value ratio). The
Bank occasionally will lend more than 80% of the appraised value of the
property, but will obtain private mortgage insurance on behalf of the borrower
on the portion of the principal amount of the loan that exceeds 80% of the
security property's value. All conventional loans with loan-to-value ratios
greater than 90% and without mortgage insurance must be approved by the Board
of Directors of the Bank.
The Bank evaluates the collateral of its residential real estate loans
using documentation that complies with applicable regulations. For most of its
loans the Bank obtains current appraisals performed by state licensed
appraisers. However, exceptions occur in the case of (i) streamlined,
rate-reduction refinance loans for which the Bank relies on appraisals in the
existing loan files (this procedure is consistent with the guidelines
promulgated by FNMA and FHLMC), and (ii) lot loans less than $100,000 for which
the Bank relies on the most recent municipal assessment and its knowledge and
experience in the respective market.
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The Bank obtains title insurance policies on most first mortgage real
estate loans it originates. If title insurance is not obtained or is
unavailable, the Bank obtains an abstract of title and title opinion. Borrowers
must also obtain hazard insurance prior to closing and, when required by
federal regulations, flood insurance. Borrowers may be required to advance
funds, along with each monthly payment of principal and interest, to an escrow
account from which the Bank makes disbursements for items such as real estate
taxes, hazard insurance premiums, and mortgage insurance premiums.
The Bank utilizes the services of a third party, which reviews loan
documents relating to a portion of the Bank's single-family residential loan
originations to test compliance with the Bank's regulatory documentation
requirements.
The Bank also originates loans to individuals to construct
single-family residences. Construction loans may be made without commitments
to purchase the property being constructed and the borrower may not have
take-out commitments for permanent financing on hand at the time of
origination. Construction loans generally have maturities of 6 to 12 to months
and a fixed rate of interest, with payments being made monthly on an
interest-only basis. Construction loans are otherwise underwritten and
approved in the same manner as other single-family residential loans.
Construction loans, however, are generally considered to involve a higher
degree of risk than conventional residential mortgage loans. A lender's risk
of loss on a construction loan is largely dependent on the accuracy of the
initial estimate of the property's value at completion of construction, the
estimated cost of construction, and the borrower's ability to advance
additional construction funds, if necessary.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE, AND COMMERCIAL
CONSTRUCTION LOANS The Bank originates and occasionally purchases
participations in mortgage loans that are secured by existing multi-family
residential and commercial real estate properties. The Bank's multi-family
residential and commercial real estate lending activities (together "commercial
real estate lending") are managed by the Senior Vice President in charge of the
Bank's Commercial Real Estate Lending Division. Pursuant to the Bank's
commercial real estate lending policy, the Bank emphasizes investment in loans
secured by collateral classified as Type A properties, which are to comprise
not less than 80% of the Bank's commercial real estate loan portfolio. Such
properties consist of multi-family residential properties such as apartment
buildings, retail shopping establishments, office buildings, and multi-tenant
industrial buildings. Not more than 20% of the Bank's commercial real estate
portfolio is to include loans secured by collateral classified as Type B
properties, which consist of nursing homes, single-tenant specialized
industrial buildings, hotels and motels, and churches. The Bank's current
policy is not to make any new loans secured by collateral classified as Type C
properties, which include restaurants, recreation facilities, and other special
purpose facilities, although the Bank has made loans secured by such properties
in the past.
Applications for commercial real estate loans are primarily obtained
from previous borrowers, direct contacts by the Bank, and referrals.
Commercial real estate loans are generally amortized over a period ranging from
20 to 30 years, mature in ten years, and have interest rates which are fixed
for one to three years, and thereafter adjust in accordance with a designated
index, subject to ceilings and floors, which generally are negotiated at the
time of origination. Loan-to-value ratios on the Bank's commercial real estate
loans may be as high as 80% for loans secured by Type A properties, but are
limited to ratios of 75% or lower for commercial real estate loans which are
secured by other properties. In addition, as part of the criteria for
underwriting commercial real estate loans, the Bank generally imposes a debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service) of 115% to 120% for loans secured by Type A properties
and 130% to 160% for loans secured by other properties. It is also the Bank's
general policy to obtain personal guarantees of its commercial real estate
loans from the principals of the borrower and, when this cannot be obtained, to
impose more stringent loan-to-value, debt service, and other underwriting
requirements. In general, mortgage loan participations purchased from other
financial institutions are subject to the same underwriting standards as
mortgage loans originated directly by the Bank.
Commercial real estate loans with principal amounts up to $250,000 may
generally be approved by the Bank's Commercial Real Estate Division Manager;
commercial real estate loans over $250,000 and up to $1.0 million require the
approval of the Bank's Senior Loan Committee; loans over $1.0 million and up to
$2.5 million must be approved by the Board of Directors' Loan Committee;
finally, loans with principal amounts over $2.5 million must be approved by the
Board of Directors of the Bank.
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From time to time the Bank originates loans to construct commercial
real estate. Construction loans generally are considered to involve a higher
degree of risk than mortgage loans on completed properties. A lender's risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction, the
estimated cost (including interest) of construction, and the borrower's ability
to advance additional construction funds if that should become necessary. If
the estimate of construction costs proves to be inaccurate, and the borrower is
unable to meet the added costs, the lender may need to advance funds beyond the
amount originally committed to permit completion of the project and protect its
security interest. The Bank's construction lending activities generally are
limited to an area within a 150-mile radius of La Crosse, Appleton, and
Madison, Wisconsin.
Commercial real estate lending is generally considered to involve a
higher level of risk than single-family residential lending due to the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on real estate developers and managers,
and on income producing properties, and the increased difficulty of evaluating
and monitoring these types of loans. Moreover, a construction loan can involve
additional risks because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost (including
interest) of the project. In addition, loans secured by properties located
outside of the Bank's immediate market area may involve a higher degree of risk
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 in its market areas. The Bank does not have a material concentration
of loans outside of its immediate market area. For additional discussion,
refer to Note 4 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data".
The Bank has attempted to minimize the foregoing risks by, among other
things, adopting what management believes are conservative underwriting
guidelines which impose more stringent loan-to-value, debt service, and other
requirements on loans which are believed to involve higher elements of risk, by
requiring independent appraisals on all loans, by limiting the geographic area
in which the Bank will make commercial construction loans, and by limiting the
amount of certain types of commercial real estate loans in its portfolio, as
discussed above. In addition, in the case of participations in commercial real
estate loans, the Bank emphasizes existing loans on newly-constructed
properties, as opposed to older properties, which may require more maintenance,
or new loans on which there is no payment experience. Furthermore, the Bank
generally requires the seller to retain not less than a 10% interest in a loan
which the Bank desires to purchase in order to ensure that the seller will
retain an interest in repayment of the loan in accordance with its terms.
CONSUMER LOANS The Bank offers consumer loans in order to provide a
full range of financial services to its customers. The majority of the Bank's
consumer loan portfolio consists of second mortgage loans and education loans,
but also contains 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.
Consumer loans generally have shorter terms and higher rates of
interest than conventional mortgage loans and may involve more risk than
conventional mortgage loans because of the type and nature of the collateral
and, in some instances, the absence of collateral. Consumer loans are
generally dependent upon the borrower's continuing financial stability, are
more likely to be affected by adverse personal circumstances, and are often
secured by rapidly depreciating personal property such as automobiles. However,
such risks are mitigated to some extent in the cases of second mortgage loans
and education loans, which compromise the majority of the Bank's consumer loan
portfolio. Second mortgage loans are secured by a second mortgage on the
borrower's residence, but do not generally exceed 100% of the property's value
including the first mortgage loan. Education loans are insured by the federal
government.
The Bank believes that the generally higher yields earned on consumer
loans compensate for the increased risk associated with such loans and that
consumer loans are important to its efforts to increase the interest rate
sensitivity and shorten the average maturity of its loan portfolio.
Furthermore, despite the risks inherent in consumer lending, the Bank's net
charge-offs on consumer loans as a percentage of gross loans has been minimal.
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DELINQUENT LOANS When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made on the fifteenth day after a
payment is due. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 15 days, the loan and payment histories are reviewed
and efforts are made to collect the loan. While the Bank generally prefers to
work with borrowers to resolve such problems, when the account becomes 90 days
delinquent the Bank institutes foreclosure or other proceedings, as necessary,
to minimize any potential loss.
NON-PERFORMING AND OTHER CLASSIFIED ASSETS Loans are generally placed
on non-accrual status and considered "non-performing" when, in the judgement of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
and/or non-performing status, previously accrued but unpaid interest is
deducted from interest income. As a matter of policy, the Bank does not accrue
interest on loans past due 90 days or more. Refer to Notes 1 and 4 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate and is considered
"non-performing" until it is sold. When property is acquired, it is recorded
at the lower of carrying or fair value at the date of acquisition. Any write
down resulting therefrom is charged to the allowance for loan losses. All
costs incurred in maintaining the Bank's interest in the property are
capitalized between the date the loan becomes delinquent and the date of
acquisition. After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized. For additional discussion, refer to Note 1
of the Corporation's Audited Consolidated Financial Statements, included herein
under Part II, Item 8, "Financial Statements and Supplementary Data".
Federal regulations require thrift institutions to classify their
assets on a regular basis. In addition, in connection with examinations of
thrift institutions, federal examiners have authority to identify problem
assets and, if appropriate, include them in classified assets. An asset is
classified as "Substandard" if it is determined to involve a distinct
possibility that the thrift institution could sustain some loss if deficiencies
associated with the loan are not corrected. An asset is classified as
"Doubtful" if full collection is highly questionable or improbable. An asset
is classified as a "Loss" if it is considered uncollectible, even if a partial
recovery could be expected in the future. The regulations also provide for a
"Special Mention" designation, described as assets which do not currently
expose an institution to a sufficient degree of risk to warrant adverse
classification, but which possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the institution to establish a general allowance for loan
losses. If an asset or portion thereof is classified as Loss, the institution
must either establish a specific allowance for loan losses in the amount of the
portion of the assets classified as loss, or charge off such amount. Refer to
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional discussion. The following paragraphs
describe certain of the Bank's classified assets in more detail.
At December 31, 1996, management of the Bank is closely monitoring a
$1.4 million first mortgage loan and $190,000 second mortgage loan on a 93-unit
apartment complex located in La Crosse, Wisconsin. These loans are classified
as Substandard. The loans are current on principal, interest, taxes, and
operating expenses. However, cash flow is marginal for principal repayment and
capital improvements. The last appraisal of the property indicated that the
Bank would not incur a significant loss were it to foreclose on this property.
Management of the Bank is also closely monitoring a $1.4 million loan
on a 44,500 square-foot office/warehouse located near Atlanta, Georgia. This
loan is classified as Substandard. The loan is current, but the cash flow from
the property, which is 100% leased, is not sufficient to cover the debt
service. The borrower, an individual which management believes has significant
personal net worth, has been maintaining the debt service with funds from other
sources. Management expects this situation to continue for the foreseeable
future, but does not anticipate a loss on the loan.
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Management of the Bank is also closely monitoring a $1.3 million loan
on a 38,000 square-foot shopping center located in Richmond, Virginia. This
loan is classified as Substandard. The property is approximately 81% leased,
and the cash flow is not enough to cover debt service. Management believes the
guarantors have significant personal net worth to maintain the debt service
with funds from other sources. Management does not expect to incur a loss on
this loan at this time.
Management of the Bank is also closely monitoring a $3.0 million loan
on a 248-unit apartment complex located in Indianapolis, Indiana. This loan is
classified as Substandard. The property is approximately 72% leased. The loan
is current with respect to interest, however, cash flow is marginal for
principal reduction and capital improvements. Management of the Bank does not
anticipate a loss on this loan at this time.
As of December 31, 1996, management does not believe that the Bank has
any significant concentration of real estate loans or other loans in areas
experiencing deteriorating economic conditions.
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. For additional
information, refer to Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1 and 4 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
Management of the Bank believes that the allowances established by the
Bank are adequate to cover any potential losses in the Bank's loan and real
estate portfolios. However, future adjustments to these allowances may be
necessary and the Bank's results of operations could be adversely affected if
circumstances differ substantially from the assumptions used by management in
making its determinations in this regard. It is not anticipated that
charge-offs during the year ending December 31, 1997, will exceed the amount
allocated to any individual category of loans, although there can be no
assurances. Furthermore, there are no material loans about which management is
aware for which there exists serious doubts as to the ability of the borrower
to comply with the loan terms, except as previously described.
MORTGAGE-BACKED AND RELATED SECURITIES
The Bank invests in CMOs which management of the Bank believes
represent attractive investment alternatives, relative to other investment
vehicles, due to the wide variety of maturity and repayment options available
through such investments and due to the limited credit risk associated with
such investments. CMOs purchased by the Bank are generally rated "AAA" by
independent credit-rating agencies. In addition, such investments are secured
by credit enhancements and/or subordinated tranches or are collateralized by
U.S. government agency MBSs. The Bank only invests in sequential-pay, planned
amortization class ("PAC"), and targeted amortization class ("TAC") tranches
that, at the time of their purchase, are not classified as high-risk derivative
securities in accordance with regulations. The Bank does not invest in
support-, companion-, or residual-type tranches. Furthermore, the Bank does
not invest in interest-only, principal-only, inverse-floating-rate CMO
tranches, or similar complex CMO securities.
The Bank also invests in MBSs which are guaranteed by the FHLMC, FNMA,
or the Government National Mortgage Association ("GNMA"). MBSs enhance the
quality of the Bank's assets by virtue of the guarantees that back them. In
addition, MBSs are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Bank.
The Bank classifies its mortgage-backed and related securities as
either available for sale or held for investment. For additional discussion,
refer to Part II, Item 7, "Management Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
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INVESTMENT SECURITIES
Federally-chartered savings institutions have authority to invest in
various types of securities, including U.S. government obligations, securities
of various federal agencies, certificates of deposit issued by insured banks
and savings institutions, and federal funds. Subject to various restrictions,
federally-chartered savings institutions also may invest a portion of their
assets in commercial paper, corporate debt securities, and mutual funds whose
assets conform to the investments that a federally-chartered savings
institution is authorized to make directly. In general, investments in these
types of securities are limited to the four highest credit categories as
established by the major independent credit-rating agencies.
The Bank must maintain minimum liquidity levels specified by the OTS
which may vary from time to time. Liquidity may increase or decrease depending
upon the yields available on investment opportunities and upon management's
judgement as to the attractiveness of such yields and its expectation of the
level of yields that will be available in the future.
Excluding U.S. government and federal agency securities and mutual
funds which invest exclusively in such securities, none of the Bank's
individual investments exceeded 10% of the Bank's retained earnings as of the
end of each of the past three years.
The Bank generally classifies its investment securities as available
for sale. For additional discussion, refer to Part II, Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 1 of the Corporation's Audited Consolidated Financial Statements, included
herein under Part II, Item 8, "Financial Statements and Supplementary Data".
SOURCES OF FUNDS
Deposits obtained through its retail banking facilities have
traditionally been the principal source of the Bank's funds for use in lending
and for other general business purposes. The Bank also obtains funds through
borrowings from the FHLB and other sources and, to a lesser extent, obtains
funds from amortization and prepayments of outstanding loans and investments.
DEPOSIT LIABILITIES The Bank's current deposit products include
regular savings accounts, checking accounts, money market deposit accounts,
individual retirement accounts, and certificates of deposit ranging in terms
from three months to five years. Substantially all of the Bank's deposits are
obtained from individual and business residents of the state of Wisconsin. In
addition to serving as the Bank's primary source of funds, deposit liabilities
(especially checking accounts) are a substantial source of non-interest income.
This income is received in the form of overdraft fees, periodic service
charges, transaction charges, teller service charges, etc.
The principal methods used by the Bank to attract deposit accounts
include offering a wide variety of products and services, competitive interest
rates, and convenient office locations and hours. Most of the Bank's
free-standing retail banking offices have drive-up facilities; 15 of the Bank's
retail banking facilities are located in supermarkets, including one that did
not officially open until January 1997. Depositors also have access to
automated teller machines ("ATMs") connected to TYME, Inc., which operates a
network of ATMs located throughout Wisconsin. TYME is affiliated with other
ATM networks, which permit the Bank's customers to access the TYME network
through similar systems located in other states and countries. 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 utilized certificates of deposit
sold through third-party brokers ("brokered deposits") as an alternative to
borrowings from the FHLB. FDIC regulations govern the acceptance of brokered
deposits by insured depository institutions such as the Bank. The capital
position of an institution determines whether and with what limitations an
institution may accept brokered deposits. The Bank is a "well capitalized"
institution under the regulations and therefore may accept brokered deposits
without restriction. At December 31, 1996, the Bank had no brokered deposits
outstanding.
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FEDERAL HOME LOAN BANK ADVANCES The Bank obtains advances from the
FHLB secured by stock which it is required to own in that bank and certain of
its home mortgage loans and other assets (principally CMOs) provided certain
creditworthiness standards have been met. Such advances may be made pursuant
to several different credit programs, each with its own interest rate, maximum
size of advance, and range of maturities. Depending on the program,
limitations on the amount of such borrowings are based either on a fixed
percentage of the Bank's capital or on the FHLB's assessment of the Bank's
creditworthiness.
OTHER BORROWINGS The Bank has lines of credit with two financial
institutions. These lines, which amount to $15.0 million in the aggregate,
permit the overnight purchase of fed funds.
The Corporation also has a $5.0 million borrowing outstanding with a
third financial institution which matures on May 31, 1998, but which is subject
to renewal under certain circumstances. Interest on this borrowing is payable
quarterly at 185 basis points above the three-month London Inter-Bank Offered
Rate ("LIBOR"), as determined on a quarterly basis.
SUBSIDIARIES
The Bank has formed a number of subsidiaries to engage in certain
activities that are only authorized to be conducted or are more appropriately
conducted in a subsidiary of the Bank. Following is a brief description of
each subsidiary.
FIRST ENTERPRISES, INC. The Bank's wholly-owned subsidiary, First
Enterprises, Inc. ("FEI"), was incorporated in November 1971. During the
period from 1979 to the mid-1980s, FEI was primarily involved in the
acquisition and development of hotels. In general, however, FEI is no longer
involved in these types of activities, other than the maintenance of its
remaining investments. FEI's investment in its remaining hotel joint ventures
was $333,000 as of December 31, 1996.
From 1988 to 1995, the Bank offered tax-deferred annuity contracts
through FEI as an investment alternative to its customers. Beginning in 1996,
however, these activities were transferred to the Bank.
FEI had net income of $56,000, $290,000, and $205,000, during the
twelve-month periods ended December 31, 1996, 1995, and 1994, respectively. At
December 31, 1996, the Bank's investment in FEI was $383,000.
FIRST CAPITAL HOLDINGS, INC. In June 1993 the Bank formed a
wholly-owned subsidiary in the State of Nevada. The subsidiary, First Capital
Holdings, Inc. ("FCHI") was formed to consolidate and improve the efficiency,
management, safekeeping, and operations of a portion of the Bank's investment
securities portfolio. Accordingly, on June 1, 1993, the Bank transferred
virtually all of its CMO portfolio to FCHI. In addition to the aforementioned
benefits, the formation of FCHI has resulted in a lower effective income tax
rate for the Bank due to the fact that the State of Nevada does not currently
impose a corporate income tax. As of December 31, 1996, FCHI was managing
$200.0 million in mortgage-backed and related securities for the Bank,
consisting principally of CMOs. FCHI's net income was $9.5 million, $9.3
million, and $8.3 million for the twelve-month periods ended December 31, 1996,
1995, and 1994, respectively. The Bank's investment in FCHI as of December 31,
1996, was $229.4 million.
TURTLE CREEK CORPORATION In December 1995 the Bank acquired an
additional subsidiary, Turtle Creek Corporation ("Turtle Creek"), as a result
of its acquisition of the net assets of another financial institution. Turtle
Creek is a joint venture partner in a real estate project to develop
single-family residential building lots and condominium building sites on a
78-acre parcel located within the city limits of Beloit, Wisconsin. Turtle
Creek's aggregate investment in this project was $39,000 at December 31, 1996.
Turtle Creek also holds a 40% limited partnership interest in a fifty-unit
complex providing housing for low-to-moderate income and elderly persons in
Beloit. Turtle Creek's aggregate investment in this project was $155,000 at
December 31, 1996.
The Bank's investment in Turtle Creek as of December 31, 1996, was
$372,000.
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COMPETITION
The Bank faces significant competition in attracting deposits. Its
most direct competition for deposits has historically come from commercial
banks, credit unions, and other savings institutions located in its market
area. In addition, during periods of high market interest rates, the Bank
faces significant competition from short-term money market mutual funds; during
periods of low interest rates, the Bank faces significant competition from
long-term bond mutual funds and equity mutual funds and issuers of corporate
and government securities. The Bank competes for deposits principally by
offering depositors a variety of deposit products, convenient branch locations,
operating hours, and other services. The Bank does not rely upon any
individual group or entity for a material portion of its deposits.
The Bank's competition for loans comes principally from mortgage
banking companies, other savings institutions, commercial banks, finance
companies, and credit unions. The Bank competes for loan originations
primarily through the interest rates and loan fees it charges, the efficiency
and quality of services it provides borrowers, referrals from real estate
brokers and builders, and the variety of its products. Factors which affect
competition include the general and local economic conditions, current interest
rate levels, and volatility in the secondary market for residential mortgage
loans.
REGULATION OF THE CORPORATION
The Corporation is a savings and loan holding company within the
meaning of Section 10 of the Home Owners' Loan Act ("HOLA"). As such, the
Corporation is registered with and subject to OTS examination and supervision
as well as certain reporting requirements. Furthermore, the Corporation is
limited with respect to the transactions it can execute with its affiliates
(including the Bank), and its ability to acquire control of another insured
financial institution, as specified more fully in the applicable regulations.
There generally are no restrictions as to activities of a unitary savings and
loan holding company such as the Corporation as long as its sole insured
subsidiary, the Bank, complies with certain regulatory requirements, which
management believes it did as of December 31, 1996.
REGULATION OF THE BANK
The Bank, as a federally-chartered savings bank, is subject to federal
regulation and oversight by the OTS extending to all aspects of its operations.
The Bank also is subject to regulation and examination by the FDIC, which
insures the deposits of the Bank to the maximum extent permitted by law, and
requirements established by the Federal Reserve Board. The laws and
regulations governing the Bank generally have been promulgated to protect
depositors and not for the purpose of protecting stockholders of financial
institutions or their holding companies.
The investment and lending authority of a federally-chartered savings
bank is prescribed by federal laws and regulations. The Bank is also subject
to regulatory provisions affecting a wide variety of matters including, but not
limited to, branching, loans to one borrower, investment restrictions,
activities of subsidiaries, loans to "insiders", and transactions with
affiliates. Certain of the regulatory requirements applicable to the Bank and
the Corporation are more particularly described below or may be referred to
elsewhere herein.
INSURANCE OF ACCOUNTS The Bank's savings deposits are insured by SAIF,
which is administered by the FDIC, up to the maximum extent provided by law,
currently $100,000. The Bank is subject to a risk-based insurance assessment
system under which higher insurance assessment rates are charged to those
thrift institutions 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 1997 will be zero. This rate compares to
0.23% of deposits paid by the Bank prior to the fourth quarter of 1996, when
all SAIF-insured institutions were subject to a higher risk-based assessment
11
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schedule. Scheduled rates were reduced for SAIF-insured institutions as a
result of federal legislation which recapitalized the SAIF in the fourth
quarter of 1996. For additional discussion, refer to Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation".
Although the Bank's risk-based insurance assessment for 1997 is
expected to be zero, the Bank will still be required to pay 0.0648% of deposits
to cover its pro rata share of the Finance Corporation ("FICO") bond
obligation. This rate is not tied to the FDIC's risk classification; as a
result, it is the same for all SAIF-insured institutions. BIF-insured
institutions, however, will be subject to a rate of only 0.01296% of deposits.
CAPITAL STANDARDS The Bank is subject to minimum regulatory capital
requirements as specified by OTS regulations. As more fully described in such
regulations, the Bank is subject to a leverage limit of at least 3% of total
assets, a tangible capital limit of at least 1.5% of total assets, and a
risk-based capital limit of at least 8% of risk-weighted assets. As of
December 31, 1996, the Bank exceeded all minimum regulatory capital
requirements as specified by the OTS.
The Bank is also subject to minimum regulatory capital requirements as
specified by FDIC regulations. As more fully described in such regulations,
the Bank must meet the following capital standards to be classified as
"adequately capitalized" under FDIC guidelines: (1) Tier 1 capital in an amount
not less than 4% of total assets, (ii) Tier 1 capital in an amount not less
than 4% of risk-weighted assets, and (iii) total capital in an amount not less
than 8% of risk-weighted assets. As of December 31, 1996, the Bank exceeded
all minimum regulatory capital requirements as specified by the FDIC. For
additional discussion refer to Note 12 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data".
Federal bank regulators such as the OTS and FDIC are required to take
"prompt corrective action" with respect to institutions that become
undercapitalized, the severity of which will depend upon the degree of
undercapitalization. The regulations provide that an insured institution that
has not met one or more of the minimum regulatory capital requirements
specified in the previous paragraph will be considered "undercapitalized".
Furthermore, an insured institution that has Tier 1 capital in an amount less
than 3% of total assets, Tier 1 capital in an amount less than 3% of risk-based
assets, or total capital in an amount less than 6% of risk-weighted assets will
be considered "significantly undercapitalized". Finally, an insured
institution that has tangible capital in an amount less than 2% of total assets
will be considered "critically undercapitalized".
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distributions, or paying a management fee to a controlling person
or entity. Significantly and critically undercapitalized institutions are
subject to additional restrictions. The Bank currently exceeds all applicable
minimum regulatory capital requirements and therefore is not subject to prompt
corrective action.
LIQUIDITY REQUIREMENTS The Bank is required to maintain a daily
average balance of liquid assets (cash, certain time deposits, corporate debt
securities and commercial paper, securities of certain mutual funds, banker's
acceptances, and specified U.S. government, state or federal agency
obligations) equal to at least 5% of the average daily balance of its net
withdrawable savings deposits plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within
the range of 4% to 10%. Short-term liquid assets currently must consist of 1%
of the liquidity base. Monetary penalties may be imposed for failure to meet
liquidity requirements. For additional information refer to Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CLASSIFICATION OF ASSETS As previously described, the Bank's problem
assets are subject to classification according to one of three categories:
Substandard, Doubtful, and Loss. An institution is required to develop an
in-house program to classify its assets, including investments in subsidiaries,
on a regular basis and to set aside appropriate loss reserves on the basis of
such classification. The Bank believes that it is in compliance with the
foregoing requirements.
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QUALIFIED THRIFT LENDER TEST A savings association that does not meet
the Qualified Thrift Lender Test ("QTL Test"), as set forth in the HOLA and
implementing regulations, must either convert to a bank charter or comply with
certain restrictions on its operations. Under the QTL Test, a savings
association is required to maintain a certain percentage of its assets in
qualifying investments, as defined by regulations. In general, qualifying
investments consist of housing-related assets. At December 31, 1996, the
Bank's assets invested in qualifying investments exceeded the percentage
required to qualify the Bank under the QTL Test.
FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System,
which consists of 12 regional FHLBs, subject to supervision and regulation by
the Federal Housing Finance Board. The FHLBs provide a central credit facility
primarily for member savings institutions. The Bank, as a member of the FHLB
of Chicago, is required to acquire and hold shares of capital stock in the FHLB
of Chicago in an amount at least 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, 1996, the Bank had a $18.8
million investment in the stock of the FHLB of Chicago and was in compliance
with this requirement.
Advances from the FHLB of Chicago are secured by a member's shares of
stock in the FHLB, certain types of mortgages, and other assets (consisting
principally of CMOs). Interest rates charged on advances varies with the
maturity of the advance and the cost of funds to the FHLB.
FEDERAL RESERVE SYSTEM Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against
transaction accounts (which consist of NOW accounts, Super NOW accounts, and
regular checking accounts) and against certain non-personal time deposits. At
December 31, 1996, the Bank's required reserves were approximately $10.6
million.
DIVIDEND RESTRICTIONS The payment of dividends by the Bank is subject
to various limitations set forth in federal regulations and as briefly
described in Note 12 of the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data".
COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act of
1977, as amended (the "CRA"), as implemented by OTS regulations, a savings
institution has a continuing and affirmative obligation, consistent with its
safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA also
requires all institutions to make public disclosure of their CRA ratings. The
Bank's latest CRA rating, received in 1995, was "Outstanding".
TAXATION
FEDERAL TAXATION The Bank is subject to those rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code.
The Corporation, the Bank, and the Bank's wholly-owned subsidiaries file
consolidated federal income tax returns, which has the effect of eliminating or
deferring the tax consequences of intercompany distributions, including
dividends, in the computation of consolidated taxable income. Refer to Notes 1
and 9 of the Corporation's Audited Consolidated Financial Statements, included
herein under Part II, Item 8, "Financial Statements and Supplementary Data" for
additional discussion.
The federal income tax returns of the Bank have been audited and closed
by the Internal Revenue Service ("IRS") through 1991 and no material disputes
are outstanding as a result of these audits.
WISCONSIN TAXATION The State of Wisconsin imposes a tax on the
Wisconsin taxable income of corporations, including savings institutions, at
the rate of 7.9%. Wisconsin taxable income is generally similar to
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federal taxable income except that interest from state and municipal
obligations is taxable, no deduction is allowed for state income taxes,
and net operating losses may be carried forward but not back. In addition,
Wisconsin law does not provide for filing of consolidated state income tax
returns.
BAD DEBT RESERVES On August 20, 1996, the President of the United
States signed the Small Business Job Protection Act of 1996 ("the Act"). The
Act repealed the "reserve method" of accounting for bad debts by most thrift
institutions, effective for taxable years beginning after 1995. Most thrift
institutions such as the Bank are now required to use the "specific charge-off
method". The Act also grants partial relief from reserve recapture provisions
which are triggered by the change in method. This legislation is not expected
to have a material impact on the Bank's financial condition or results of
operations.
ITEM 2 -- PROPERTIES
As of December 31, 1996, the Bank conducted its business from its
corporate offices in La Crosse, Wisconsin, 45 other retail banking facilities
located throughout Wisconsin, as previously described, and two separate loan
production offices, also located in Wisconsin. At such date, the Bank owned
the building and land for 20 of its offices and leased the building and/or the
land for its remaining 28 properties, including 15 located in supermarkets.
The Bank also owns or leases certain other properties to meet various business
needs. For additional information, refer to Note 6 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
ITEM 3 -- LEGAL PROCEEDINGS
The information required herein is included in Note 11 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
ITEM 4 -- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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 14, 1997, the Corporation had 6,120,844 common
shares outstanding (net of 522,300 shares of treasury stock), 1,478
stockholders of record, 2,300 estimated beneficial stockholders, and 3,778
estimated total stockholders.
Dividend and stock price information required by this item, as well as
information relating to the Corporation's stock repurchase plans, is included
under the following sections of this report:
(1) "Liquidity and Capital Resources", included herein under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
(2) "Note 12 -- Stockholder's Equity", included herein under Item 8, "Financial
Statements and Supplementary Data -- Audited Consolidated Financial
Statements".
(3) "Quarterly Financial Information", included herein under Item 8, "Financial
Statements and Supplementary Data -- Supplementary Data".
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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 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Total assets $1,515,413 $1,402,479 $1,172,886 $941,395 $869,235
Investment securities:
Available for sale, at fair value 74,029 80,325 89,476 - -
Held for investment, at cost - - - 126,541 64,674
Mortgage-backed and related securities:
Available for sale, at fair value 61,875 84,173 - - -
Held for investment, at cost 147,835 171,493 269,443 118,021 133,455
Loans held for investment, net 1,106,040 932,084 723,826 572,066 571,550
Allowance for loan losses 7,888 8,186 8,074 7,828 7,227
Intangible assets 5,221 5,643 97 78 119
Deposit liabilities 1,024,093 969,423 778,641 745,509 701,744
FHLB advances and other borrowings 383,593 322,296 308,476 116,504 98,597
Stockholders' equity 95,414 98,939 77,181 71,517 60,841
=====================================================================================================================
SELECTED OPERATING DATA FOR YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Interest income $103,977 $88,858 $73,208 $65,852 $71,021
- ---------------------------------------------------------------------------------------------------------------------
Interest expense 63,684 54,954 40,938 35,218 41,48
Net interest income 40,293 33,904 32,270 30,634 29,523
Provision for loan losses - - - 160 1,171
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 40,293 33,904 32,270 30,474 28,352
- ---------------------------------------------------------------------------------------------------------------------
Gains from sales of loans 4,331 3,545 2,945 9,198 6,308
Gains (losses) from sales of mortgage-backed securities
and other investments (311) (29) 100 728 379
Other non-interest income 15,811 13,597 11,262 6,685 5,888
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 19,831 17,113 14,307 16,611 12,575
- ---------------------------------------------------------------------------------------------------------------------
FDIC special assessment 5,941 - - - -
Other non-interest expense 38,304 34,372 30,889 27,172 23,787
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 44,245 34,372 30,889 27,172 23,787
Income before income taxes, cumulative effect of
accounting change and extraordinary charge 15,880 16,646 15,687 19,913 17,140
Income tax expense 5,806 6,001 5,707 7,868 6,716
- ---------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of accounting
change and extraordinary charge 10,074 10,645 9,980 12,045 10,424
Accounting change (1) - - - - 1,100
Extraordinary charge (2) - - (203) - -
- ---------------------------------------------------------------------------------------------------------------------
Net income $10,074 $10,645 $9,777 $12,045 $11,524
=====================================================================================================================
SELECTED OTHER DATA AT OR FOR THE YEAR ENDED DECEMBER 31 (3) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Return on average assets 0.97% 0.87% 0.93% 1.34% 1.21%
Return on average equity 14.21 12.86 13.32 18.11 18.65
Average equity to average assets 6.80 6.75 6.96 7.39 6.50
Average interest rate spread 2.61 2.54 2.82 3.18 3.26
Average net interest margin 3.02 2.92 3.15 3.58 3.62
Ratio of allowance for loan losses to total loans held
for investment at end of period 0.71 0.88 1.12 1.37 1.26
Ratio of non-interest expense to average assets (4) 2.71 2.83 2.89 3.14 2.76
Earnings per share: (5)
Primary earnings per share $2.04 $1.72 $1.64 $2.00 $1.77
Fully-diluted earnings per share 2.03 1.71 1.64 2.00 1.75
Dividends paid per share (5) 0.620 0.550 0.481 0.323 0.236
Stock price at end of period (5) 23.50 18.00 16.25 14.77 11.82
Book value per share at end of period(5) 15.57 15.07 13.40 12.59 10.76
Banking facilities at end of period 48 44 35 26 24
=====================================================================================================================
(1) The accounting change in 1992 represented the cumulative effect of the
Corporation's adoption of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes".
(2) The extraordinary charge in 1994 consisted of a prepayment penalty, net of
income tax benefit, on certain FHLB advances.
(3) Selected other data excludes the after-tax impact of the FDIC special
assessment as well as the impact of extraordinary charges and accounting
changes.
(4) Excludes the FDIC special assessment and provision for real estate losses
and recoveries.
(5) Per share data and historical stock prices have been adjusted for a
4-for-3 stock split on June 8, 1992, a 2-for-1 stock split on March 18,
1993, and a 10% stock dividend on June 2, 1994.
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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 Part I, Item 1, "Business".
RESULTS OF OPERATIONS
OVERVIEW The Corporation's earnings for the years ended December 31,
1996, 1995, and 1994, were $13.6 million, $10.6 million, and $10.0 million,
respectively, excluding the after-tax effects of a $3.5 million special
assessment from the FDIC in 1996 and a $203,000 extraordinary charge in 1994.
These amounts, as adjusted, represented returns on average assets of 0.97%,
0.87% and 0.93%, respectively, and returns on average equity of 14.21%, 12.86%,
and 13.32%, respectively. Primary earnings per share during these periods were
$2.04, $1.72, and $1.64, respectively, excluding the after-tax effects of the
special assessment ($0.54 per share) and the extraordinary charge ($0.02 per
share).
The improvement in earnings from 1995 to 1996 (as adjusted for the FDIC
special assessment) was primarily attributable to an increase in net interest
income. Also contributing, however, were increases in retail banking fees,
commissions on annuity and insurance sales, and gain on sales of loans, as well
as a decrease in advertising and marketing expenses. These favorable
developments, however, were partially offset by increases in compensation and
employee benefits, occupancy and equipment expenses, and other expenses, most
notably amortization of goodwill from the 1995 acquisition of Rock Financial
Corp. ("RFC"). In addition, loss on sales of investment securities increased
and loan servicing fees decreased in 1996 as compared to the previous year.
The improvement in earnings from 1994 to 1995 (as adjusted for the
extraordinary charge) was due primarily to an increase in net interest income.
Also contributing, however, were increases in retail banking fees and gain on
sales of mortgage loans. These favorable developments were partially offset by
increases in compensation and employee benefits, occupancy and equipment
expenses, and other expenses, most notably fees paid to originate education
loans and fees paid for customer usage of ATMs owned by other financial
institutions.
The following paragraphs discuss the aforementioned changes in greater
detail along with other changes in the components of earnings during the years
ended December 31, 1996, 1995, and 1994.
NET INTEREST INCOME Net interest income increased by $6.4 million or
18.8% and $1.6 million or 5.1% during the years ended December 31, 1996 and
1995, respectively. The improvement in both of these periods was primarily
volume related as the Corporation's average interest-earning assets grew by
$173.7 million or 15.0% and $136.7 million or 13.4% in 1996 and 1995,
respectively. The principal source of growth in interest-earning assets in
1996 was the Corporation's purchase of RFC in December of 1995. Also
contributing to growth in both periods, however, were significant increases in
mortgage and consumer loans outstanding, the origination of which was funded by
growth in deposit liabilities and FHLB advances (refer to "Financial Condition
- -- Overview" for additional discussion).
Also contributing to the increase in net interest income in 1996 was a
modest increase in the Corporation's average interest rate spread. Management
attributes this increase to a higher percentage of interest-earning assets
invested in mortgage and consumer loans, which generally earn higher yields
than the Corporation's other interest-earning assets, such as CMOs, MBSs, and
other investment securities. Contributing to a lesser degree was the fact that
a higher percentage of the Corporation's funding sources were from deposit
liabilities, which generally have a lower weighted-average interest cost than
the Corporation's other funding sources. These developments were partially
offset by an increase in the average interest cost on the Corporation's deposit
liabilities, due to more competitive rate offerings in recent periods (refer to
"Financial Condition -- Deposit Liabilities" for additional discussion).
Net interest income in 1995 was adversely affected by a 28 basis point
decline in the Corporation's average interest rate spread as compared to the
previous year. Management attributes this decline to the lag effect of higher
interest rates in 1994 as well as the combined effects of a flatter yield curve
during the period and the
16
18
Corporation's negative one-year funding gap. In general, a flatter yield curve
environment will result in a narrower interest rate spread for the
Corporation due to the tendency of its interest-earning assets to price off a
longer end of the yield curve than its interest-bearing liabilities (i.e, the
Corporation's "negative gap" -- refer to "Asset/Liability Management" for
additional discussion).
The following table sets forth information regarding (i) the total
dollar amount of interest income from average interest-earning assets and the
resulting average yields, (ii) the total dollar amount of interest expense from
average interest-bearing liabilities and the resulting average costs, (iii) net
interest income, (iv) interest rate spread, (v) net interest margin, and (vi)
the ratio of average interest-earning assets to interest-bearing liabilities.
The information is based on daily average balances during the years ended
December 31, 1996, 1995, and 1994.
Dollars in thousands Year Ended December 31
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Interest-earning assets:
Mortgage loans $734,959 $59,862 8.14% $584,083 $47,778 8.18% $481,042 $38,212 7.94%
Consumer loans 269,951 23,816 8.82 211,797 18,581 8.77 154,543 12,417 8.03
Commercial business loans 1,630 108 6.65 1,709 126 7.37 2,184 122 5.59
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 1,006,540 83,786 8.32 797,589 66,485 8.34 637,769 50,751 7.96
Mortgage-backed and related securities 234,430 14,495 6.18 258,590 15,803 6.11 263,619 16,055 6.09
Investment securities 72,149 4,347 6.03 85,114 5,319 6.25 100,278 5,326 5.31
Interest-bearing deposits with banks 4,756 256 5.39 3,266 206 6.31 9,200 314 3.41
Other earning assets 16,126 1,093 6.77 15,775 1,045 6.62 12,743 762 5.98
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,334,001 103,977 7.79 1,160,334 88,858 7.66 1,023,609 73,208 7.15
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets:
Office properties and equipment 26,670 24,909 20,431
Real estate 199 63 1,061
Other assets 50,909 40,963 32,035
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,411,779 $1,226,269 $1,077,136
=================================================================================================================================
Interest-bearing liabilities:
Regular savings accounts $89,202 $1,775 1.99% $82,553 $1,753 2.12% $87,546 $1,807 2.06%
Checking accounts 52,297 521 1.00 45,928 655 1.43 44,913 692 1.54
Money market accounts 118,916 5,103 4.29 101,736 3,987 3.92 116,494 3,678 3.16
Certificates of deposit 654,299 39,091 5.97 557,016 32,592 5.85 450,004 21,858 4.86
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 914,714 46,490 5.08 787,233 38,987 4.95 698,957 28,035 4.01
FHLB advances 297,892 16,642 5.59 277,816 15,885 5.72 241,600 12,856 5.32
Other borrowings 15,274 552 3.61 7,478 82 1.10 5,655 47 0.83
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,227,880 63,684 5.19 1,072,527 54,954 5.12 946,212 40,938 4.33
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 78,890 63,398 50,634
Other liabilities 8,943 7,587 5,346
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,315,713 1,143,512 1,002,192
Stockholders' equity 96,066 82,757 74,944
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,411,779 $1,226,269 $1,077,136
=================================================================================================================================
Net interest income $40,293 $33,904 $32,270
=================================================================================================================================
Interest rate spread 2.61% 2.54% 2.82%
=================================================================================================================================
Net interest margin 3.02% 2.92% 3.15%
=================================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 108.64% 108.19% 108.18%
=================================================================================================================================
17
19
The following table sets forth the effects of changing rates and
volumes on net interest income of the Corporation for the periods indicated.
Information is provided with respect to (i) effects on net interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) effects on net interest income attributable to changes in rate (changes in
rate multiplied by prior volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume), and (iv) the net change.
1996 COMPARED TO 1995 1995 COMPARED TO 1994
Dollars in thousands Increase (Decrease) Increase (Decrease)
- ------------------------------------------------------------------------------------------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
- ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans ($206) $12,342 ($54) $12,082 $1,138 $8,185 $244 $9,567
Consumer loans 105 5,102 28 5,235 1,141 4,600 423 6,164
Commercial business loans (12) (6) 0 (18) 39 (27) (8) 4
- ------------------------------------------------------------------------------------------------------------------------
Total loans (113) 17,438 (27) 17,300 2,318 12,758 658 15,735
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed and related securities 186 (1,476) (17) (1,306) 55 (306) (1) (252)
Investment securities (190) (810) 29 (971) 939 (805) (142) (8)
Interest-bearing deposits with banks (30) 94 (14) 50 266 (203) (171) (108)
Other earning assets 24 23 1 47 82 181 20 283
- ------------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (123) 15,269 (27) 15,119 3,660 11,625 365 15,650
- ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits 759 6,597 147 7,503 5,458 4,599 895 10,952
FHLB advances (365) 1,148 (26) 756 958 1,927 144 3,029
Other borrowings 188 85 197 470 15 15 5 35
- ------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 582 7,830 318 8,730 6,431 6,541 1,044 14,016
- ------------------------------------------------------------------------------------------------------------------------
Net change in net interest income ($705) $7,439 ($345) $6,389 ($2,771) $5,084 ($679) $1,634
========================================================================================================================
PROVISION FOR LOAN LOSSES Management of the Corporation elected to not
record loan loss provisions during the years ended December 31, 1996, 1995, and
1994, as a result of low levels of charge-offs, as well as low levels of
non-performing and other classified assets during such periods (refer to
"Financial Condition -- Non-Performing Assets" for additional discussion).
However, due to recent growth in the Corporation's loan portfolio, management
believes that additional loan loss provisions may be necessary in 1997. Such
loss provisions, however, are not expected to have a significant impact on the
Corporation's results of operations, although there can be no assurances.
The following table summarizes the activity in the Corporation's
allowance for loan losses during each of years indicated.
Dollars in thousands 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Balance at beginning of period $8,186 $8,074 $7,828 $7,227 $7,467
Provision for losses - - - 160 1,171
- -------------------------------------------------------------------------------
Charge-offs:
Mortgage loans - - 27 58 692
Consumer loans 337 334 146 205 207
Commercial business loans - 135 108 168 -
- -------------------------------------------------------------------------------
Total loans charged-off 337 469 281 431 899
Recoveries 39 44 49 72 88
- -------------------------------------------------------------------------------
Charge-offs net of recoveries 298 425 232 359 811
Transfers - - 478 800 (600)
Purchased allowances - 537 - - -
- -------------------------------------------------------------------------------
Balance at end of period $7,888 $8,186 $8,074 $7,828 $7,227
===============================================================================
Net charge-offs as a percentage
of average loans outstanding 0.03% 0.05% 0.04% 0.06% 0.13%
Ratio of allowance to total loans
held for investment at end of period 0.71% 0.88% 1.12% 1.37% 1.26%
===============================================================================
Recent increases in consumer loan charge-offs have generally been caused
by growth in that loan category, although charge-offs for 1995 were also
impacted by a one-time adjustment of accrued interest on education loans. This
adjustment was caused by a change in a government-sponsored program that
affected all lenders.
18
20
The purchased allowances shown for 1995 were from the RFC acquisition.
The transfers shown for 1994 and 1993 resulted from the transfer of excess
general loss allowances from real estate to mortgage loans. Management
considered these transfers to be appropriate given the significant decline in
the Corporation's problem real estate during such periods. The transfer shown
for 1992 related to a charge-off of the Corporation's mortgage servicing
rights.
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 1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------
Residential real estate loans $183 0.03% $177 0.04% $179 0.05% $171 0.07% $181 0.06%
Multi-family and commercial
real estate loans 7,326 3.30 7,710 3.93 7,409 4.38 7,452 4.52 6,684 4.07
Consumer loans 302 0.10 222 0.09 275 0.15 195 0.15 142 0.15
Commercial business loans 77 6.33 77 3.49 211 11.77 10 0.38 220 6.96
- -----------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $7,888 0.71% $8,186 0.88% $8,074 1.12% $7,828 1.37% $7,227 1.26%
=======================================================================================================================
The amounts in the preceding table are expressed as a percentage of
gross loans outstanding for each loan category, excluding construction loans.
The total allowance is expressed as a percent of net loans held for investment.
Although management believes that the Corporation's present level of
allowance for loan losses is adequate, there can be no assurance that future
adjustments to the allowance will not be necessary, which could adversely
affect the Corporation's results of operations. For additional discussion,
refer to "Financial Condition -- Non-Performing Assets" and Note 1 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
NON-INTEREST INCOME Non-interest income for the years ended December
31, 1996, 1995, and 1994, was $19.8 million, $17.1 million, and $14.3 million,
respectively. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their changes from 1995 to 1996
and 1994 to 1995.
Retail banking fees and service charges increased by $1.7 million or
20.3% in 1996 and by $1.7 million or 25.8% in 1995. The increase in both years
was due to a general increase in per-transaction service charges and 31.2%
growth since December 31, 1994, in the number of checking accounts serviced by
the Corporation. Approximately 40% of this growth came from retail banking
offices opened or acquired in 1995 and 1996 (refer to "Results of Operations -
Non-Interest Expense" for additional discussion).
During the last quarter of 1996, the Corporation issued VISA "debit
cards" to a large number of its checking account customers. In addition to
giving customers access to virtually any ATM network, debit cards give
customers the ability to make purchases directly from any merchant that accepts
VISA credit cards. Debit cards differ from credit cards in that customers'
purchases are deducted directly from their checking accounts. This new product
contributed $161,000 to retail banking fees in 1996 and is expected to
contribute in excess of $1.0 million in 1997, although there can be no
assurances. Such fees would be gross of approximately $300,000 in anticipated
transaction charges that will be recorded as non-interest expense during 1997.
Loan servicing fees decreased by $221,000 in 1996 and by $63,000 in
1995. These decreases were principally caused by losses on the Corporation's
mortgage servicing rights. A declining interest rate environment during 1995,
which extended into early 1996, resulted in an increase in mortgage refinance
activity which translated into increased loan prepayments during such periods.
As a result of such prepayments, the Corporation recorded losses on its
mortgage servicing rights of $624,000 and $250,000 during 1996 and 1995,
respectively. If interest rates decline substantially in future periods, the
Corporation may be required to record additional losses on its mortgage
servicing rights as a result of likely increases in mortgage refinance and
prepayment activity. For additional discussion, refer to Notes 1 and 5 of the
Corporation's Audited Consolidated Financial Statements, included herein under
Part II, Item 8, "Financial Statements and Supplementary Data".
19
21
Excluding the effects of the aforementioned losses, loan servicing fees
would have increased by $153,000 or 5.7% and by $187,000 or 7.5% in 1996 and
1995, respectively. These increases were attributable to a $51.2 million or
4.5% increase and a $331.4 million or 41.3% increase in mortgage loans serviced
for others during such periods, respectively. The growth in 1995 was primarily
attributable to the Corporation's purchase of mortgage servicing rights
relating to $287.7 million of mortgage loans. Such loans consisted principally
of fixed-rate, single-family mortgage loans on properties located in Wisconsin,
Minnesota, and Illinois. The Corporation intends to purchase additional
mortgage servicing rights in future periods, although there can be no
assurances.
The 1996 increase in the Corporation's portfolio of mortgage loans
serviced for others was due to the Corporation's own origination of fixed-rate,
single-family residential loans. As is the Corporation's general practice,
such loans were sold in the secondary market and the servicing rights were
retained.
Servicing mortgage loans includes such functions as collecting monthly
payments of principal and interest from borrowers, passing such payments
through to third-party investors, maintaining escrow accounts for taxes and
insurance, and making such payments when they are due. The Corporation
generally earns a fee of 25 basis points or more on the outstanding loan
balance for performing these services, as well as fees and interest income from
ancillary sources such as delinquency charges and float. Management believes
that mortgage servicing rights can provide a natural hedge against other risks
inherent in the Corporation's mortgage banking activities. That is,
fluctuations in gains on sales of mortgage loans as a result of changes in
market interest rates will generally be offset in part by opposite changes in
loan servicing fee income (due to fluctuations in losses on mortgage servicing
rights, as previously described).
Commissions on annuity and insurance sales increased by $1.1 million or
approximately 105% in 1996 and by $127,000 or 14.3% in 1995. The Corporation's
current sources of commission revenues are primarily from sales of tax-deferred
annuity contracts, credit life insurance policies, and mortgage loan insurance
policies. The increase in 1996 was due principally to an increase in
commissions on the sale of annuity contracts due to a more aggressive promotion
of such products. This trend is not expected to continue in 1997.
Gains on sales of mortgage loans for the years ended December 31, 1996,
1995, and 1994, were $4.3 million, $3.5 million, and $2.9 million,
respectively. The increase in 1996 was primarily attributable to an $84.8
million or 49.0% increase in the Corporation's mortgage loan sales. This
increase was primarily attributable to a lower interest rate environment during
the early part of 1996. Lower interest rates during this period increased
consumer demand for fixed-rate mortgage loans, which were generally sold by the
Corporation in the secondary market.
The increase in gain on sales of mortgage loans in 1995 was primarily
attributable to $1.5 million in gains recorded as a result of the Corporation's
adoption of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights" ("SFAS 122"). In general, such gains
approximated 1% of the principal balance of the mortgage loans sold by the
Corporation and for which the mortgage servicing was retained. Excluding the
effect of the Corporation's adoption of SFAS 122, gain on sale of mortgage
loans decreased by $853,000 or 29.0% in 1995. This decrease was principally
due to a $23.5 million or 12.0% decline in the Corporation's mortgage loan
sales. This decline was due primarily to a higher interest rate environment
during late 1994 and early 1995, which reduced consumer demand for fixed-rate
mortgage loans.
Gains (losses) on sales of other investments for the years ended
December 31, 1996, 1995, and 1994, were $(311,000), $(29,000), and $100,000,
respectively. The losses in 1996 and 1995 were due to the sale or early
redemption of certain investment securities classified as available for sale.
The gain in 1994 was due to the sale of the Corporation's remaining interest in
certain hotel joint ventures.
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, in 1994 the Corporation adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), which limits the Corporation's ability to sell
investments classified as "held for
20
22
investment". For additional discussion refer to "Financial Condition --
Mortgage-Backed and Related Securities" and to Note 1 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
Other income was $1.3 million, $1.6 million, and $1.1 million for the
years ended December 31, 1996, 1995, and 1994, respectively. The decrease in
1996 was primarily due to a $168,000 decline in fees received on loans
originated as agent for the Wisconsin State Veterans Administration ("State
VA") and the Wisconsin Housing and Economic Development Authority ("WHEDA").
The increase in 1995 was primarily due to the recognition of $297,000 in gains
under SFAS 122 on loans originated by the Corporation for the State VA and
WHEDA.
NON-INTEREST EXPENSE Non-interest expense for the years ended December
31, 1996, 1995, and 1994, was $38.3 million, $34.4 million, and $30.9 million,
respectively, excluding the effect of a $5.9 million special assessment from
the FDIC in 1996. Non-interest expense as a percent of average assets during
these periods was 2.71%, 2.83%, and 2.89%, respectively (again, excluding the
effects of the special assessment). The following paragraphs discuss the
principal components of non-interest expense and the primary reasons for their
changes from 1995 to 1996 and 1994 to 1995.
Compensation and employee benefits increased by $1.6 million or 8.8% in
1996 and by $2.1 million or 13.1% in 1995. In general, the increase in both
periods was due to normal annual merit increases and to general growth in the
number of banking facilities operated by the Corporation, including four which
were added as a result of the Corporation's December 1995 purchase of RFC.
Since December 31, 1994, the Corporation has opened 16 retail banking
facilities (four of which were opened in the most recent year and one which
opened in January 1997) and one loan production facility. The Corporation also
intends to open four retail banking facilities in 1997, although there can be
no assurances. The Corporation closed two loan production facilities in 1995,
two retail banking facilities in 1996, and intends to close one retail banking
facility in 1997. The majority of customer deposits associated with this
location are expected to remain with the Corporation.
Also contributing to the increase in compensation and employee benefits
in 1996, was an increase in compensation paid in the Corporation's Residential
Lending Division, due primarily to increased originations of mortgage loans.
As of December 31, 1996, the Corporation had 641 full-time equivalent
employees. This compares to 623 and 595 as of December 31, 1995 and 1994,
respectively.
Occupancy and equipment expense increased by $677,000 or 11.8% in 1996
and by $781,000 or 15.8% in 1995. The increase in both years was due primarily
to general growth in the number of banking facilities operated by the
Corporation, as previously described. In addition, during 1995 the Corporation
completed the construction of a separate facility located in La Crosse,
Wisconsin, which houses a large portion of the Corporation's retail support
operations.
Federal insurance premiums increased by $262,000 or 14.1% in 1996 and
by $157,000 or 9.2% in 1995. These increases were due primarily to increases in
the Bank's deposit liabilities (refer to "Financial Condition - Deposit
Liabilities" for additional discussion). Management expects the Bank's federal
insurance premiums to decline substantially in 1997 as a result of the
recapitalization of the SAIF. During the years ended December 31, 1996, 1995,
and 1994, the Bank's federal insurance premiums were 0.23% of deposits. In
1997 this rate is expected to be zero, although the Bank will still be subject
to a 0.0648% charge for its pro-rata share of the FICO bond obligation (refer
to Part I, Item I, "Regulation of the Bank - Insurance of Accounts" for
additional discussion). Based on current deposit levels, management expects
this decline to contribute approximately $1.0 million, or $0.16 per share, to
the Corporation's annual after-tax earnings.
21
23
During the third quarter of 1996 the Bank incurred a $5.9 million
charge from the FDIC which represented its share of the recapitalization of the
SAIF (substantially all SAIF-insured institutions were required to participate
in the recapitalization). This charge was set at 0.657% of the Bank's deposit
liabilities as of March 31, 1995. Although this charge adversely impacted the
Bank's 1996 results of operations, it is expected to provide long-term benefits
to the Bank in the form of lower federal insurance premiums, as previously
described.
Advertising and marketing expense decreased by $254,000 or 13.0% in
1996 and decreased by $206,000 or 9.5% in 1995. The decrease in 1996 was due
in part to fewer openings of new banking facilities than the previous year.
Also contributing, however, was the increased use of deposit premiums that
qualify as interest payments. As such, these expenditures were reported as a
component of interest expense rather than advertising and marketing. The
decrease in 1995 was principally due to a decrease in expenditures related to
mortgage lending promotions, customer brochures, and general image advertising.
A continued decline in advertising and marketing expenses is not expected in
1997.
Other non-interest expenses increased by $1.6 million or 25.0% in 1996
and by $741,000 or 12.2% in 1995. The change in both periods was due to
increased usage by the Corporation's customers of ATMs owned by other financial
institutions and an increase in fees paid to originate and service education
loans, caused by an increase in originations of such loans. Also contributing
to the increase in 1996, however, was $344,000 in amortization of goodwill
recorded as a result of the acquisition of RFC as well as a $155,000 increase
in merger-related expenses.
INCOME TAX EXPENSE Income tax expense for the years ended December 31,
1996, 1995, and 1994, was $5.8 million, $6.0 million, and $5.7 million,
respectively, or 36.6%, 36.1%, and 36.4%, of pretax income, respectively.
EXTRAORDINARY CHARGE The extraordinary charge recorded in 1994
consisted of a penalty on the prepayment of $32.7 million in FHLB advances, net
of the related income tax benefit.
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $112.9 million or
8.1% during the year ended December 31, 1996. This increase was primarily the
result of a $174.0 million or 18.7% increase in loans held for investment.
This growth was funded in part by a $54.7 million or 5.6% increase in deposit
liabilities. The majority of this growth occurred in time deposits, money
market accounts, and non-interest-bearing accounts. Also funding the increase
in loans was a $61.3 million or 19.0% increase in FHLB advances and other
borrowings and a $52.3 million or 15.6% aggregate decrease in the Corporation's
investment and MBS portfolios. The increase in FHLB advances and other
borrowings was due primarily to increases in overnight and short-term
borrowings from the FHLB as well as the purchase of fed funds from another
financial institution. The decreases in the Corporation's investment and MBS
portfolios were due to periodic maturities and/or principal amortization, as
well as sales of certain investment securities, as previously described.
LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
increased by $174.0 million or 18.7% during the year ended December 31, 1996.
This increase was principally due to strong demand for single-family
residential mortgage loans and a higher interest rate environment during the
last nine months of 1996. The higher rate environment encouraged borrowers to
shift their preferences to adjustable-rate mortgage loans, rather than
fixed-rate mortgage loans. Since the Corporation generally retains all of its
adjustable-rate loan production in portfolio, the Corporation experienced an
increase in loans held for investment. Also contributing to the increase in
loans held for investment during 1996, however, were increased originations of
consumer, education, and commercial real estate loans; the first due to strong
demand and competitive interest rate offerings on the part of the Corporation;
the second due to enrollment increases and improved market share at educational
institutions served by the Corporation; and the last due to increased emphasis
on commercial real estate lending and continued strong demand in the
Corporation's market areas.
22
24
The following table sets forth the composition of the Corporation's
portfolio of loans held for investment as of December 31 for each of the years
indicated.
Dollars In thousands 1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Single-family residential $ 544,727 47.83% $464,043 48.22% $343,969 45.77% $256,685 43.23% $298,013 50.70%
Multi-family residential 127,334 11.18 119,955 12.47 102,356 13.62 96,857 16.31 91,629 15.59
Commercial real estate loans 96,857 8.29 76,242 7.92 66,848 8.90 67,882 11.43 72,539 12.34
Construction (1) 94,401 6.14 51,983 5.40 47,561 6.33 39,848 6.71 27,796 4.73
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 836,337 73.44 712,223 74.01 560,734 74.62 461,272 77.69 489,977 83.35
Consumer loans:
Education loans 134,094 11.77 108,003 11.22 84,604 11.26 60,992 10.27 45,087 7.67
Second mortgage and home
equity loans 119,645 10.51 83,393 8.73 53,931 7.18 33,627 5.66 27,437 4.67
Automobile loans 36,831 3.23 39,653 4.12 39,822 5.30 27,060 4.56 16,496 2.81
Other consumer loans(2) 10,724 0.94 16,238 1.69 10,613 1.41 8,185 1.38 5,683 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 301,294 26.46 247,887 25.76 188,970 25.15 129,864 21.87 94,703 16.11
Other loans
Small Business Administration
loans 1,006 0.10 1,237 0.14 1,381 0.18 1,702 0.29 1,952 0.33
Commercial business loans 211 0.02 968 0.10 411 0.05 898 0.15 1,207 0.21
- ------------------------------------------------------------------------------------------------------------------------------------
Total other loans 1,217 0.11 2,205 0.23 1,792 0.24 2,600 0.44 3,159 0.54
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for investment,
gross 1,138,848 100.00% 962,315 100.00% 751,496 100.00% 593,736 100.00% 587,839 100.00%
Less:
Undisbursed loan proceeds 23,895 20,619 17,714 11,590 6,930
Discount on purchased loans 193 363 468 536 638
Unearned discounts and loan fees 832 1,063 1,414 1,716 1,494
Allowance for loan losses 7,888 8,186 8,074 7,828 7,227
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for $1,106,040 $932,084 $723,826 $572,066 $571,550
investment
====================================================================================================================================
(1) At December 31, 1996, construction loans consisted of $50.9 million in
single-family residences, $5.7 million in multi-family residences, and
$13.3 million in commercial real estate.
(2) At December 31, 1996, other consumer loans included $0.7 million of
mobile home loans, $1.9 million of recreational and household goods loans,
$7.0 million of unsecured loans, and $1.1 million of deposit
account-secured loans.
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios decreased
by $46.0 million or 18.0% during the year ended December 31, 1996. This
decrease was principally due to the normal periodic amortization of the
mortgage loans that support these types of securities. The proceeds from such
amortization were generally reinvested in loans held for investment, as
previously described. There were no purchases of mortgage-backed and related
securities during 1996 or 1995.
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 AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $64,890 $ 61,875 $ 85,763 $ 84,173 - -
- ------------------------------------------------------------------------------------------------------------------
Dollars in thousands HELD FOR INVESTMENT
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $136,184 $133,584 156,233 $154,006 $263,135 $234,514
Mortgage-backed securities 11,651 11,633 15,260 15,360 6,308 6,188
- --------------------------------------------------------------------------------------------------------------------
Total $147,835 $145,217 $171,493 $169,366 $269,443 $240,702
====================================================================================================================
On December 31, 1995, the Corporation reclassified a portion of its
mortgage-backed and related securities from its held for investment portfolio to
its available for sale portfolio. This reclassification was made in accordance
with a one-time opportunity that was granted by the Financial Accounting
Standards Board ("FASB") as a result of guidance it had issued relating to SFAS
115. Although management of the Corporation did not anticipate that any of the
securities reclassified would be sold, management believed it would be prudent
from a liquidity management
23
25
standpoint to reclassify a portion of its mortgage-backed and related
securities under this one-time opportunity. For additional information, refer
to Note 1 of the Corporation's Audited Consolidated Financial Statements,
included herein under Part II, Item 8, "Financial Statements and Supplementary
Data".
INVESTMENT SECURITIES The Corporation's investment securities available
for sale decreased by $6.3 million or 7.8% during the year ended December 31,
1996. This decrease was due primarily to the maturity or sale of a number of
corporate notes and marketable equity securities during the year, the proceeds
from which were used to purchase other investment securities or fund growth in
loans held for investment, as previously described.
The following table sets forth the composition of the Corporation's
investments available for sale as of December 31 for each of the years
indicated.
Dollars in thousands 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
Corporate obligations $41,083 $41,078 $32,168 $32,294 $39,743 $38,478
U.S. Treasury securities 262 262 3,023 3,048 - -
Asset-backed securities 1,076 1,076 2,340 2,338 3,456 3,367
Adjustable-rate mortgage
and short-term government
mutual funds 32,436 31,613 43,767 42,645 49,910 47,631
- -------------------------------------------------------------------------------------------------------------------
Total $74,857 $74,029 $81,298 $80,325 $93,109 $89,476
===================================================================================================================
DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$54.7 million or 5.6% during the year ended December 31, 1996. The majority of
this growth occurred in time deposits, money market accounts, and
non-interest-bearing accounts. The Corporation attributes this growth to a
combination of its expansion efforts in recent years, strong local economies in
its market areas, and competitive product and interest rate offerings.
Management expects these trends to continue in the immediate future, resulting
in continued modest growth in the Corporation's deposit liabilities, although
there can be no assurances.
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 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Regular savings accounts $85,675 1.98% $88,179 2.07% $ 83,822 2.23%
Interest-bearing checking accounts 53,907 1.00 55,967 0.97 47,394 1.59
Non-interest bearing checking accounts 75,341 - 69,861 - 50,761 -
Money market accounts 134,977 4.35 106,802 4.08 102,714 3.83
Variable-rate IRA accounts 3,345 4.43 3,626 4.67 2,613 3.81
Certificates of deposit 670,848 6.01 644,988 6.08 491,337 4.98
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,024,093 4.74% $969,423 4.77% $778,641 4.00%
===================================================================================================================================
At December 31, 1996, certificates of deposit in denominations of
$100,000 or more amounted to $47.4 million and mature as follows: $14.5 million
within three months, $6.7 million over three through six months, $17.1 million
over six through 12 months, $9.0 million over 12 through 24 months, and $0.1
million over 24 months.
FHLB ADVANCES AND OTHER BORROWINGS The Corporation's FHLB advances and
other borrowings increased by $61.3 million or 19.0% during the year ended
December 31, 1996. This increase was primarily attributable to growth in the
Corporation's loans held for investment, as previously described.
24
26
The following table presents certain information regarding the
Corporation's short-term FHLB advances and other borrowings (original maturities
of one year or less) at or for the years ended December 31, 1996, 1995, and
1994.
Dollars in thousands 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
FHLB advances:
Average balance outstanding (1) $271,537 $207,895 $107,860
Maximum amount outstanding at any month-end during the period 347,109 258,300 199,455
Balance outstanding at end of period 347,109 258,300 199,455
Average interest rate during the period (2) 5.52% 5.70% 5.10%
Weighted-average interest rate at the end of period 5.46% 5.73% 5.52%
Other borrowings: (3)
Average balance outstanding (1) $ 2,308 $ 308 -
Maximum amount outstanding at any month-end during the period 5,000 4,000 -
Balance outstanding at end of period 5,000 - -
Average interest rate during the period (2) 5.98% 7.79% -
Weighted-average interest rate at the end of period 5.64% - -
Total short-term borrowings:
Average balance outstanding (1) $273,845 $208,203 $ 107,860
Maximum amount outstanding at any month-end during the period 352,109 262,300 199,455
Balance outstanding at end of period 352,109 262,300 199,455
Average interest rate during the period (2) 5.52% 5.70% 5.10%
Weighted-average interest rate at the end of period 5.46% 5.76% 5.52%
==================================================================================================================
(1) Calculated using month-end balances.
(2) Calculated using month-end weighted average interest rates.
(3) Consists primarily of an over night line of credit with another financial
institution and reverse-repurchase agreements.
NON-PERFORMING ASSETS The Corporation's non-performing assets
(consisting of non-accrual loans, real estate acquired through foreclosure or
deed-in-lieu thereof, and real estate in judgement) amounted to $2.4 million or
0.16% of total assets at December 31, 1996, compared to $1.4 million or 0.10% at
December 31, 1995. The following table contains information regarding the
Corporation's non-performing assets during the years ended December 31, 1996,
1995, and 1994.
Dollars in thousands 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
Non-accrual loans:
Single-family residential $1,003 $ 547 $ 428 $ 361 $1,574
Multi-family and commercial real estate - 104 - 13 299
- -----------------------------------------------------------------------------------------------------
Total real estate loans 1,003 651 428 374 1,873
Consumer loans 973 605 313 218 226
Commercial business loans - - 129 - -
- -----------------------------------------------------------------------------------------------------
Total non-accrual loans 1,976 1,256 870 592 2,099
Real estate owned and in judgement 460 193 265 2,929 3,402
- -----------------------------------------------------------------------------------------------------
Total non-performing assets $2,436 $1,449 $1,135 $3,521 $5,501
=====================================================================================================
Ratio of non-accrual loans to total net loans receivable 0.18% 0.13% 0.12% 0.10% 0.37%
Ratio of total non-performing assets to total assets 0.16% 0.10% 0.10% 0.37% 0.63%
Ratio of total allowance for loan and real estate losses
to total non-performing assets 331% 577% 727% 246% 162%
=====================================================================================================
The $1.0 million or 68.1% increase in non-performing assets during the
year-ended December 31, 1996, was principally due to increased delinquencies in
mortgage and consumer loans due to increased growth in those portfolios in
recent years, as previously described. Contributing to a lesser degree was an
increase in foreclosed real estate due to increased delinquencies. The $314,000
or 27.7% increase in non-performing assets during the year ended December 31,
1995, was primarily attributable to non-performing loans acquired as part of the
RFC purchase.
The Corporation's ratio of total allowance for loan and real estate
losses to total non-performing assets has decreased in recent years. This
decrease was principally due to the increase in non-performing assets in recent
periods which management attributes to growth in the Corporation's loan
portfolio, as previously described. Management does not believe that recent
decreases in the ratio signal a significant deterioration in the overall credit
quality of the Corporation's loan portfolio or that it signals a need for
significant future additions to the Corporation's
25
27
allowance for loan losses, although there can be no assurances.
Management does believe, however, that modest provisions for loan losses may be
necessary in future periods to compensate for growth in its loan portfolio.
In addition to non-performing assets, at December 31, 1996, management
was closely monitoring $11.0 million of assets which it had classified as
doubtful, substandard, or special mention, but which were performing in
accordance with their terms. This compares to $9.8 million in such assets at
December 31, 1995. The increase during 1996 was primarily due to the
classification of a $3.0 million commercial real estate loan secured by a
multi-family residence located in Indianapolis, Indiana. As described herein
under Part I, Item 1, "Business, Lending Activities, Non-Performing and Other
Classified Assets", the Corporation does not anticipate incurring a loss on
this loan at this time, although there can be no assurances.
ASSET/LIABILITY MANAGEMENT
The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk") by monitoring its ratios of
interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates. Management has sought to control
these ratios, thereby limiting the affects of changes in interest rates on the
Corporation's earnings, by selling substantially all of its originations of
long-term, fixed-rate, single-family mortgage loans in the secondary market,
investing in adjustable-rate or medium-term, fixed-rate single-family
residential loans, investing in medium-term CMOs, and investing in consumer and
education loans which generally have shorter terms to maturity and higher
interest rates.
The Corporation also originates multi-family residential and commercial
real estate loans for its own portfolio, which generally have adjustable or
floating interest rates and/or shorter terms to maturity than conventional
single-family residential loans.
Long-term, fixed-rate, single-family mortgage loans originated for sale
in the secondary market are generally committed for sale at the time the
interest rate is locked with the borrower. As such, these loans pose little
interest rate risk to the Corporation.
The following table summarizes the anticipated maturities or repricings
of the Corporation's interest- earning assets and interest-bearing liabilities
as of December 31, 1996.
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 and other loans:
Fixed $70,472 $23,293 $40,364 $23,697 $22,860 $180,685
Adjustable 196,015 184,190 271,035 110 - 651,350
Consumer loans 188,154 28,264 64,142 14,988 4,773 300,321
Mortgage-backed and related securities 20,904 20,115 59,162 61,053 51,383 212,616
Investment securities and other earning assets 45,748 15,146 16,194 - 18,823 95,911
- -------------------------------------------------------------------------------------------------------------------------------
Total $521,293 $271,008 $450,897 $99,848 $97,839 $1,440,883
===============================================================================================================================
Interest-bearing liabilities:
Deposits liabilities:
Regular savings and checking accounts $139,410 - - - - $139,410
Money market deposit accounts 135,148 - - - - 135,148
Variable-rate IRA accounts 3,345 - - - - 3,345
Time deposits 310,731 $199,887 $148,263 $11,942 $26 670,849
FHLB advances and other borrowings 351,381 5,734 25,032 1,415 32 383,593
- -------------------------------------------------------------------------------------------------------------------------------
Total $940,015 $205,621 $173,295 $13,357 $58 $1,332,345
===============================================================================================================================
Excess (deficiency) of earning assets over
interest-bearing liabilities ($418,723) $65,387 $277,602 $86,491 $97,781
===============================================================================================================================
Cumulative excess (deficiency) of
earning assets over interest-bearing liabilities ($418,723) ($353,336) ($75,734) $10,757 $108,538
===============================================================================================================================
Cumulative excess (deficiency) of
earning assets over interest-bearing liabilities
as a percent of total assets -27.63% -23.32% -5.00% 0.71% 7.16%
===============================================================================================================================
Cumulative earning assets as a
percentage of interest-bearing liabilities 55.46% 69.16% 94.26% 100.81% 108.15%
===============================================================================================================================
26
28
The Corporation's one-year funding gap was -23.32% at December 31,
1996, compared to -26.87% and - 28.33% at December 31, 1995 and 1994,
respectively. The Corporation's one-year funding gap is significantly impacted
by management's strategy of funding investments in adjustable-rate mortgage
loans (the majority of which carry fixed rates of interest during the first two
to three years of their terms), as well as consumer loans (which have average
lives of approximately two to three years), with deposit liabilities and FHLB
advances that generally have average terms to maturity of less than one year or
carry floating rates of interest. 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 this strategy exposes the Corporation to unacceptable levels of
interest rate risk as evidenced by the fact that the Corporation's three-year
funding gap was -5.00% as of December 31, 1996, which compares to -9.69% and
- -10.51% as of December 31, 1995 and 1994, respectively. In addition, it should
be noted that for purposes of the foregoing analysis, the Corporation
classifies its interest-bearing checking, savings, and money market deposits in
the "6 Months or Less" 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. Accordingly, if such deposits were deemed to reprice
after one year, the Corporation's one-year funding gap would be -14.12% as of
December 31, 1996, which compares to -16.88% and -17.14% as of December 31,
1995 and 1994, respectively.
In late 1993 and early 1994 the Corporation engaged in leveraged
purchases of medium-term CMOs (original weighted-average lives of two to five
years) using FHLB advances as the primary funding source. Such transactions
exposed the Corporation to interest rate risk in that the maturities and
durations of the FHLB advances were approximately half that of the respective
CMOs. Furthermore, the maturities of the advances were fixed whereas the
maturities of the respective CMOs would fluctuate with market interest rates
and loan prepayment activity. Management of the Corporation believed that the
leveraged purchase of CMOs using FHLB advances provided sufficient interest
rate spread to compensate for the interest rate risk assumed by the
Corporation. Management estimated that only in the most extreme assumptions of
interest rate volatility, defined as immediate and sustained changes in
interest rates of more than 400 to 500 basis points from the time of purchase,
would these transactions become unprofitable to the Corporation. Increases in
interest rates during the last three years have not been sufficient to render
these transactions unprofitable to the Corporation. However, if interest rates
increase substantially from current levels, the net interest income contributed
by these transactions will decline or may even be negative. As of December 31,
1996, the remaining book value of CMOs purchased under this program was $131.0
million compared to an original book value of $166.7 million. Management does
not anticipate engaging in leveraged purchases of CMOs in the immediate future,
although there can be no assurances.
Although management believes that its asset/liability management
strategies reduce the potential effects of changes in interest rates on the
Corporation's operations, material and prolonged increases in interest rates
may adversely affect the Corporation's operations because the Corporation's
interest-bearing liabilities which mature or reprice within one year are
greater than the Corporation's interest-earning assets which mature or reprice
within the same period. Alternatively, material and prolonged decreases in
interest rates may benefit the Corporation's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain
specified levels of liquid investments in qualifying types of U.S. government,
federal agency, and other investment securities of not less than 5% of its net
withdrawable accounts and short-term borrowings, of which liquid assets
maturing in one year or less must consist of not less than 1%. The Bank's
long-term regulatory liquidity ratio averaged 5.2% during the year ended
December 31, 1996, and was 5.5% on December 31, 1996.
The Corporation's primary sources of funds are deposits obtained
through its retail branch offices, amortization, maturity, and prepayment of
outstanding loans and investments, sales of loans, and borrowings from the FHLB
of Chicago and other sources. During 1996, 1995, and 1994, the Corporation
used these sources of funds to primarily fund loan commitments, purchase CMO
securities, corporate obligations, and other investment securities, and cover
maturing liabilities and deposit withdrawals. At December 31, 1996, the
Corporation had
27
29
approved real estate loan commitments of $14.3 million outstanding and
mortgage loan sale commitments of $20.3 million outstanding. In addition, the
Corporation had $496.0 million in time deposits and $290.5 million in FHLB term
advances that were scheduled to mature within one year. Management believes
that the Corporation has adequate resources to fund all of these commitments,
that all of these commitments will be funded by the required date, and that the
Corporation can adjust the rates it offers on certificates of deposit to retain
such deposits in changing interest rate environments. Under current FHLB
lending and collateralization guidelines, the Corporation has approximately
$125.0 million in unused borrowing capacity at the FHLB.
The Corporation's stockholder's equity ratio as of December 31, 1996,
was 6.3% of total assets. The Corporation's objective is to maintain its
stockholders' equity ratio in a range of approximately 6.5% to 7.0%, which is
consistent with return on asset and return on equity goals of 1% and 15%,
respectively. The Corporation's equity ratio is below its target range as of
December 31, 1996, as a result of the aforementioned special assessment from
the FDIC. The Corporation expects its equity ratio to return to its target
range during the next 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, 1996, the Bank's regulatory capital
exceeded all regulatory minimum requirements as well as the minimum amount
required to be classified as a "well capitalized" institution. For additional
discussion, refer to Note 12 of the Corporation's Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial Statements and
Supplementary Data".
The Corporation paid cash dividends of $3.9 million, $3.2 million, and
$2.8 million during the years ended December 31, 1996, 1995, and 1994,
respectively. These amounts equated to dividend payout ratios of 38.6%, 30.0%
and 28.3% of the net income in such periods, respectively. It is the
Corporation's objective to maintain its dividend payout ratio in a range of 25%
to 35% of net income. However, the Corporation's dividend policy and/or
dividend payout ratio will be impacted by considerations such as the level of
stockholders' equity in relation to the Corporation's stated goal, as
previously described, regulatory capital requirements for the Bank, as
previously described, and certain dividend restrictions in effect for the Bank
(for additional discussion refer to Note 12 of the Corporation's Audited
Consolidated Financial Statements, included herein under Part II, Item 8,
"Financial Statements and Supplementary Data"). Furthermore, unanticipated or
non-recurring fluctuations in earnings may impact the Corporation's ability to
pay dividends and/or maintain a given dividend payout ratio. The
aforementioned special assessment from the FDIC was the primary reason the
Corporation's dividend payout ratio was outside of the Corporation's target
range during 1996.
On January 28, 1997, the Corporation's Board of Directors approved a
regular quarterly dividend of $0.16 per share payable on March 13, 1997, to
shareholders of record on February 20, 1997.
During 1996, the Corporation repurchased 464,800 shares of common stock
at a cost of $9.7 million under its 1995 and 1996 stock repurchase plans.
Furthermore, on January 28, 1997, the Corporation's Board of Directors
authorized the repurchase of an additional 306,351 shares over the next twelve
months and extended the stock repurchase plan adopted in 1996 for an additional
twelve months (103,700 shares remain eligible for repurchase under this plan).
All of the shares authorized under the plan adopted in 1995 have been
repurchased. For additional discussion, refer to Note 12 of the Corporation's
Audited Consolidated Financial Statements, included herein under Part II, Item
8, "Financial Statements and Supplementary Data".
28
30
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $24,644,254 $30,384,484
Interest-bearing deposits with banks 2,456,901 4,051,288
Investment securities available for sale, at fair value 74,029,474 80,325,428
Mortgage-backed and related securities:
Available for sale, at fair value 61,875,130 84,172,997
Held for investment, at cost (fair value of $145,217,199 and $169,365,825, respectively) 147,834,733 171,493,244
Loans held for sale 20,338,790 23,976,063
Loans held for investment, net 1,106,039,995 932,083,879
Federal Home Loan Bank stock 18,823,200 16,855,100
Accrued interest receivable, net 11,487,427 10,133,211
Office properties and equipment 26,210,947 27,176,063
Mortgage servicing rights, net 11,887,202 10,292,604
Intangible assets 5,221,245 5,642,719
Other assets 4,564,171 5,891,607
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $1,515,413,469 $1,402,478,687
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Deposit liabilities $1,024,092,887 $969,422,519
Federal Home Loan Bank advances and other borrowings 383,592,983 322,295,781
Advance payments by borrowers for taxes and insurance 3,912,206 3,740,518
Accrued interest payable 2,432,796 2,632,658
Other liabilities 5,968,239 5,448,217
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,419,999,111 1,303,539,693
============================================================================================================================
Preferred stock, $.10 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $.10 par value, 20,000,000 shares authorized, 6,639,326 and 6,612,305
shares issued and outstanding, respectively, including 512,300 and 47,500 shares
of treasury stock, respectively 663,933 661,231
Additional paid-in capital 35,580,114 35,192,795
Unearned restricted stock (414,392) (817,250)
Securities valuation allowance, net (2,450,764) (1,609,161)
Retained earnings 72,569,092 66,370,129
Treasury stock, at cost (10,533,625) (858,750)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 95,414,358 98,938,994
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,515,413,469 $1,402,478,687
============================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
29
31
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Interest on loans $83,786,180 $66,484,567 $50,751,216
Interest on mortgage-backed and related securities 14,494,999 15,802,529 16,054,569
Interest and dividends on investments 5,695,818 6,571,240 6,401,800
- ------------------------------------------------------------------------------------------------------------------
Total interest income 103,976,997 88,858,336 73,207,585
- ------------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 46,490,086 38,987,042 28,035,078
Interest on FHLB advances and other borrowings 17,193,577 15,967,433 12,902,948
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 63,683,663 54,954,475 40,938,026
- ------------------------------------------------------------------------------------------------------------------
Net interest income 40,293,334 33,903,861 32,269,559
Provision for loan losses - - -
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 40,293,334 33,903,861 32,269,559
- ------------------------------------------------------------------------------------------------------------------
Retail banking fees and service charges 10,237,623 8,509,906 6,763,097
Loan servicing fees 2,221,690 2,443,004 2,505,736
Commissions on annuity and insurance sales 2,063,520 1,012,990 886,111
Gain on sales of loans 4,330,550 3,544,575 2,944,782
Gain (loss) on sales of other investments (311,151) (28,598) 100,000
Other income 1,288,940 1,631,207 1,107,358
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income 19,831,172 17,113,084 14,307,084
- ------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 19,913,513 18,295,649 16,169,883
Occupancy and equipment 6,412,307 5,735,799 4,954,427
Federal deposit insurance premiums 2,124,036 1,861,879 1,705,036
Advertising and marketing 1,710,140 1,964,587 2,170,919
FDIC special assessment 5,941,000 - -
Other expenses 8,143,731 6,513,253 5,888,671
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense 44,244,727 34,371,167 30,888,936
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 15,879,779 16,645,778 15,687,707
Income tax expense 5,805,862 6,001,144 5,707,464
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 10,073,917 10,644,634 9,980,243
Extraordinary charge (Note 8) - - (203,226)
- ------------------------------------------------------------------------------------------------------------------
Net income $10,073,917 $10,644,634 $9,777,017
==================================================================================================================
Earnings per share:
Primary earnings per share:
Income before extraordinary charge $1.51 $1.72 $1.64
Extraordinary charge - - (0.03)
- ------------------------------------------------------------------------------------------------------------------
Net income per share $1.51 $1.72 $1.61
==================================================================================================================
Fully-diluted earnings per share:
Income before extraordinary charge $1.50 $1.71 $1.64
Extraordinary charge - - (0.03)
- ------------------------------------------------------------------------------------------------------------------
Net income per share $1.50 $1.71 $1.61
==================================================================================================================
Dividends paid per share $0.620 $0.550 $0.481
==================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
30
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $10,073,917 $10,644,634 $9,777,017
Adjustments to reconcile net income to net cash provided (used) by operations:
Real estate recoveries, net (10,240) (311,523) (194,797)
Net loan fees deferred 73,827 75,300 555,562
Depreciation and amortization 5,950,546 4,622,988 3,776,050
Gains on sales of loans, and other investments (4,019,400) (3,515,977) (3,044,782)
Increase in accrued interest receivable (1,354,216) (1,528,313) (1,969,928)
Increase (decrease) in accrued interest payable (199,862) 201,148 703,764
Increase in current and deferred income taxes 1,819,263 882,970 1,473,389
Other accruals and prepaids, net (414,056) 6,431 (25,462)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations before loan originations and sales 11,919,779 11,077,658 11,050,813
Loans originated for sale (242,726,074) (180,319,098) (132,359,656)
Sales of loans originated for sale 245,726,109 164,476,609 187,178,478
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations 14,919,814 (4,764,831) 65,869,635
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with banks 1,594,387 3,479,866 (1,859,950)
Purchases of investment securities (34,828,051) (7,459,642) (159,138,293)
Sales of investment securities 11,019,370 8,097,820 2,405,000
Maturities of investment securities 29,482,069 16,106,502 189,435,976
Purchases of mortgage-backed and related securities - - (211,284,602)
Mortgage-backed and related securities principal repayments 44,170,348 26,915,207 59,285,855
Loans originated for investment (467,678,503) (297,401,986) (319,603,967)
Loans purchased for investment (9,692,282) (1,968,075) (233,296)
Loan principal repayments 292,198,986 186,023,943 161,385,150
Sales of loans originated for investment 11,975,972 8,470,485 9,300,339
Sales of real estate 242,993 586,314 3,063,385
Additions to office properties and equipment (1,954,572) (5,874,671) (5,678,939)
Purchases of mortgage servicing rights - (4,088,169) (478,097)
Purchase of net assets of Rock Financial Corp. - (21,040,620) -
Other, net (330,466) 839,839 (8,184,901)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (123,799,749) (87,313,187) (281,586,340)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposit liabilities 54,670,368 87,598,932 33,131,479
Deposits purchased - 5,336,084 -
Long-term advances from Federal Home Loan Bank 132,000,000 50,000,000 127,066,000
Repayment of long-term Federal Home Loan Bank advances (114,905,000) (61,175,000) (69,660,000)
Net increase in short-term Federal Home Loan Bank borrowings 38,207,000 1,715,000 134,750,000
Increase (decrease) in other borrowings 5,995,202 3,995,611 (4,013)
Increase (decrease) in advance payments by borrowers for taxes and insurance 171,688 (1,616,241) 350,860
Proceeds from sale of common stock 194,225 13,551,631 155,307
Purchase of treasury stock (9,674,875) (858,750) -
Dividends paid (3,874,954) (3,192,137) (2,762,047)
Other, net 356,051 747,920 (366,743)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 103,139,705 96,103,050 222,660,843
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (5,740,230) 4,025,032 6,944,138
Cash and due from banks at beginning of period 30,384,484 26,359,452 19,415,314
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $24,644,254 $30,384,484 $26,359,452
==================================================================================================================================
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $102,622,781 $87,330,023 $71,237,657
Interest paid on deposits and borrowings 63,883,525 54,753,327 40,234,262
Income taxes paid 4,540,490 5,376,067 4,104,060
==================================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
31
33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995, and 1994
Common
Stock and
Additional Guarantee of Unearned Securities
Paid-In ESOP Restricted Valuation Retained Treasury
Capital Indebtedness Stock Allowance Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $19,943,094 ($295,775) ($40,122) - 51,909,770 - $71,516,967
Net income 9,777,017 9,777,017
Exercise of stock options 316,326 316,326
Restricted stock award 737,032 (665,311) 71,721
Repayment of ESOP indebtedness 180,444 180,444
Restricted stock award amortization 248,031 248,031
Valuation adjustment, net of taxes $(2,159,980) (2,159,980)
Fractional shares on 10% stock dividend (7,108) (7,108)
Dividends paid (2,762,047) (2,762,047)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 20,996,452 (115,331) (457,402) (2,159,980) 58,917,632 - 77,181,371
Net income 10,644,634 10,644,634
Proceeds from sale of common stock 13,358,743 13,358,743
Exercise of stock options 559,592 559,592
Restricted stock award 939,239 (864,968) 74,271
Repayment of ESOP indebtedness 115,331 115,331
Restricted stock award amortization 505,120 505,120
Valuation adjustment, net of taxes 550,819 550,819
Dividends paid (3,192,137) (3,192,137)
Purchase of treasury stock $(858,750) (858,750)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 35,854,026 - (817,250) (1,609,161) 66,370,129 (858,750) 98,938,994
Net income 10,073,917 10,073,917
Exercise of stock options 390,021 390,021
Restricted stock award amortization 402,858 402,858
Valuation adjustment, net of taxes (841,603) (841,603)
Dividends paid (3,874,954) (3,874,954)
Purchase of treasury stock (9,674,875) (9,674,875)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $36,244,047 - $(414,392) $(2,450,764) $72,569,092 $(10,533,625) $95,414,358
===================================================================================================================================
Refer to accompanying Notes to Audited Consolidated Financial Statements.
32
34
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Corporation provides a wide range of financial services
to individuals and businesses in Wisconsin through its wholly-owned subsidiary
bank. The Corporation is subject to competition from other financial
institutions. The Corporation, the Bank, and the Bank's subsidiaries are also
subject to the regulations of certain governmental agencies and undergo
periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting
policies of the Corporation, the Bank, and the Bank's subsidiaries conform to
generally accepted accounting principles ("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 statement of
financial condition and revenues and expenses for the period. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts and balances of the Corporation, the Bank, and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
INVESTMENT SECURITIES, INCLUDING MORTGAGE-BACKED AND RELATED
SECURITIES, AND STOCK HELD FOR REGULATORY PURPOSES Investment securities,
including mortgage-backed and related securities, are classified in one of two
categories and accounted for as follows: (1) securities that the Corporation
has the positive intent and ability to hold to maturity are classified as "held
for investment" and reported at amortized cost; (2) securities not classified
as "held for investment" are classified as "available for sale" and reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity ("securities valuation
allowance"), net of estimated income taxes. Management determines the
appropriate classification for its securities at the time of purchase. The
specific identification method is used to determine the cost of securities
sold.
On October 18, 1995, the FASB granted a one-time opportunity for
institutions to reassess the classification of all or a portion of their
securities. This guidance allowed institutions to transfer securities from the
"held for investment" category without calling into question their intent to
hold other securities in such category to maturity. On December 31, 1995,
management of the Corporation elected to transfer mortgage-backed and related
securities with a carrying value of $85.8 million from the "held for
investment" category to the "available for sale" category. As a result of this
change, the Corporation recorded a $1.6 million adjustment against the
securities as of December 31, 1995. This adjustment represented the difference
between the book and fair values of the securities as of such date. The
Corporation also recorded a $1.0 million adjustment against its stockholders'
equity as of the same date, which represented the after-tax effect of the
aforementioned adjustment.
The Corporation occasionally enters into purchases of securities and/or
whole-loans under agreements to resell ("repurchase agreements"). The amounts
advanced under these agreements represent short-term loans and are reflected as
a receivable in the Corporation's Consolidated Statement of Financial
Condition.
Stock of the FHLB of Chicago is owned due to regulatory requirements
and is carried at cost.
INTEREST ON LOANS Interest income is accrued on loan balances
outstanding. Loans are reviewed regularly by management and are placed in a
non-accrual status when the collection of interest or principal is considered
unlikely.
DISCOUNTS, PREMIUMS, AND DEFERRED LOAN FEES Discounts and premiums on
loans are amortized over the life of the related loans using the level-yield
method. Loan origination fees and certain direct loan origination costs are
deferred and amortized over the life of the related loans as an adjustment of
yield. Such fees are amortized using the level-yield method.
33
35
LOANS HELD FOR SALE Loans originated and held for sale are carried at
the lower of aggregate cost or market. The Corporation generally retains the
servicing rights to such loans after they are sold.
MORTGAGE SERVICING RIGHTS Servicing mortgage loans includes such
functions as collecting monthly payments of principal and interest from
borrowers, passing such payments through to third-party investors, maintaining
escrow accounts for taxes and insurance, and making such payments when they are
due. The Corporation generally earns a fee of 25 basis points or more on the
outstanding loan balance for performing these services as well as fees and
interest income from ancillary sources such as delinquency charges and float.
Prior to 1995 the Corporation's mortgage servicing rights consisted of
only two assets -- excess mortgage servicing rights ("EMSR") and purchased
mortgage servicing rights ("PMSR"). EMSR is typically recorded as a component
of gain on sale of mortgage loans and represents the present value of the
difference between the contractual interest rate of the loans sold and the
yield to the investor, adjusted to exclude a normal servicing fee (typically 25
basis points). The offsetting deferred charge is amortized against service fee
income over the estimated lives of the loans using the income-forecast method.
PMSR represents mortgage servicing rights acquired from third-parties. It is
recorded at cost and is also amortized over the estimated lives of the loans
using the income-forecast method.
On January 1, 1995, the Corporation adopted SFAS 122. This accounting
standard permitted the recognition of a third mortgage servicing asset -
originated mortgage servicing rights ("OMSR"). OMSR, like EMSR, is typically
recorded as a component of gain on sale of mortgage loans. It differs from
EMSR in that it approximates the present value of the normal servicing fee
(typically 25 basis points) 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 offsetting deferred charge is amortized
against service fee income over the estimated lives of the loans using the
income-forecast method.
As a result of its adoption of SFAS 122, the Corporation recorded an
additional gain of $1.8 million on loans sold with servicing retained in 1995.
Retroactive application of SFAS 122 to mortgage loans sold prior to 1995
was prohibited.
The value of EMSR, PMSR, and OMSR (collectively "mortgage servicing
rights") is subject to impairment as a result of changes in loan prepayment
expectations and in market discount rates used to value the future cash flows
associated with such assets. If actual loan prepayment activity associated
with serviced loans exceeds that which was estimated by management at the time
the mortgage servicing rights were originally recorded, a valuation adjustment
is recorded against such assets and against the Corporation's loan servicing
fee income in the period of the prepayment. The valuation adjustment is
calculated using the current outstanding principal balance of the related
loans, a long-term prepayment assumption as determined by management, and a
discount rate that the Corporation has experienced in recent bids on mortgage
servicing rights in the secondary market.
The Corporation purchases or originates mortgage servicing rights on
single-family residential mortgage loans only. In valuing the mortgage
servicing rights recorded on such loans, the Corporation stratifies the loans
by type of loan (i.e., non-government-guaranteed loans versus
government-guaranteed loans), year of original funding, contractual interest
rate, and original term to maturity.
PENDING ACCOUNTING CHANGE In June 1996, the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). This
standard establishes new accounting and financial reporting rules for sales,
securitizations, and servicing of receivables and other financial assets, for
secured borrowing and collateral transactions, and for extinguishment of
liabilities. SFAS 125 also eliminates the distinction between EMSR and OMSR.
The statement is applicable to transactions occurring after December 31, 1996,
with certain exceptions. SFAS 125 is not expected to have a material impact on
the financial condition or operations of the Corporation.
34
36
REAL ESTATE Real estate acquired through foreclosure or deed in lieu
of foreclosure and real estate subject to redemption are recorded at the lower
of cost or estimated fair market value. Costs relating to the development and
improvement of the property are capitalized. Income and expenses incurred in
connection with holding and operating the property are included in the
Corporation's Consolidated Statements of Operations.
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE A periodic review of
loans and real estate is made to determine whether the estimated fair value of
the related assets is equal to or in excess of the related carrying amounts.
In making such determination, consideration is given to estimated sales prices,
refurbishing costs, selling costs, and market discount rates. Where loss is
indicated, a specific allowance for loss is established. In addition, the
Corporation maintains a general loss allowance against its loan and real estate
portfolios which is based on its own loss experience, that of the financial
services industry, and management's ongoing assessment of current economic
conditions, and the credit risk inherent in the portfolios. An allocation of
the general loss allowance between loans and real estate is made for financial
reporting purposes and is generally based on the relative gross book values of
the assets in each portfolio. Accordingly, transfers of general loss allowances
between the loan and real estate portfolios may occur from time to time in
order to adjust for changes in relative loss exposures between the portfolios.
Management of the Corporation believes that its allowances for losses
on loans and real estate are adequate. However, the estimates used by
management in determining the adequacy of such allowances are susceptible to
significant change due primarily to changes in economic and market conditions.
In addition, various regulatory agencies periodically review the Corporation's
allowances for losses as an integral part of their examination processes. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments of information available to them at the time of their
examinations.
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 resulting gain or loss is recorded in income.
Costs of holding office properties under construction (principally
interest and real estate taxes) are capitalized and depreciated over the
estimated useful lives of the related assets.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Corporation
occasionally enters into sales of securities under agreements to repurchase
("reverse-repurchase agreements"). Reverse-repurchase agreements are treated
as financing, and the obligations to repurchase securities sold are reflected
as a liability in the Corporation's Consolidated Statement of Financial
Condition. The securities underlying the agreements remain in the asset
accounts.
INCOME TAXES The Corporation, the Bank, and the Bank's subsidiaries
file a consolidated federal income tax return and separate state income tax
returns. Provision is made in the income tax expense accounts for deferred
taxes applicable to income and expense items reported in different periods for
financial statement purposes than for income tax purposes.
PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS The Corporation's net
periodic pension cost consists of the expected cost of benefits earned by
employees during the current period and an interest cost on the projected
benefit obligation, reduced by the earnings on assets held by the retirement
plan, by amortization of a transitional assets over a period of 15 years
(beginning in 1987), and by amortization of any actuarial gains and losses over
the estimated future service period of existing plan participants. The
projected unit credit actuarial cost method is used to determine expected
pension costs. The Corporation's funding policy is to contribute amounts
deductible for federal income tax purposes.
35
37
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 The following methods and
assumptions were used by the Corporation in estimating fair value disclosures
for financial instruments (refer to Note 13 for actual fair value amounts):
INTEREST-BEARING DEPOSITS WITH BANKS The face amounts presented in the
Corporations Consolidated Statements of Financial Condition for
interest-bearing deposits with banks approximates fair value for such asset.
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 as of
December 31, 1996 and 1995. 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.
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 yields quoted in the secondary market,
adjusted for management's estimate of differences in liquidity and/or credit
risk. For instances in which comparable yields cannot be obtained in the
secondary market, discount rates used in the computations are those interest
rates offered by the Corporation on such loans as of December 31, 1996 and
1995.
FEDERAL HOME LOAN BANK STOCK FHLB stock held in excess of minimum
requirements can be returned to the FHLB of Chicago for face value.
Accordingly, the fair value of all FHLB stock is estimated to be equal to the
face amount presented in the Corporation's Consolidated Statements of Financial
Condition.
DEPOSIT LIABILITIES The fair values of demand deposit accounts (i.e.,
interest-bearing and non-interest-bearing checking accounts and money market
and regular savings accounts) are equal to the face amount presented in Note 7.
The fair value of fixed-rate time deposits is estimated using a discounted cash
flow calculation that applies interest rates offered by the Corporation as of
December 31, 1996 and 1995, 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 December 31, 1996 and 1995, to a schedule of aggregate
contractual maturities of such liabilities as of the same date. The fair value
of FHLB advances excludes the effect of any prepayment penalties that may be
incurred if the Corporation were to prepay any of its term advances.
OTHER BORROWINGS Other borrowings consist of short-term borrowings
from third-party financial institutions and borrowings under long-term
contracts. Other borrowings are not material to the Corporation either
individually or in the aggregate. As such, the Corporation has not estimated
the fair value of such borrowings.
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.
36
38
ACCRUED INTEREST RECEIVABLE AND PAYABLE The fair value of accrued
interest is equal to the face amount presented in the Corporation's
Consolidated Statement of Financial Condition.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The Corporation has become a
party to financial instruments with off-balance-sheet risk in the normal course
of its business in order to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
lines of credit, commitments to sell loans, and financial guarantees.
Off-balance-sheet financial instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the statement of financial condition. In the event of non-performance by
the other party to a financial instrument, the Corporation's exposure to credit
loss is represented by the contractual amount of the instrument. The
Corporation uses the same credit policies in granting commitments, letters and
lines of credit, and financial guarantees as it does for on-balance-sheet
financial instruments.
The fair values of commitments to extend credit and commitments to sell
loans, both of which are generally short-term in nature and which involve
primarily fixed- and adjustable-rate residential mortgage loans, are estimated
to be equal to their respective face values. Any difference that may exist in
the fair value of the Corporation's sales commitments will generally be offset
by a similar difference in the fair value of the fixed-rate loan commitments
that are to be matched against such sales. In general, the Corporation does
not maintain material long or short positions with respect to its mortgage
banking operations.
Home equity lines of credit carry floating market rates of interest.
Accordingly, the fair value of outstanding home equity lines of credit is
estimated to be equal to the face value of such commitments.
The Corporation does not issue material amounts of stand-by letters of
credit or financial guarantees. Accordingly, the fair value of such exposures
are estimated to be equal to their face value in all material respects.
STOCK DIVIDENDS Earnings per share and dividends paid per share, as
presented in the Corporation's Consolidated Statements of Operations, have been
adjusted to recognize a 10% stock dividend on June 2, 1994. Common shares
issued and outstanding, as presented in the Corporation's Consolidated
Statements of Financial Condition, have also been adjusted for such stock
dividend.
STOCK-BASED COMPENSATION On January 1, 1996 the Corporation adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). As permitted by SFAS 123, the
Corporation did not adopt the fair value method of expense recognition for
stock-based compensation awards (the "fair value method"). As such, the
adoption of SFAS 123 had no effect on the Corporation's reported earnings.
Rather, the effects of the fair value method on the Corporation's earnings have
been disclosed on a proforma basis, as permitted by SFAS 123. Refer to Note 10
for the appropriate disclosures.
EARNINGS PER SHARE Primary and fully-diluted earnings per share are
based on the weighted-average number of common shares outstanding during each
period and the common stock equivalent shares outstanding at the end of each
period (as adjusted for stock splits and dividends). Common stock equivalent
shares are computed using the treasury stock method and consist of stock
options outstanding under the stock incentive plans described in Note 10. All
stock options are assumed to be 100% vested for purposes of the earnings per
share computations. The computation of earnings per share for the years ended
December 31, 1996, 1995, and 1994, is as follows:
37
39
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
FULLY- FULLY- FULLY-
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $10,073,917 $10,073,917 $10,644,634 $10,644,634 $9,777,017 $9,777,017
====================================================================================================================================
Average common shares issued, net of
actual treasury shares purchased 6,261,572 6,261,572 5,848,080 5,848,080 5,738,012 5,738,012
Common stock equivalents based
on the treasury stock method 419,421 446,817 357,184 385,933 331,242 338,465
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares and
common stock equivalents 6,680,993 6,708,389 6,205,264 6,234,013 6,069,254 6,076,477
====================================================================================================================================
Earnings per share $1.51 $1.50 $1.72 $1.71 $1.61 $1.61
====================================================================================================================================
STATEMENT 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").
RECLASSIFICATION Certain 1995 and 1994 balances have been reclassified
to conform with the 1996 presentation.
NOTE 2 - INVESTMENT SECURITIES
Investment securities available for sale at December 31, 1996, are
summarized as follows:
1996
- -----------------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
Corporate obligations $41,083,255 $60,294 ($65,656) $41,077,893
U.S. Treasury securities 261,621 313 - 261,934
Asset-backed securities 1,076,022 1,288 (1,006) 1,076,304
Adjustable-rate mortgage and short-term government mutual funds 32,435,911 - (822,568) 31,613,343
- -----------------------------------------------------------------------------------------------------------------------------
Total $74,856,809 $61,895 ($889,230) $74,029,474
=============================================================================================================================
Investment securities available for sale at December 31, 1995, are
summarized as follows:
1995
- -----------------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
Corporate obligations $32,168,065 $147,286 ($21,359) $32,293,992
U.S. Treasury securities 3,023,242 24,727 (469) 3,047,500
Asset-backed securities 2,339,982 1,924 (3,641) 2,338,265
Adjustable-rate mortgage and short-term government mutual funds 43,766,432 5,020 (1,125,781) 42,645,671
- -----------------------------------------------------------------------------------------------------------------------------
Total $81,297,721 $178,957 ($1,151,250) $80,325,428
==============================================================================================================================
The weighted average yield on all investment securities was 6.24% and
5.90% at December 31, 1996 and 1995, respectively.
Accrued interest receivable on investment securities was $781,270 and
$983,718 at December 31, 1996 and 1995, respectively.
Realized losses on sales of investment securities were $311,151,
$39,146, and zero during 1996, 1995, and 1994, respectively. Realized gains
were $10,548 during 1995. There were no realized gains on sales of investment
securities during 1996 and 1994.
38
40
The amortized cost and estimated fair value of investment securities at
December 31, 1996, by contractual maturity, are summarized as follows:
AMORTIZED FAIR
INVESTMENTS MATURING ... COST VALUE
- ---------------------------------------------------------------------------------------------------------------
Within one year $13,868,696 $13,880,275
In one year to five years 28,552,202 28,535,856
- ---------------------------------------------------------------------------------------------------------------
Subtotal 42,420,898 42,416,131
- ---------------------------------------------------------------------------------------------------------------
Marketable equity securities 32,435,911 31,613,343
- ---------------------------------------------------------------------------------------------------------------
Total $74,856,809 $74,029,474
===============================================================================================================
NOTE 3 - MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities available for sale at December
31, 1996, are summarized as follows:
1996
- ---------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $64,889,598 $16,517 ($3,030,985) $61,875,130
===============================================================================================================
Mortgage-backed and related securities held for investment at December
31, 1996, are summarized as follows:
1996
- ---------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $136,183,410 $17,587 ($2,617,054) $133,583,943
Mortgage-backed securities 11,651,323 98,962 (117,029) 11,633,256
- ---------------------------------------------------------------------------------------------------------------
Total $147,834,733 $116,549 ($2,734,083) $145,217,199
===============================================================================================================
Mortgage-backed and related securities available for sale at December
31, 1995, are summarized as follows:
1995
- ---------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $85,763,301 $43,975 ($1,634,279) $84,172,997
===============================================================================================================
Mortgage-backed and related securities held for investment at December
31, 1995, are summarized as follows:
1995
- ---------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $156,233,329 $129,014 ($2,356,981) $154,005,362
Mortgage-backed securities 15,259,915 181,654 (81,106) 15,360,463
- ---------------------------------------------------------------------------------------------------------------
Total $171,493,244 $310,668 ($2,438,087) $169,365,825
===============================================================================================================
The weighted average yield on mortgage-backed and related securities was
6.30% and 6.16% at December 31, 1996 and 1995, respectively.
Accrued interest receivable on mortgage-backed and related securities
was $1,177,988 and $1,499,754 at December 31, 1996 and 1995, respectively.
39
41
Mortgage-backed securities consist of FHLMC, FNMA, and GNMA securities.
Collateralized mortgage obligations consist of securities backed by the
aforementioned agency-backed securities or by whole-loans. As of December 31,
1996, approximately 71% of the Corporation's CMO portfolio consisted of
securities backed by whole loans, all of which were generally rated "AAA" by
the major credit-rating agencies. Approximately 25% of the Corporation's
whole-loan CMOs consisted of loans on properties located in the state of
California. No other geographical location had a material concentration.
There were no realized gains or losses on sales of mortgage-backed and
related securities during 1996, 1995 or 1994.
CMOs with a book value of $62.9 million were pledged to secure FHLB
advances as of December 31, 1996.
NOTE 4 - LOANS HELD FOR INVESTMENT
Loans held for investment at December 31 are summarized as follows:
1996 1995
- --------------------------------------------------------------------------------------------
First mortgage loans:
Single-family $544,726,550 $464,042,592
Multi-family 127,334,307 119,955,341
Commercial 94,400,682 76,241,653
Construction 69,874,835 51,983,402
Education loans 134,093,919 108,003,498
Second mortgage and home equity loans 119,644,928 83,991,638
Consumer loans 47,555,741 55,891,541
Commercial business and Small Business Administration loans 1,217,477 2,205,128
- --------------------------------------------------------------------------------------------
Subtotal 1,138,848,439 962,314,793
Less:
Undisbursed loan proceeds 23,895,301 20,618,879
Discount on purchased loans 192,854 362,882
Unearned discounts and loan fees 831,966 1,063,076
Allowance for loan losses 7,888,323 8,186,077
- --------------------------------------------------------------------------------------------
Total $1,106,039,995 $932,083,879
============================================================================================
The weighted average contractual interest rate for all loans was 8.16%
and 8.24% at December 31, 1996 and 1995, respectively.
Accrued interest receivable on loans held for investment was $9,506,719
and $7,634,319 at December 31, 1996 and 1995, respectively.
Loans serviced for investors were $1.2 billion, $1.1 billion, and $803.2
million at December 31, 1996, 1995, and 1994, respectively. These loans are not
reflected in the Corporation's Consolidated Statements of Financial Condition.
At December 31, 1996 and 1995, loans on non-accrual status were $2.0
million and $1.3 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 area (defined as the
metropolitan areas of La Crosse, Madison, Hudson, Eau Claire, Beloit, and
Janesville Wisconsin, and surrounding areas, as well as contiguous counties in
Iowa and Minnesota), though from time to time the Corporation will purchase
single-family loans originated outside of its primary market area. It is also
the Corporation's general policy to limit an individual single-family mortgage
loan to 80% of the appraised value of the property securing the loan. The
Corporation will occasionally lend more than 80% of the appraised value of the
property, but generally will require the borrower to obtain private mortgage
insurance on the portion of the loan amount that exceeds 80% of the collateral.
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42
With respect to multi-family and commercial real estate loans, it is
the Corporation's policy to restrict its lending area to loans secured by
property located within a 300-mile radius of La Crosse, to include the states
of Nebraska, Illinois, Iowa, and Minnesota, although in the past the
Corporation originated multi-family and commercial real estate loans outside
of this area. It is also the Corporation's general policy to limit loans on
multi-family residential complexes, retail shopping centers, office buildings,
and multi-tenant industrial buildings to 80% of the appraised value of the
property securing the loan. Loans on other types of commercial properties,
such as nursing homes, hotels/motels, churches, and single-tenant industrial
buildings are limited to 75% or less of the appraised value of the property
securing the loan. In addition, it is the Corporation's policy that no more
than 20% of its multi-family and commercial real estate loans consist of this
second category of loans. Multi-family and Commercial real estate loans
originated or purchased outside of the Corporation's market area amounted to
only $25.3 million and $27.8 million, at December 31, 1996 and 1995,
respectively.
With respect to consumer loans, it is the Corporation's policy that
such loans be supported primarily by the borrower's ability to repay the loan
and secondarily by the value of the collateral securing the loan, if any.
Education loans are guaranteed by the U.S. government.
A summary of the activity in the allowance for loan losses is as
follows:
1996 1995 1994
- -----------------------------------------------------------------------------
Balance at beginning of period $8,186,077 $8,073,670 $7,828,211
Provision charged to expense - - -
- -----------------------------------------------------------------------------
Loans charged-off (336,989) (468,737) (281,907)
Recoveries 39,235 44,036 49,332
- -----------------------------------------------------------------------------
Charge-offs, net (297,754) (424,701) (232,575)
Transfers - - 478,034
Purchased allowances - 537,108 -
- -----------------------------------------------------------------------------
Balance at end of period $7,888,323 $8,186,077 $8,073,670
=============================================================================
NOTE 5 - MORTGAGE SERVICING RIGHTS
A summary of the activity in mortgage servicing rights is as follows:
Allowance
Excess Purchased Originated for
MSR MSR MSR Loss Total
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $5,032,581 - - ($1,223,948) $3,808,633
Purchased servicing $ 478,097 478,097
Originated servicing 1,288,242 1,288,242
Amortization (581,229) (16,324) (597,553)
Charge-offs (875,990) 875,990 -
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 4,863,604 461,773 - (347,958) 4,977,419
Purchased servicing 4,088,169 4,088,169
Originated servicing 737,329 $1,750,622 $1,750,622 2,487,951
Amortization (593,163) (355,977) (61,795) (1,010,935)
Valuation adjustments (250,000) (250,000)
Charge-offs (190,226) 190,226 -
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,817,544 4,193,965 1,688,827 (407,732) 10,292,604
Originated servicing 1,249,238 2,477,098 3,726,336
Amortization (693,177) (485,880) (328,783) (1,507,840)
Valuation adjustments (623,898) (623,898)
Charge-offs (291,100) (157,346) (172,184) 620,630 -
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $5,082,505 $3,550,739 $3,664,958 ($ 411,000) $11,887,202
=======================================================================================================
Refer to Note 1 for a description of the Corporation's accounting policies with
respect to mortgage servicing rights.
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NOTE 6 -- OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31 are summarized as
follows:
1996 1995
- -------------------------------------------------------------------
Office buildings and improvements $18,637,456 $18,743,376
Furniture and equipment 15,710,546 15,197,138
Land and improvements 3,683,478 3,654,259
Leasehold improvements 4,681,491 3,988,154
Property acquired for expansion 1,179,808 1,179,808
Construction in progress 388,138 882,587
- -------------------------------------------------------------------
Subtotal 44,280,917 43,645,322
- -------------------------------------------------------------------
Less allowances for depreciation
and amortization 18,069,970 16,469,259
- -------------------------------------------------------------------
Total $26,210,947 $27,176,063
===================================================================
Depreciation expense was $2,599,431, $2,399,505, and $2,150,757 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The Corporation rents office space and land under operating leases at
certain of its locations. These leases have terms expiring between 1997 and
2006 and provide for renewals subject to escalation clauses. Rental expense was
$988,483, $821,236, and $491,564 for the years ended December 31, 1996, 1995,
and 1994, respectively.
NOTE 7 -- DEPOSIT LIABILITIES
Deposit liabilities at December 31 are summarized as follows:
1996 1995
- -----------------------------------------------------------------------------------------
WEIGHED WEIGHED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
- -----------------------------------------------------------------------------------------
Checking accounts:
Non-interest-bearing $ 75,340,636 - $69,860,694 -
Interest-bearing 53,907,106 1.00% 55,967,270 0.97%
Money market savings:
Great Rate accounts 89,889,046 4.93 61,760,198 4.80
Insured Market Fund accounts 16,886,876 4.11 12,538,740 4.02
Market Rate accounts 28,200,632 2.64 32,503,262 2.75
Regular savings accounts 85,674,670 1.98 88,178,532 2.07
Variable-rate IRA accounts 3,344,848 4.43 3,625,773 4.67
Time deposits maturing...
Within three months 172,798,057 6.24 71,409,515 5.56
Four to six months 104,522,278 5.70 94,334,392 5.92
Seven to twelve months 218,640,578 5.97 284,756,262 6.05
One to five years 174,888,160 6.00 194,487,881 6.35
- -----------------------------------------------------------------------------------------
Total time deposits 670,849,073 6.01 644,988,050 6.08
- -----------------------------------------------------------------------------------------
Total $1,024,092,887 4.74% $969,422,519 4.77%
=========================================================================================
Time deposits include $47.4 million and $41.9 million of certificates in
denominations of $100,000 or more at December 31, 1996 and 1995, respectively.
Accrued interest payable on deposit liabilities was $740,828 and $1,192,964 at
December 31, 1996 and 1995, respectively.
Included in non-interest-bearing checking accounts at December 31, 1996
and 1995, were $12.2 million and $13.8 million, respectively, which represented
amounts held in custody for third-party investors in loans serviced by the
Corporation.
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44
Interest expense on deposit liabilities for the year ended December 31
is summarized as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Checking accounts $ 521,038 $ 654,496 $ 692,152
Money market savings accounts 5,103,182 3,987,442 3,677,728
Regular savings 1,774,934 1,753,301 1,807,505
Time deposits 39,090,932 32,591,803 21,857,693
- --------------------------------------------------------------------------------
Total $46,490,086 $38,987,042 $28,035,078
================================================================================
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank advances and other borrowings at December 31 are
summarized as follows:
1996 1995
- ------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
Federal Home Loan Bank
advances maturing in...
- ------------------------------------------------------------------------------------------
1996 - - $164,905,000 5.67%
1997 $290,507,000 5.43% 33,507,000 5.08
1998 18,305,000 5.49 18,305,000 5.49
1999 6,715,000 6.16 6,715,000 6.16
2000 1,400,000 6.93 1,400,000 6.93
Open line of credit 56,602,000 5.61 93,395,000 5.83
- ------------------------------------------------------------------------------------------
Total FHLB advances 373,529,000 5.48 318,227,000 5.66
Other borrowings 10,063,983 6.52 4,068,781 7.81
- ------------------------------------------------------------------------------------------
Total $383,592,983 5.50% $322,295,781 5.69%
==========================================================================================
The Corporation's borrowings at the FHLB of Chicago are limited to 35%
of total assets or 60% of the book value of certain mortgage loans plus 75% of
the market value of certain mortgage-backed and related securities, whichever is
less. Interest on the open line of credit is paid monthly at 0.45% above the
FHLB's daily investment deposit rate or approximately 25 basis points above the
federal funds rate.
The Corporation has lines of credit with two financial institutions.
These lines, which amount to $15.0 million in the aggregate, permit the
overnight purchase of fed funds.
The Corporation has a $5.0 million borrowing outstanding with a third
financial institution which matures on May 31, 1998, but which is subject to
renewal under certain circumstances. Interest on the borrowings is payable
quarterly at 185 basis points above the three-month LIBOR, as determined on a
quarterly basis. The Corporation has pledged all issued and outstanding capital
stock of the Bank as collateral for this line of credit.
Accrued interest payable on FHLB advances and other borrowings was
$1,691,973 and $1,437,212 December 31, 1996 and 1995, respectively.
NOTE 9 - INCOME TAXES
Federal and state income tax expense for the years ended December 31 is
summarized as follows:
1996 1995 1994
- -----------------------------------------------------------------------
Current:
Federal $5,007,142 $5,289,144 $4,321,369
State 77,720 108,000 84,125
- -----------------------------------------------------------------------
Total current 5,084,862 5,397,144 4,405,494
- -----------------------------------------------------------------------
Deferred:
Federal 582,000 450,000 1,069,170
State 139,000 154,000 232,800
- -----------------------------------------------------------------------
Total deferred 721,000 604,000 1,301,970
- -----------------------------------------------------------------------
Total $5,805,862 $6,001,144 $5,707,464
=======================================================================
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The significant components of the Corporation's deferred tax expense for
the years ended December 31 are summarized as follows:
1996 1995 1994
- ---------------------------------------------------------------------------------
Mortgage servicing rights $818,705 $724,766 -
Asset valuation allowances (311,288) (580,554) $1,426,073
Deferred loan fees 288,351 496,927 96,336
Deferred compensation (147,559) (406,795) (3,884)
Provision for loan losses and
real estate recoveries, net 128,248 284,857 144,185
FHLB stock dividends - 155,126 -
Office properties and equipment
depreciation (56,321) 73,138 13,308
Investments in partnerships (182) (5,686) (138,091)
Other 1,046 (137,779) (235,957)
- ---------------------------------------------------------------------------------
Total deferred $721,000 $604,000 $1,301,970
=================================================================================
The income tax provision differs from the provision computed at the
federal statutory corporate tax rate for the years ended December 31 as follows:
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Income taxes at federal statutory rate of 35% $5,557,922 $5,826,022 $5,490,697
State income taxes net of federal income tax benefit 140,868 170,300 206,001
Other 107,072 4,822 10,765
- ----------------------------------------------------------------------------------------------------
Income tax provision $5,805,862 $6,001,144 $5,707,464
====================================================================================================
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, are summarized as follows:
1996 1995
- -------------------------------------------------------------------------------------
Deferred tax assets:
Loan and real estate loss allowances $2,617,549 $2,783,003
Securities valuation allowance 1,391,038 953,435
Deferred compensation 1,004,144 868,192
State tax loss carryforwards 473,760 525,450
Deferred loan fees - 119,827
Other 43,960 55,517
- -------------------------------------------------------------------------------------
Total deferred tax assets 5,530,451 5,305,424
Valuation allowance (212,980) (350,709)
- -------------------------------------------------------------------------------------
Adjusted deferred tax assets 5,317,471 4,954,715
- -------------------------------------------------------------------------------------
Deferred tax liabilities:
Mortgage servicing rights 1,580,177 771,790
FHLB stock dividends 625,814 520,910
Office properties and equipment depreciation 444,692 507,802
Purchase acquisition adjustments 413,251 384,622
Asset valuation allowances - 308,326
Federal tax effect of state deferred taxes, net 184,208 262,033
Deferred loan fees 170,127 -
Investment in unconsolidated partnerships 85,771 87,117
Other 64,112 115,270
- -------------------------------------------------------------------------------------
Total deferred tax liabilities 3,568,152 2,957,870
- -------------------------------------------------------------------------------------
Net deferred tax assets $1,749,319 $1,996,845
=====================================================================================
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NOTE 10 -- EMPLOYEE BENEFIT PLANS
PENSION PLAN The Corporation has established a pension plan for the
benefit of full-time employees that have at least one year of service and have
attained the age of 20. Benefits under the plan are based on the employee's
years of service and compensation during the years immediately preceding
retirement. The following table summarizes the components of pension expense,
the funded status of the plan, and the amount recognized in the Corporation's
consolidated financial statements for the years ended December 31, 1996, 1995,
and 1994.
1996 1995 1994
- ------------------------------------------------------------------------------------------
Components of pension expense:
Service cost $304,387 $ 260,146 $ 298,078
Interest cost 402,318 410,126 393,472
Actual return on plan assets (910,319) (1,211,311) 188,947
Net amortization and deferral 256,735 735,350 (674,406)
- ------------------------------------------------------------------------------------------
Total pension expense $ 53,121 $ 194,311 $ 206,091
==========================================================================================
Actuarial present value of projected
benefit obligation:
Accumulated benefit obligation:
Vested $4,494,897 $4,202,359 $ 3,325,564
Non-vested 485,933 346,494 250,638
Provision for future salary increases 711,202 1,564,221 1,075,248
- ------------------------------------------------------------------------------------------
Projected benefit obligation 5,692,032 6,113,074 4,651,450
- ------------------------------------------------------------------------------------------
Plan assets at fair market value 6,218,479 5,495,832 4,430,449
- ------------------------------------------------------------------------------------------
Plan assets (over) under projected
benefit obligation (526,447) 617,242 221,001
Unrecognized loss (714,114) (1,090,109) (1,016,553)
Unrecognized net asset 301,831 397,283 492,735
Unrecognized prior service cost 1,042,274 126,007 158,929
- ------------------------------------------------------------------------------------------
Accrued (prepaid) pension cost at end $ 103,544 $ 50,423 ($ 143,888)
of period
==========================================================================================
At December 31, 1996, assets of the Corporation's pension plan consisted
of various institutional money market, bond, and equity funds, as well as
individual equity securities.
The discount rate used to determine the actuarial present value of the
projected benefit obligation for the years ended December 31, 1996, 1995, and
1994 was 7.5%, 7.5%, and 8.5%, respectively. The rate of increase in future
compensation used to determine the actuarial present value of such obligation
was 5.5% for all periods presented. The expected long-term rate of return on
plan assets was 9.0% for all periods presented.
POSTRETIREMENT EMPLOYEE BENEFITS The Corporation provides certain
health care insurance benefits to retired employees. Substantially all of the
employees of the Corporation may become eligible for these benefits if they
reach normal retirement age while working for the Corporation. The following
table summarizes the components of postretirement benefit expense and the amount
recognized in the Corporation's consolidated financial statements for the years
ended December 31, 1996, 1995, and 1994.
1996 1995 1994
- ------------------------------------------------------------------------------------------------
Components of postretirement benefits expense:
Service cost $ 24,924 $ 54,216 $ 79,375
Interest cost 76,498 105,297 111,644
Amortization of unrecognized
transitional obligation 34,230 59,807 68,332
Amortization of (gain) loss (7,311) (20,461) -
- ------------------------------------------------------------------------------------------------
Total postretirement benefit expense $ 128,341 $198,859 $ 259,351
=================================================================================================
Accumulated postretirement benefit
obligation:
Retirees $ 637,742 $561,430 $ 507,835
Fully eligible active plan participants 37,992 40,835 42,625
Other active plan participants 422,058 338,750 952,783
- ------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 1,097,792 941,015 1,503,243
Unrecognized gain 169,843 264,474 183,254
Unrecognized transition obligation (547,679) (581,909) (1,229,971)
- ------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost at end of
period $ 719,956 $623,580 $ 456,526
=================================================================================================
45
47
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits for 1997 is 13.0% and is assumed to decrease gradually
to 5.5% in 2004 and thereafter. The discount rate used to determine the
actuarial present value of the projected postretirement benefit obligation was
7.5%, 7.5%, and 8.5% for 1996, 1995 and 1994, respectively.
The assumed rate of increase in the per capita cost of covered benefits
has an effect on the amounts reported in the Corporation's consolidated
financial statements. For example, a one percentage point increase in the
assumed trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1996, by approximately $68,000 and the aggregate
service and interest cost components of postretirement benefit expense for 1996
by approximately $5,000.
SAVINGS PLANS The Corporation maintains a 401(k) savings plan for the
benefit of substantially all of its employees. Employees may contribute up to
a certain percentage of their compensation to the plan and the Corporation will
match their contributions within certain limits. In addition, the employee may
also receive discretionary profit sharing contributions from the Corporation.
The Corporation provided matching and discretionary contributions of
approximately $181,000, $140,000, and $139,000 during the years ended December
31, 1996, 1995, and 1994, 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 $217,000, $121,000, and
$162,000 in ESOP-related compensation expense during the years ended December
31, 1996, 1995, and 1994, respectively.
STOCK INCENTIVE PLANS During 1989 and 1992, the Corporation adopted
stock incentive plans designed to attract and retain qualified personnel in key
management positions. In addition, during 1995 the Corporation assumed the
stock incentive plan of a financial institution that was acquired by the
Corporation. These plans provide for the grant of stock options, restricted
stock, and stock appreciation rights. In general, stock options granted under
these plans are exercisable at a price equal to the fair value of the stock on
the date of the grant. Furthermore, the options are subject to three- to
five-year graded vesting requirements and a maximum exercise period of ten
years. These plans authorize the issuance of approximately one million shares
in the aggregate, of which 97,290 shares were unallocated as of December 31,
1996. Activity in these stock incentive plans for each of the three years
ended December 31, 1996, 1995, and 1994, is summarized in the following
paragraphs:
Stock options outstanding at the beginning of each of the three
preceding years were 645,743, 469,358, and 483,352, respectively. These
options had weighted-average exercise prices of $8.43, $5.91, and $5.79,
respectively. Stock options granted during these years were 6,000, 222,652,
and 2,640, respectively, at weighted-average exercise prices of $20.38, $12.80,
and $14.32, respectively. Stock options exercised during these years were
20,155, 46,267, and 16,634, respectively, at weighted-average exercise prices
of $6.10, $3.92, and $3.92, respectively. Stock options outstanding at the end
of each of the three preceding years were 626,503, 645,743, and 469,358,
respectively. These options had weighted-average exercise prices of $8.59,
$8.43, and $5.91, respectively. Of these options, 509,608, 462,733, and
410,090, respectively, were fully-vested and exercisable at weighted-average
exercise prices of $7.04, $6.12, and $5.48, respectively. As of December 31,
1996, the exercise prices of options outstanding on that date ranged from $3.92
to $21.75 and had a weighted-average remaining life of 5.3 years. Expirations
and forfeitures of stock options during the three years ended December 31,
1996, 1995, and 1994, were not material.
Shares of restricted stock granted under these plans were zero, 55,385,
and 46,465 during the three years ended December 31, 1996, 1995, and 1994,
respectively. The weighted-average fair value of these shares were zero,
$15.62, and $14.32 for these periods, respectively. Restricted stock is
generally subject to vesting requirements of one to three years.
During 1989 and 1992, the Corporation also adopted stock incentive
plans designed to attract and retain qualified non-employee directors for the
Corporation and its subsidiaries. The 1989 plan granted each director options
to purchase 5,867 shares of common stock. In addition, under both plans each
director receives options to
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48
purchase an additional 2,932 shares upon election or re-election to the Board
of Directors. The stock options are exercisable at a price at least equal
to the fair value of the stock on the date of grant and are fully-vested on the
date of the grant. These plans have authorized the issuance of 224,314 shares
in the aggregate, of which 92,318 shares were unallocated as of December 31,
1996. Activity in these stock incentive plans for each of the three years ended
December 31, 1996, 1995, and 1994 is summarized in the following paragraph:
Stock options outstanding at the beginning of each of the three
preceding years were 80,019, 74,153, and 84,956, respectively. These options
had weighted-average exercise prices of $8.42, $7.40, and $6.06, respectively.
Stock options granted during these years were 11,732, 8,799, and 8,798,
respectively at weighted-average exercise prices of $21.13, $15.50, and $14.09,
respectively. Stock options exercised during these years were 6,866, 2,933,
and 19,601, respectively, at weighted-average exercise prices of $10.39, $3.92,
and $4.60, respectively. Finally, stock options outstanding at the end of
December 31, 1996, were 84,885. These options had a weighted-average exercise
price of $10.02, a range of exercise prices from $3.92 to $21.50, and a
weighted-average remaining life of 5.5 years. There were no expirations or
forfeitures of stock options during these years.
As described in Note 1, the Corporation has elected to provide proforma
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 proforma net income would have been $9,700,000 and $10,369,000
during the years ended December 31, 1996 and 1995, respectively. Proforma
primary earnings per share would have been $1.46 and $1.68, and proforma
fully-diluted earnings per share would have been $1.45 and $1.67 during the
same periods, respectively. It should be noted, however, that because SFAS 123
prohibited the proforma disclosure of the effects of stock options granted in
years prior to 1995, the proforma disclosures for 1996 and 1995 may not be
representative of the proforma effects in future years.
The weighted-average fair value of the options granted in 1996 and 1995
were $6.26 and $3.87, respectively. The fair values of these options were
estimated as of the dates they were granted using a Black-Scholes option
pricing model. Weighted-average assumptions for both periods were as follows:
6.5% risk-free interest rate, 2.6% dividend yield, 30% volatility, and a
seven-year expected life.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS FEI, a wholly-owned subsidiary of the Bank that was
formerly involved in the acquisition and development of hotels, has received a
favorable judgement in a U.S. District Court awarding it $1.1 million in
compensatory damages, plus post-judgement interest on the damages, as well as
filing fees and other court costs. The defendant in the action is a well
capitalized money center bank that provided certain trust services relating to
one of FEI's hotel joint ventures in the 1980s.
In addition to this judgement, FEI also has a pending claim against the
defendant for punitive damages which could substantially increase the final
award, if any. A hearing on this claim is scheduled for early 1997. The
defendant is expected to appeal the judgement as well as vigorously oppose any
award of punitive damages. As a result, management of the Corporation is
unable to determine the likelihood of a favorable outcome or reliably estimate
the amount of the final award, if any. Accordingly, the Corporation has not
recognized any portion of the current judgement or possible future punitive
damages in its results of operations.
The Corporation and its subsidiaries are also engaged in various
routine legal proceedings occurring in the ordinary course of business which in
the aggregate are believed by management to be immaterial to the consolidated
financial condition of the Corporation.
OTHER COMMITMENTS AND CONTINGENCIES At December 31, 1996, the
Corporation had commitments to originate mortgage loans at market terms
aggregating approximately $14.3 million which expire on various dates in 1997.
As of the same date the Corporation had approximately $4.5 million in
commitments outstanding under standby letters of credit and $8.1 million in
commitments outstanding under unused home equity lines of credit. Furthermore,
the Corporation had commitments to sell approximately $20.3 million in mortgage
loans to FHLMC and FNMA at various dates in 1997.
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49
NOTE 12 -- STOCKHOLDERS' EQUITY
PREFERRED STOCK The Corporation is authorized to issue up to 5,000,000
shares of preferred stock, $.10 par value per share, though no such stock was
outstanding at December 31, 1996. 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 On January 24, 1995, the Corporation's Board
of Directors adopted a shareholders' rights plan (the "Rights Plan"). Under
the terms of the Rights Plan, the Board of Directors declared a dividend of one
preferred share purchase right on each outstanding share of common stock of the
Corporation. However, the rights can only be exercised if a person or group
acquires 20% or more of the common stock or announces a tender or exchange
offer that would result in a 20% or greater position in the stock. Initially,
each right will entitle shareholders to buy one one-hundredth share of the
Corporation's preferred stock at a price of $50.00, subject to adjustment.
Under certain circumstances, including the acquisition of beneficial ownership
of 25% or more of the Corporation's common stock, holders of the Corporation's
common stock, other than the acquirer, will be entitled to exercise the rights
to purchase common stock from the Corporation having a value equal to two times
the exercise price of the right. If the Corporation is acquired in a merger,
share exchange, or other business combination in which the Corporation is not
the survivor, after a person or group's acquisition of beneficial ownership of
20% or more of the common stock, rights holders will be entitled to purchase
the acquirer's shares at a similar discount. Issuance of the rights has no
dilutive effect, will not affect reported earnings per share, is not taxable to
the Corporation or its shareholders, and will not change the way in which the
Corporation's shares are traded. The rights expire in ten years.
STOCK REPURCHASE PLANS AND TREASURY STOCK In January of 1997, 1996,
and 1995, the Corporation's Board of Directors authorized the repurchase of up
to 306,351, 328,000, and 288,000 shares of the Corporation's outstanding common
stock, respectively (the "1997", "1996", and "1995 Plans", respectively). Such
repurchases may be made from time to time in the open market during the next
twelve months as conditions permit (the 1996 and 1995 Plans were extended for
an additional twelve months in January 1997 and January 1996, respectively).
The repurchased shares will be held as treasury stock and will be available for
general corporate purposes.
During 1996 and 1995, the Corporation repurchased 464,800 and 47,500
shares, respectively, under the 1996 and 1995 Plans. These shares were
repurchased at an average cost of $20.82 and $18.08 per share during 1996 and
1995, respectively. As of December 31, 1996, all shares authorized for
repurchase under the 1995 Plan had been repurchased.
DIVIDEND RESTRICTIONS The ability of the Corporation to pay dividends
will depend primarily upon the receipt of dividends from the Bank. The Bank
may not declare or pay a cash dividend without regulatory approval if such
dividend would cause its net capital to be reduced below either the amount
required for the liquidation account or the current risk-based capital
requirements imposed by the Office of Thrift Supervision ("OTS"). The Bank is
a Tier 1 association under current OTS regulations. As such, the Bank's
dividend payments are limited to 100% of its net income during the year plus an
amount that would reduce by one-half its excess risk-based regulatory capital
as of the beginning of the year, or 75% of its net income during the most
recent four-quarter period, whichever is greater.
REGULATORY CAPITAL REQUIREMENTS Financial institutions such as the
Bank are subject to minimum regulatory capital requirements as specified in
federal banking law and supporting regulations. Failure of a financial
institution to meet such requirements may subject the institution to certain
mandatory -- and possibly discretionary -- actions on the part of its regulators
(referred to as "prompt corrective actions"). Such actions, if undertaken,
could severely restrict the activities of the institution. During each of the
years ended December 31, 1996 and 1995, the Bank's regulatory capital was
sufficient for it to be classified as "well capitalized" under the prompt
corrective action provisions of the federal banking law and supporting
regulations. Accordingly, the Bank is not subject to prompt corrective actions
by its regulators.
48
50
The following table summarizes the Bank's current regulatory capital in
both percentage and dollar terms as of December 31, 1996. It also summarizes
the minimum capital levels that must be maintained by the Bank for it to be
classified as "adequately capitalized" and "well capitalized" under the prompt
corrective action provisions of federal banking law and supporting regulations.
MINIMUM REQUIREMENTS
TO BE CLASSIFIED AS...
- --------------------------------------------------------------------------------
ADEQUATELY WELL
CAPITALIZED CAPITALIZED ACTUAL
- --------------------------------------------------------------------------------
Tier 1 leverage ratio 4.0% 5.0% 6.13%
Tier 1 risk-based capital ratio 4.0% 6.0% 11.53%
Total risk-based capital ratio 8.0% 10.0% 12.47%
Tier 1 leverage ratio capital $ 60,639,000 $75,799,000 $ 92,971,000
Tier 1 risk-based capital 32,246,000 48,370,000 92,971,000
Total risk-based capital 64,493,000 80,616,000 100,533,000
================================================================================
Following is a reconciliation of the Bank's stockholder's equity as
determined under generally accepted accounting principles to Tier 1 capital and
total capital as determined by regulations as of December 31, 1996:
TIER 1 TOTAL
CAPITAL CAPITAL
- --------------------------------------------------------------------------------
Stockholder's equity (Bank only) $97,643,000 $97,643,000
General loss allowance - 7,828,000
Securities valuation allowance, net 2,451,000 2,451,000
Goodwill and other intangible assets (5,221,000) (5,221,000)
Other non-includable investments
(primarily mortgage servicing rights (1,902,000) (2,168,000)
- ----------------------------------------------------------------------------------
Regulatory capital $92,971,000 $100,533,000
==================================================================================
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments as of December 31 are as follows:
1996 1995
- ------------------------------------------------------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $24,644,254 $24,644,254 $30,384,484 $30,384,484
Interest-bearing deposits with banks 2,456,901 2,456,901 4,051,288 4,051,288
Investment securities available for sale 74,029,474 74,029,474 80,325,428 80,325,428
Mortgage-backed and related securities:
Available for sale 61,875,130 61,875,130 84,172,997 84,172,997
Held for investment 147,834,733 145,217,199 171,493,244 169,365,825
Loans held for sale 20,338,790 20,700,000 23,976,063 24,500,000
Loans held for investment, gross 1,113,928,318 1,130,000,000 940,269,956 949,900,000
Federal Home Loan Bank stock 18,823,200 18,823,200 16,855,100 16,855,100
Accrued interest receivable 11,487,427 11,487,427 10,133,211 10,133,211
Financial liabilities:
Deposit liabilities $ 1,024,092,887 $1,027,200,000 $ 969,422,519 $974,500,000
Federal Home Loan Bank advances and '
other borrowings 383,592,983 383,300,000 322,295,781 322,300,000
Advance payments by borrowers for
taxes and insurance 3,912,206 3,912,206 3,740,518 3,740,518
Accrued interest payable 2,432,796 2,432,796 2,632,658 2,632,658
============================================================================================================
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.
49
51
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION
DECEMBER 31
CONDENSED STATEMENTS OF FINANCIAL CONDITION: 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Cash in bank $221,993 $333,229
Interest-bearing deposits with subsidiary bank 2,415,879 6,865,060
Investment in subsidiary 97,643,105 95,848,128
Other assets 195,821 77,563
- -----------------------------------------------------------------------------------------------------------------
Total assets $100,476,798 $103,123,980
=================================================================================================================
Other borrowings $5,000,000 $4,000,000
Other liabilities 62,440 184,986
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 5,062,440 4,184,986
- -----------------------------------------------------------------------------------------------------------------
Common stock 663,933 661,231
Additional paid-in capital 35,580,114 35,192,795
Unearned restricted stock (414,392) (817,250)
Valuation allowance (2,450,764) (1,609,161)
Retained earnings 72,569,092 66,370,129
Treasury stock, at cost (10,533,625) (858,750)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 95,414,358 98,938,994
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $100,476,798 $103,123,980
=================================================================================================================
YEAR ENDED DECEMBER 31
CONDENSED STATEMENTS OF OPERATIONS: 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Dividends from subsidiary $8,000,000 $5,000,000 $5,000,000
Other income 133,581 273,810 125,485
Other expense 693,068 353,478 350,224
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
net income of subsidiary 7,440,513 4,920,332 4,775,261
Income tax benefit 195,820 27,884 78,634
- -----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiary 7,636,333 4,948,216 4,853,895
Equity in undistributed net income of subsidiary 2,437,584 5,696,418 4,923,122
- -----------------------------------------------------------------------------------------------------------------
Net income $10,073,917 $10,644,634 $9,777,017
=================================================================================================================
YEAR ENDED DECEMBER 31
CONDENSED STATEMENTS OF CASH FLOWS: 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Net income $10,073,917 $10,644,634 $9,777,017
Equity in earnings of subsidiary (10,437,583) (10,696,418) (9,923,122)
Other accruals and prepaids (76,584) 97,243 34,032
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations (440,250) 45,459 (112,073)
- ------------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest-bearing deposits with subsidiary bank 4,449,181 (320,316) (1,106,331)
Sale of investment-securities - 2,311,367 -
Dividends received from subsidiary 8,000,000 6,250,000 3,750,000
Purchase of net assets of Rock Financial Corp. - (21,040,620) -
Other, net (3,200) 451,007 -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 12,445,981 12,348,562) 2,643,669
- ------------------------------------------------------------------------------------------------------------------
Proceeds from sale of common stock 194,225 13,551,631 155,307
Increase in other borrowings 1,000,000 4,000,000 -
Dividends paid to shareholders (3,874,954) (3,192,137) (2,762,047)
Purchase of treasury stock (9,674,875) (858,750) -
Other, net 238,637 (1,333,492) 240,922
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (12,116,967) 12,167,252 (2,365,818)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash in bank (111,236) (135,851) 165,778
Cash at beginning of period 333,229 469,080 303,302
- ------------------------------------------------------------------------------------------------------------------
Cash in bank at end of period $221,993 $333,229 $469,080
==================================================================================================================
50
52
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,
1996, 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" published by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
the Corporation believes that, as of December 31, 1996, 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 and Executive Vice President and Vice President and Controller
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated statements of financial
condition of First Federal Capital Corp as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those statements require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Federal Capital Corp at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the Audited Consolidated Financial
Statements, the Corporation changed its method of accounting for mortgage
servicing rights in 1995.
Ernst & Young LLP
Milwaukee, Wisconsin
January 24, 1997
51
53
SUPPLEMENTARY DATA
Quarterly Financial Information (Unaudited)
DEC SEPT. JUNE MARCH
Dollars in thousands, except for per share amounts 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------
Interest on loans $22,736 $21,080 $19,963 $20,008
Interest on mortgage-backed and related securities 3,371 3,539 3,710 3,873
Interest and dividends on investments 1,511 1,369 1,353 1,461
- ------------------------------------------------------------------------------------------------------------
Total interest income 27,619 25,988 25,027 25,343
- ------------------------------------------------------------------------------------------------------------
Interest on deposits 11,880 11,668 11,486 11,456
Interest on borrowings 4,885 4,242 3,734 4,333
- ------------------------------------------------------------------------------------------------------------
Total interest expense 16,765 15,910 15,220 15,789
- ------------------------------------------------------------------------------------------------------------
Net interest income 10,854 10,078 9,806 9,554
Provision for loan losses - - - -
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,854 10,078 9,806 9,554
- ------------------------------------------------------------------------------------------------------------
Gain on sale of loans 873 777 1,134 1,547
Gain (loss) on sale of other investments (59) (62) (136) (54)
Other non-interest income 4,110 4,401 3,958 3,288
- ------------------------------------------------------------------------------------------------------------
Total non-interest income 4,924 5,116 4,956 4,835
- ------------------------------------------------------------------------------------------------------------
FDIC special assessment - 5,941 - -
Other non-interest expense 9,647 9,631 9,537 9,488
- ------------------------------------------------------------------------------------------------------------
Total non-interest expense 9,647 15,572 9,537 9,488
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 6,131 (377) 5,225 4,901
Income tax expense 2,322 (317) 1,969 1,832
- ------------------------------------------------------------------------------------------------------------
Net Income $3,809 ($60) $3,256 $3,069
============================================================================================================
Income before FDIC special assessment $3,809 $3,515 $3,256 $3,069
FDIC special assessment, net of income taxes - 3,575 - -
- ------------------------------------------------------------------------------------------------------------
Net Income $3,809 ($60) $3,256 $3,069
============================================================================================================
Primary earnings per share:
Income before FDIC special assessment $0.57 $0.54 $0.48 $0.45
FDIC special assessment, net of income taxes - (0.54) - -
- ------------------------------------------------------------------------------------------------------------
Net income $0.57 ($0.00) $0.48 $0.45
============================================================================================================
Dividends paid per share $ 0.16 $ 0.16 $ 0.16 $ 0.14
============================================================================================================
Stock price at end of period $23.50 $22.50 $20.25 $20.00
============================================================================================================
High stock price during period $24.25 $23.00 $22.25 $20.50
============================================================================================================
Low stock price during period $22.50 $19.50 $20.25 $18.50
============================================================================================================
Dec Sept. June March
Dollars in thousands, except for per share amounts 1995 1995 1995 1995
- ------------------------------------------------------------------------------------------------------------
Interest on loans $18,424 $17,033 $16,013 $15,014
Interest on mortgage-backed and related securities 3,857 3,876 4,002 4,068
Interest and dividends on investments 1,625 1,605 1,664 1,676
- ------------------------------------------------------------------------------------------------------------
Total interest income 23,907 22,514 21,680 20,759
- ------------------------------------------------------------------------------------------------------------
Interest on deposits 10,764 10,345 9,555 8,323
Interest on borrowings 4,050 3,724 3,975 4,219
- ------------------------------------------------------------------------------------------------------------
Total interest expense 14,814 14,069 13,530 12,542
- ------------------------------------------------------------------------------------------------------------
Net interest income 9,092 8,445 8,150 8,216
Provision for loan losses - - - -
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,092 8,445 8,150 8,216
- ------------------------------------------------------------------------------------------------------------
Gain on sale of loans 1,354 1,266 783 141
Gain (loss) on sale of other investments (1) (38) 11 -
Other non-interest income 3,503 3,816 3,341 2,937
- ------------------------------------------------------------------------------------------------------------
Total non-interest income 4,856 5,044 4,135 3,078
- ------------------------------------------------------------------------------------------------------------
FDIC special assessment - - - -
Other non-interest expense 8,585 8,732 8,605 8,449
- ------------------------------------------------------------------------------------------------------------
Total non-interest expense 8,585 8,732 8,605 8,449
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 5,363 4,758 3,680 2,845
Income tax expense 1,986 1,731 1,312 973
- ------------------------------------------------------------------------------------------------------------
Net Income $3,377 $3,027 $2,368 $1,872
============================================================================================================
Income before FDIC special assessment $3,377 $3,027 $2,368 $1,872
FDIC special assessment, net of income taxes - - - -
- ------------------------------------------------------------------------------------------------------------
Net Income $3,377 $3,027 $2,368 $1,872
============================================================================================================
Primary earnings per share:
Income before FDIC special assessment $0.53 $0.49 $0.38 $0.32
FDIC special assessment, net of income taxes - - - -
- ------------------------------------------------------------------------------------------------------------
Net income $0.53 $0.49 $0.38 $0.32
============================================================================================================
Dividends paid per share $ 0.14 $ 0.14 $ 0.14 $ 0.13
============================================================================================================
Stock price at end of period $18.00 $17.75 $16.00 $16.25
============================================================================================================
High stock price during period $18.50 $19.25 $17.13 $17.50
============================================================================================================
Low stock price during period $17.25 $15.75 $15.25 $14.00
============================================================================================================
52
54
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from pages
5 to 6 and page 12 of the definitive proxy statement of the Corporation dated
March 12, 1997.
ITEM 11 -- EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages
15 to 24 of the definitive proxy statement of the Corporation dated March 12,
1997.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages
13 to 14 of the definitive proxy statement of the Corporation dated March 12,
1997.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page
19 and 20 and page 26 of the definitive proxy statement of the Corporation
dated March 12, 1997.
PART IV
ITEM 14 -- EXHIBIT INDEX, 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, 1996 and 1995
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1996
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996
Notes to Audited Consolidated Financial Statements
Report of Management
Report of Independent Auditors
53
55
(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.
(3) Exhibit Index.
# DESCRIPTION
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen stock certificate (1)
4.2 Rights Agreement, dated as of January 24, 1995 (2)
10.1 1989 Stock Incentive Plan (1)
10.2 1989 Directors' Stock Option Plan, as amended (3)
10.3 1992 Stock Incentive Plan (4)
10.4 1992 Directors' Stock Option Plan (4)
10.5 Rock Financial Corp. 1992 Stock Option and Incentive Plan (5)
10.6 Employee Stock Ownership Plan (1)
10.7 Employment agreements between the Bank and the following executive officers:
a) Thomas W. Schini (6)
b) Bradford R. Price (1)
c) Jack C. Rusch (1)
d) Joseph M. Konradt (1)
e) Milne J. Duncan (1)
f) Robert P. Abell (1)
g) Jeffrey J. Johnson (7)
10.8 Employment agreement between the Bank and John T. Bennett (8)
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 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 1996 Summary Annual Report to Shareholders (9)
21 Subsidiaries of the Registrant -- Reference is made to Part I, Item 1, "Business -- Subsidiaries"
23 Consent of Ernst & Young LLP (8)
27 Financial Data Schedule
99 1996 Proxy Statement (8)
(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 the Corporation's Registration
Statement on a Form 8-A filed with the SEC on January 27, 1995.
(3) 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.
(4) Incorporated herein by reference to the Corporation's definitive
proxy statement dated March 11, 1992.
(5) 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).
(6) Incorporated herein by reference to exhibits filed with the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1994, filed with the SEC on March 30, 1995.
(7) Incorporated herein by reference to exhibits filed with the
Corporation's Form S-4 Registration Statement declared effective by the
SEC on October 18, 1995 (Registration No. 33-98298-01).
(8) Filed herewith.
(9) Filed in paper format pursuant to Rule 100 (b) (1) of Regulation S-T.
(b) The Corporation filed no reports on Form 8-K during the fourth quarter
of 1996.
(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.
54
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
February 25, 1997 By: /s/ Thomas W. Schini
Thomas W. Schini
President, Chairman of
the Board, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas W. Schini February 25, 1997
Thomas W. Schini
President, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/
Dale A. Nordeen
Vice Chairman of the Board
/s/ Henry C. Funk February 25, 1997
Henry C. Funk
Director
/s/ John F. Leinfelder February 25, 1997
John F. Leinfelder
Director
/s/ Richard T. Lommen February 25, 1997
Richard T. Lommen
Director
/s/ Phillip J. Quillin February 25, 1997
Phillip J. Quillin
Director
/s/
Don P. Rundle
Director
55
57
/s/ Patrick J. Luby February 25, 1997
Patrick J. Luby
Director
/s/
David C. Mebane
Director
/s/
Robert B. Rennebohm
Director
/s/ John T. Bennett February 25, 1997
John T. Bennett
Director
/s/ Jack C. Rusch February 25, 1997
Jack C. Rusch
Executive Vice President and
Chief Financial Officer
(principal financial officer)
/s/ Michael W. Dosland February 25, 1997
Michael W. Dosland
Vice president and Controller
(principal accounting officer)
56
58
Exhibit Index.
# DESCRIPTION
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen stock certificate (1)
4.2 Rights Agreement, dated as of January 24, 1995 (2)
10.1 1989 Stock Incentive Plan (1)
10.2 1989 Directors' Stock Option Plan, as amended (3)
10.3 1992 Stock Incentive Plan (4)
10.4 1992 Directors' Stock Option Plan (4)
10.5 Rock Financial Corp. 1992 Stock Option and Incentive Plan (5)
10.6 Employee Stock Ownership Plan (1)
10.7 Employment agreements between the Bank and the following
executive officers:
a) Thomas W. Schini (6)
b) Bradford R. Price (1)
c) Jack C. Rusch (1)
d) Joseph M. Konradt (1)
e) Milne J. Duncan (1)
f) Robert P. Abell (1)
g) Jeffrey J. Johnson (7)
10.8 Employment agreement between the Bank and John T. Bennett (8)
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 LaCrosse Incentive Bonus Plan for Group
Life Insurance (1)
10.12 First Federal of Madison Deferred Compensation Plan for
Directors (1)
11 Computation of Earnings Per Share - Reference is made to Note
1 on the Corporation's Audited Consolidated Financial
Statements, included herein under Part II, Item 8, "Financial
Statements and Supplementary Data"
13 1996 Summary Annual Report to Shareholders (9)
21 Subsidiaries of the Registrant - Reference is made to Part I,
Item 1, "Business - Subsidiaries"
23 Consent of Ernst & Young LLP (8)
27 Financial Data Schedule
99 1996 Proxy Statement (8)
(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 by reference to the Corporation's Registration
Statement on a form 8-A filed with the SEC on
January 27, 1995.
(3) 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.
(4) Incorporated herein by reference to the Corporation's
definitive proxy statement dated March 11, 1992.
(5) 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).
(6) Incorporated herein by reference to exhibits filed with the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994, filed with the SEC on March 30, 1995.
(7) Incorporated herein by reference to exhibits filed with the
Corporation's Form S-4 Registration Statement declared
effective by the SEC on October 18, 1995 (Registration No.
33-98298-01).
(8) Filed herewith.
(9) Filed in paper format pursuant to Rule 100(b)(1) of
Regulation S-T.
(b) The Corporation filed no reports on Form 8-K during the fourth quarter of
1996.
(c) Refer to item (a)(30 above for all exhibits filed herewith.
(d) Refer to items (a)(1) and (2) above for financial statements required under
this item.