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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended....................................MARCH 31, 2003
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
NOT APPLICABLE
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period as the Registrant has
been subject to such requirements), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: COMMON STOCK--$.10 PAR VALUE. Outstanding as of May 12, 2003: 19,776,245
(excludes 439,688 shares held as treasury stock).
FORM 10-Q TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION Page
Item 1--Financial Statements...........................................2
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations............................9
Item 3--Quantitative and Qualitative Disclosures about Market
Risk..........................................................21
Item 4--Controls and Procedures.......................................22
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.............................................23
Item 2--Changes in Securities.........................................23
Item 3--Defaults Upon Senior Securities...............................23
Item 4--Submission of Matters to Vote of Security Holders.............23
Item 5--Other Information.............................................23
Item 6--Exhibits and Reports on Form 8-K..............................23
SIGNATURES....................................................................24
CERTIFICATION.................................................................25
1
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2003, and December 31, 2002
MARCH 31 DECEMBER 31
2003 2002
ASSETS (UNAUDITED)
----------- ------------
Cash and due from banks $ 88,137,004 $ 84,482,722
Interest-bearing deposits with banks 110,619,132 179,755,367
Mortgage-backed and related securities:
Available for sale, at fair value 580,455,994 366,075,106
Held for investment, at cost (fair value of $9,513,613 and $30,192,176, respectively) 9,476,827 30,029,690
Loans held for sale 48,708,133 50,237,199
Loans held for investment, net 2,052,934,722 2,100,641,557
Federal Home Loan Bank stock 56,325,100 55,634,400
Accrued interest receivable, net 16,807,760 17,522,581
Office properties and equipment 36,934,376 35,647,335
Mortgage servicing rights, net 27,789,420 30,171,341
Intangible assets 43,636,280 43,818,386
Other assets 21,294,521 31,608,545
-------------- --------------
Total assets $3,093,119,269 $3,025,624,228
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit liabilities $2,439,880,689 $2,355,148,292
Federal Home Loan Bank advances 376,250,000 400,600,000
Other borrowings 13,521,180 17,012,682
Advance payments by borrowers for taxes and insurance 4,435,531 11,906,038
Accrued interest payable 2,818,283 3,119,227
Other liabilities 44,953,235 32,385,986
-------------- --------------
Total liabilities 2,881,858,918 2,820,172,225
-------------- --------------
Preferred stock, $.10 par value (5,000,000 shares authorized, none outstanding) -- --
Common stock, $.10 par value (100,000,000 shares authorized, 20,215,933 outstanding) 2,021,593 2,021,593
Additional paid-in capital 46,577,431 46,577,431
Retained earnings 170,956,527 165,628,148
Treasury stock, at cost (513,221 and 511,497 shares, respectively) (10,180,511) (10,178,374)
Unearned restricted stock (18,333) (32,083)
Accumulated non-owner adjustments to equity, net 1,903,644 1,435,289
-------------- --------------
Total stockholders' equity 211,260,351 205,452,003
-------------- --------------
Total liabilities and stockholders' equity $3,093,119,269 $3,025,624,228
-------------- --------------
Refer to accompanying Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2003 and 2002
THREE MONTHS ENDED MARCH 31
---------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
Interest on loans $32,425,980 $33,056,765
Interest on mortgage-backed and related securities 3,478,656 5,415,298
Interest and dividends on investments 1,253,409 960,680
----------- -----------
Total interest income 37,158,044 39,432,743
----------- -----------
Interest on deposit liabilities 13,656,615 15,014,012
Interest on FHLB advances and other borrowings 5,220,231 5,789,053
----------- -----------
Total interest expense 18,876,846 20,803,065
----------- -----------
Net interest income 18,281,198 18,629,678
Provision for loan losses 378,898 647,400
----------- -----------
Net interest income after provision for loan losses 17,902,300 17,982,277
----------- -----------
Community banking revenue 8,827,729 7,306,073
Mortgage banking revenue 8,512,326 4,936,887
Loss on sale of investments -- (166,264)
Other income 600,924 836,544
----------- -----------
Total non-interest income 17,940,980 12,913,240
----------- -----------
Compensation and employee benefits 13,995,764 12,078,479
Occupancy and equipment 3,125,081 2,403,074
Communications, postage, and office supplies 1,848,478 1,394,133
ATM and debit card transaction costs 1,089,626 840,609
Advertising and marketing 679,721 564,169
Amortization of intangibles 182,106 129,559
Other expenses 2,204,471 1,722,818
----------- -----------
Total non-interest expense 23,125,247 19,132,840
----------- -----------
Income before income taxes 12,718,032 11,762,677
Income tax expense 4,703,563 4,095,183
----------- -----------
Net income $ 8,014,469 $ 7,667,493
----------- -----------
PER SHARE INFORMATION
Diluted earnings per share $0.40 $0.38
Basic earnings per share 0.41 0.38
Dividends paid per share 0.13 0.12
----------- -----------
Refer to accompanying Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2003 and 2002
COMMON
STOCK AND ACCUMULATED
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
---------- -------- -------- ---------- ----------- -----
Balance at December 31, 2001 $48,627,928 $141,717,089 -- ($87,083) $2,139,769 $192,397,703
------------
Net income 7,667,493 7,667,493
Securities valuation adjustment,
net of income taxes (957,150) (957,150)
Reclassification adjustment for loss
on securities included in income,
net of income taxes 108,072 108,072
------------
Net income and non-owner
adjustments to equity 6,818,416
------------
Dividends paid (2,419,589) (2,419,589)
Exercise of stock options (28,904) (174,121) 460,711 257,686
Purchase of treasury stock (3,429,116) (3,429,116)
Amortization of restricted stock 216,775 13,750 230,525
----------- ------------ ------------ -------- ---------- ------------
Balance at March 31, 2002 $48,599,024 $147,007,647 ($ 2,968,406) ($73,333) $1,290,691 $193,855,624
----------- ------------ ------------ -------- ---------- ------------
UNAUDITED
Balance at December 31, 2002 $48,599,024 $165,628,148 ($10,178,374) ($32,083) $1,435,289 $205,452,003
------------
Net income 8,014,469 8,014,469
Securities valuation adjustment,
net of income taxes 468,355 468,355
------------
Net income and non-owner
adjustments to equity 8,482,824
------------
Dividends paid (2,561,925) (2,561,925)
Exercise of stock options (144,050) 541,055 397,005
Purchase of treasury stock (474,112) (474,112)
Amortization of restricted stock 189,804 13,750 203,554
Other activity (169,919) (69,080) (238,999)
----------- ------------ ------------ -------- ---------- ------------
Balance at March 31, 2003 $48,599,024 $170,956,527 ($10,180,511) ($18,333) $1,903,644 $211,260,351
----------- ------------ ------------ -------- ---------- ------------
Refer to accompanying Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2002
THREE MONTHS MARCH 31
------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
------------ -----------
Cash flows from operating activities:
Net income $ 8,014,469 $ 7,667,493
Adjustments to reconcile net income to net cash provided (used) by operations:
Provision for loan and real estate losses 223,940 649,223
Increase (decrease) in mortgage servicing rights valuation allowance 1,800,000 (1,850,000)
Net loan costs deferred (1,178,823) (475,805)
Amortization of mortgage servicing rights 8,694,869 4,118,191
Other amortization 3,667,438 1,853,399
Depreciation 964,909 757,835
Gains on sales of mortgage loans (16,110,274) (4,617,382)
Loss on sales of investments -- 166,264
Decrease in accrued interest receivable 714,821 1,570,583
Decrease in accrued interest payable (300,944) (725,544)
Increase in current and deferred income taxes 4,425,055 2,411,040
Other accruals and prepaids, net (1,012,137) (1,086,649)
------------- -----------
Net cash provided by operations before loan originations and sales 9,903,323 10,438,648
Loans originated for sale (633,625,302) (165,579,237)
Sales of loans originated for sale or transferred from held for investment 675,241,033 220,767,473
------------- -----------
Net cash provided by operations 51,519,054 65,626,884
------------- -----------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with banks 69,136,235 (20,477,963)
Sales of investment securities -- 35,098,150
Purchases of mortgage-backed and related securities available for sale (327,039,765) (85,055,729)
Principal repayments on mortgage-backed and related securities available for sale 111,887,038 59,699,056
Principal repayments on mortgage-backed and related securities held for investment 20,391,922 24,121,545
Loans originated for investment (284,403,138) (199,821,923)
Loan principal repayments 298,631,140 228,145,995
Increase in Federal Home Loan Bank stock (690,700) (25,393,900)
Additions to office properties and equipment (2,321,935) (1,750,436)
Other, net 12,962,669 16,175,399
------------- -----------
Net cash provided (used) by investing activities (101,446,534) 30,740,194
------------- -----------
Cash flows from financing activities:
Increase (decrease) in deposit liabilities 84,732,397 (87,236,171)
Repayment of long-term Federal Home Loan Bank advances (24,350,000) (13,600,000)
Decrease in short-term Federal Home Loan Bank borrowings -- (12,500,000)
Increase (decrease) in other borrowings (3,491,502) 2,136,653
Increase (decrease) in advance payments by borrowers for taxes and insurance (7,470,507) 2,707,523
Purchase of treasury stock (474,112) (3,429,116)
Dividends paid (2,561,925) (2,419,589)
Other, net 7,197,411 (571,879)
------------- -----------
Net cash provided (used) by financing activities 53,581,762 (114,912,579)
------------- -----------
Net increase (decrease) in cash and due from banks 3,654,282 (18,545,501)
Cash and due from banks at beginning of period 84,482,722 70,756,705
------------- -----------
Cash and due from banks at end of period $ 88,137,004 $ 52,211,204
------------- -----------
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $ 37,872,865 $ 41,003,326
Interest paid on deposits and borrowings 19,177,790 21,528,609
Income taxes paid 279,400 1,685,025
Transfer of loans from held for investment to held for sale 31,315,451 29,122,413
------------- -----------
Refer to accompanying Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and balances of
First Federal Capital Corp (the "Corporation"), First Federal Capital Bank (the
"Bank"), and the Bank's wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 2--BASIS OF PRESENTATION
The accompanying interim consolidated financial statements are unaudited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles ("GAAP"). However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three-month period
ended March 31, 2003, may not necessarily be indicative of the results that may
be expected for the entire year ending December 31, 2003
Certain 2002 balances have been reclassified to conform to the 2003
presentation.
NOTE 3--EARNINGS PER SHARE
Basic and diluted earnings per share data are based on the weighted-average
number of common shares outstanding during each period. Diluted earnings per
share is further adjusted for potential common shares that were dilutive and
outstanding during the period. Potential common shares generally consist of
stock options outstanding under the Corporation's stock incentive plans. The
dilutive effect of potential common shares is computed using the treasury stock
method. All stock options are assumed to be 100% vested for purposes of the
earnings per share computations. The computation of earnings per share for the
three-month periods ended March 31, 2003 and 2002, is as follows:
THREE MONTHS ENDED MARCH 31
-----------------------------------------------------
2003 2002
------------------------- -------------------------
DILUTED BASIC DILUTED BASIC
------- ----- ------- -----
Net income $ 8,014,469 $ 8,014,469 $ 7,667,493 $ 7,667,493
----------- ----------- ----------- -----------
Average common shares issued, net of actual treasury shares 19,698,621 19,698,621 20,112,893 20,112,893
Potential common shares issued under stock options (treasury stock method) 259,791 -- 206,722 --
----------- ----------- ----------- -----------
Average common shares and potential common shares 19,958,412 19,698,621 20,319,615 20,112,893
----------- ----------- ----------- -----------
Earnings per share $0.40 $0.41 $0.38 $0.38
----------- ----------- ----------- -----------
NOTE 4--CONTINGENCIES
The Corporation and its subsidiaries are engaged in various routine legal
proceedings occurring in the ordinary course of business, which considered
together are believed by management to be immaterial to the consolidated
financial condition of the Corporation.
NOTE 5--SEGMENT INFORMATION
REPORTABLE SEGMENTS The Corporation tracks profitability in six major
areas: (i) residential lending, (ii) commercial real estate lending, (iii)
consumer lending, (iv) education lending, (v) business banking, and (vi)
investment and mortgage-related securities. Residential lending is divided into
two profit centers for segment reporting purposes: (i) a mortgage banking profit
center that is responsible for loan origination, sales of loans in the
6
secondary market, and servicing of residential loans, and (ii) a residential
loan portfolio that consists of loans held by the Corporation for investment
purposes (loans held for sale are included in the mortgage banking profit
center). This profit center also includes mortgage-backed securities that are
collateralized by loans that were originated by the Corporation. Commercial real
estate lending consists of the Corporation's portfolio of multi-family and
non-residential mortgage loans, as well as functions related to the origination
and servicing of such loans. Consumer lending consists of the Corporation's
second mortgage, automobile, and other consumer installment loans, as well as
functions related to the origination and servicing of such loans. The education
loan portfolio, which includes functions related to the origination and
servicing of the loans. Business banking consists of the Corporation's portfolio
of commercial business loans and deposits, as well as functions related to the
origination and servicing of such loans and deposits. Finally, the Corporation's
investment and mortgage-related securities portfolio is considered a profit
center for segment reporting purposes. As previously noted, however,
mortgage-backed securities collateralized by loans originated by the Corporation
are included in the residential loan profit center, rather than the investment
and mortgage-related securities portfolio.
The Corporation's extensive branch network, which delivers checking,
savings, certificates of deposit and other financial products and services to
customers, is considered a support department for segment reporting purposes, as
more fully described in a subsequent paragraph.
MEASUREMENT OF SEGMENT PROFIT (LOSS) Management evaluates the after-tax
performance of the Corporation's profit centers as if each center were a
separate entity--each with its own earning assets, actual and/or allocated
non-earning assets, and allocated funding resources. Each profit center has its
own interest income, non-interest income, and non-interest expense as captured
by the Corporation's accounting systems. Interest expense is allocated to each
profit center according to its use of the Corporation's funding sources, which
consist primarily of deposit liabilities, wholesale borrowings, and equity. In
general, all funding sources are allocated proportionately to each profit
center. However, in certain instances specific liabilities may be matched
against specific assets of profit centers.
The net cost of operating the Corporation's support departments is
allocated to the Corporation's profit centers and to the banking network using a
variety of methods deemed appropriate by management. In general, these net costs
are included in the non-interest expense of each profit center, to include the
branch network. In addition, certain allocations of revenues and expenses are
made between profit centers when they perform services for each other. Such
amounts, however, are not generally material in nature.
The Corporation's branch network is considered a support department center
for segment reporting purposes. Community banking fees and revenues are deducted
from the non-interest expense of operating the network (to include an allocation
of net costs from the Corporation's other support departments) to arrive at net
costs for the branch network. This net cost is then allocated to each profit
center based on its use of deposit liabilities to fund its operations. This
amount is reported as "net cost to acquire and maintain deposit liabilities" and
is included as an adjustment to the net interest income of each profit center.
For segment reporting purposes, management makes certain non-GAAP
adjustments and reclassifications to the results of operations and financial
condition of the Corporation that, in management's judgment, more fairly reflect
the performance and/or financial condition of certain of the Corporation's
profit centers.
SEGMENT PROFIT (LOSS) STATEMENTS AND OTHER INFORMATION The following table
summarizes the profit (loss) and average assets of each of the Corporation's
reportable segments for the three-month periods ended March 31, 2003 and 2002.
In addition to the after-tax performance of profit centers, management of the
Corporation closely monitors the net cost to acquire and maintain deposit
liabilities, which consists principally of the net costs to operate the
Corporation's branch network, as previously described. The net cost to acquire
and maintain deposit liabilities was 1.39% and 1.27% of average deposit
liabilities outstanding during the three months ended March 31, 2003 and 2002,
respectively.
7
THREE MONTHS ENDED MARCH 31
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
PROFIT CENTER PROFIT (LOSS) AVERAGE ASSETS PROFIT (LOSS) AVERAGE ASSETS
- ------------- ------------- -------------- ------------- --------------
Mortgage banking $4,466,575 $ 93,235,287 $1,216,539 $ 80,478,105
Residential loans 1,083,888 845,473,213 1,970,060 792,675,029
Commercial real estate lending 2,644,055 515,584,896 2,275,021 553,474,665
Consumer lending 1,407,445 472,438,347 1,223,653 376,863,719
Education lending 289,105 212,870,628 754,428 217,526,273
Business banking (157,218) 187,401,920 -- --
Investment and mortgage-related securities (771,615) 674,765,496 379,400 523,352,723
Other segments (131,390) 1,260,728 (53,900) 40,752,097
---------- -------------- ---------- --------------
Subtotal 8,830,845 3,003,030,515 7,765,201 2,585,122,611
Non-GAAP adjustments (816,376) 25,676,188 (97,708) 16,851,764
---------- -------------- ---------- --------------
Net income/total average assets $8,014,469 $3,028,706,703 $7,667,493 $2,601,974,375
---------- -------------- ---------- --------------
NOTE 6--STOCK-BASED COMPENSATION
The Corporation records expense relative to stock-based compensation using
the "intrinsic value method". Since the intrinsic value of the Corporation's
stock options is generally "zero" at the time of the award, no expense is
recorded. With respect to restricted stock awards, the intrinsic value is
generally equal to the fair value of the Corporation's common stock on the date
of the initial contingent award, adjusted retroactively for any changes in the
value of the stock between the initial award date and the final measurement
date. Such value is amortized as expense over the measurement period of the
award.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amended the
disclosure provisions of FASB Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and APB Opinion No.
28, "Interim Financial Reporting" ("APB 28"). Specifically, SFAS 148 amends SFAS
123 and APB 28 to require disclosure in condensed consolidated interim financial
information for any period in which stock-based employee awards are outstanding
and accounted for using the intrinsic value method of SFAS 123.
The following table provides pro forma disclosure of the effects of the
Corporation's stock incentive plans at the dates indicated.
THREE MONTHS ENDED MARCH 31
---------------------------
2003 2002
---- ----
Net income as reported $8,014,469 $7,667,493
Stock-based compensation, net of tax (146,219) (242,923)
---------- ----------
Pro forma net income $7,868,250 $7,424,570
---------- ----------
Basic earnings per share as reported $0.41 $0.38
Pro forma basic earnings per share $0.40 $0.37
Diluted earnings per share as reported $0.40 $0.38
Pro forma diluted earnings per share $0.39 $0.37
---------- ----------
8
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report includes certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements include
words and phrases such as "will likely result", "are expected to", "will
continue", "is anticipated", "is estimated", "is projected", "intends to", or
similar expressions. Forward-looking statements are based on management's
current expectations. Examples of factors which could cause future results to
differ from management's expectations include, but are not limited to, the
following: general economic and competitive conditions; legislative and
regulatory initiatives; monetary and fiscal policies of the federal government;
general market rates of interest; interest rates on competing investments;
interest rates on funding sources; consumer and business demand for deposit and
loan products and services; consumer and business demand for other financial
services; changes in accounting policies or guidelines; and changes in the
quality or composition of the Corporation's loan and investment portfolios.
Readers are cautioned that forward-looking statements are not guarantees of
future performance and that actual results may differ materially from
management's current expectations. Furthermore, management of the Corporation
does not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
CRITICAL JUDGMENTS AND ESTIMATES For a summary of the Corporation's
significant accounting policies, refer to Note 1 of the Corporation's Audited
Consolidated Financial Statements included in Part II, Item 8, of its 2002 Form
10-K. Particular attention should be paid to two accounting areas that in
management's judgment, require significant judgments and/or estimates on the
part of management because of the inherent uncertainties surrounding these areas
and/or the subjective nature of the areas. These areas are itemized and
referenced as follows.
MORTGAGE SERVICING RIGHTS For a detailed discussion of the judgments
and estimates relating to the initial recording of and ongoing accounting for
mortgage servicing rights ("MSRs"), refer to the appropriate section in Note 1
of the Corporation's Audited Consolidated Financial Statements, included in Part
II, Item 8, of its 2002 Form 10-K. Additional discussion is also available in
the 2002 Form 10-K "Residential Lending" section of Part I, Item 1,
"Business--Lending Activities". Finally, information on the impact mortgage
servicing rights have had on the Corporation's financial condition and results
of operations for the three months ended March 31, 2003 and 2002, can be found
below, in the sections entitled "Financial Condition--Mortgage Servicing Rights"
and "Results of Operations--Non-Interest Income--Mortgage Banking Revenue".
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE For a detailed
discussion of the judgments and estimates relating to allowances for losses on
loans and real estate, refer to the appropriate section in Note 1 of the
Corporation's Audited Consolidated Financial Statements, included in Part II,
Item 8, of its 2002 Form 10-K. Additional discussion is also available in the
2002 Form 10-K "Non-Performing and Other Classified Assets" section and the
"Allowances for Losses on Loans and Real Estate" section of Part I, Item 1,
"Business--Lending Activities". Finally, information on the impact loss
allowances have had on the Corporation's financial condition and results of
operations for the three months ended March 31, 2003 and 2002, can be found
below, in the sections entitled "Financial Condition--Non-Performing Assets" and
"Results of Operations--Provisions for Loan Losses".
NEW ACCOUNTING STANDARDS AND POLICIES During the three months ended March
31, 2003 and 2002, the Corporation adopted no new accounting standards or
policies that, in management's judgment, had a material impact on its financial
condition or results of operations. However, two new accounting standards were
adopted during the period that were significant to the financial services
industry as a whole. These standards are itemized in the paragraphs that follow.
9
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 141, "BUSINESS
COMBINATIONS" ("SFAS 141") This standard requires the purchase method of
accounting for all mergers and acquisitions, except in very limited instances.
The Corporation adopted SFAS 141 in January 2002. This adoption did not have a
material impact on the Corporation because the acquisitions completed in 2002
would have been accounted for using the purchase method regardless of SFAS 141.
For additional discussion, refer to Note 15 of the Corporation's Audited
Consolidated Financial Statements, in Part II, Item 8, of its 2002 Form 10-K.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS" ("SFAS 142") The Corporation adopted SFAS 142 in
January 2002. For further discussion, refer to "Goodwill and Intangible Assets"
in Note 1, as well as Note 6, of the Corporation's Audited Consolidated
Financial Statements, included in Part II, Item 8, of its 2002 Form 10-K.
RESULTS OF OPERATIONS
QUARTER OVERVIEW The Corporation's net income for the three months ended
March 31, 2003, was $8.0 million or $0.40 per diluted share compared to $7.7
million or $0.38 in the same period last year. These amounts represented a
return on average assets of 1.06% and 1.18%, respectively, and a return on
average equity of 15.37% and 15.68%, respectively.
The increase in net income from 2002 to 2003 was primarily attributable to
a $3.6 million increase in mortgage banking revenue, a $1.5 million increase in
community banking revenue, and a $269,000 decrease in provision for loan losses.
These developments were offset in large part by a $4.0 million increase in
non-interest expense, a $349,000 decrease in net interest income, and a $609,000
increase in income tax expense.
The following paragraphs discuss the aforementioned changes in more detail
along with other changes in the components of net income during the three-month
periods ended March 31, 2003 and 2002.
NET INTEREST INCOME Net interest income decreased by $349,000 or 1.9%
during the three-month period ended March 31, 2003, as compared to the same
period in the previous year. This decline occurred despite the fact that the
Corporation's average interest-earning assets increased by $376 million or 15.5%
between these periods. The principal source of this growth occurred in the
Corporation's consumer and single-family residential loan portfolios, as well as
overnight investments. Contributing to a lesser extent was an increase in the
Corporation's commercial business loan portfolio. This growth was largely funded
by increases in deposit liabilities, primarily certificates of deposit and to a
lesser degree, non-interest-bearing deposits.
The Corporation's interest rate spread declined from 2.64% during the three
months ended March 31, 2002, to 2.17% during the same period in 2003, which more
than offset the increase in net interest income caused by growth in
interest-earning assets. Market interest rates declined dramatically in 2002 and
have remained at historically low levels into 2003. As a result, the Corporation
experienced a larger decline in the yield on its earning assets than it did on
its cost of funding sources. In recent periods asset yields have continued to
decline due to high levels of refinance activity and the build-up of liquidity.
In March 2003, management lowered rates on certificates of deposit and certain
other deposit offerings to improve the Corporation's interest rate spread.
Despite these adjustments, management believes deposit products continue to be
attractively priced relative to competitors. Additionally, a substantial portion
of the Bank's existing certificates of deposit and wholesale borrowings will
mature during the next six months and will likely be replaced at significantly
lower costs. As a result, management expects the Corporation's interest rate
spread to stabilize or improve slightly during the remainder of 2003, although
there can be no assurances.
Net interest income in 2003 also benefited from an increase in average
non-interest-bearing deposits, which was the principal reason the Corporation's
ratio of average interest-earning assets to interest-bearing liabilities
improved during the three-month period ended March 31, 2003. The increase in
non-interest-bearing deposits was due in part to deposits acquired in the
Rochester and Commercial Federal acquisitions in April 2002 and September 2002,
respectively. Also contributing was a substantial increase in custodial accounts
on mortgage loans serviced by the Corporation
10
The following table sets forth information regarding the average balances
of the Corporation's assets, liabilities, and equity, as well as the interest
earned or paid and the average yield or cost of each. The information is based
on daily average balances during the three-month periods ended March 31, 2003
and 2002.
Dollars in thousands THREE MONTHS ENDED MARCH 31, 2003 THREE MONTHS ENDED MARCH 31, 2002
--------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- ------
Interest-earning assets:
Single-family mortgage loans $ 816,928 $10,654 5.22% $ 724,718 $11,994 6.62%
Commercial real estate loans 527,982 10,176 7.71 530,294 10,299 7.77
Consumer loans 505,004 8,661 6.86 356,830 7,120 7.98
Education loans 202,859 1,986 3.92 207,708 3,053 5.88
Commercial business loans 74,584 948 5.09 37,726 591 6.27
---------- ------- ------ ---------- ------- ------
Total loans 2,127,357 32,426 6.10 1,857,276 33,057 7.12
Mortgage-backed and related securities 425,786 3,479 3.27 416,075 5,415 5.21
Investment securities -- -- -- 11,460 92 3.21
Interest-bearing deposits with banks 193,105 563 1.17 109,165 475 1.74
Other earning assets 55,887 691 4.94 31,670 394 4.98
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 2,802,135 37,158 5.30 2,425,646 39,433 6.50
Non-interest-earning assets:
Office properties and equipment 36,681 31,102
Other assets 189,890 145,226
---------- ----------
Total assets $3,028,707 $2,601,974
---------- ----------
Interest-bearing liabilities:
Regular savings accounts $ 165,836 $ 102 0.25% $ 145,791 $ 359 0.98%
Checking accounts 133,220 83 0.25 96,432 130 0.54
Money market accounts 238,755 520 0.87 215,842 881 1.63
Certificates of deposit 1,463,777 12,951 3.54 1,232,942 13,643 4.43
---------- ------- ------ ---------- ------- ------
Total interest-bearing deposits 2,001,588 13,657 2.73 1,691,006 15,014 3.55
FHLB advances 388,750 5,128 5.28 460,061 5,767 5.01
Other borrowings 17,626 91 2.06 4,886 22 1.81
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 2,407,964 18,877 3.14 2,155,954 20,803 3.86
Non-interest-bearing liabilities:
Non-interest-bearing deposits 364,196 222,570
Other liabilities 47,930 27,905
---------- ----------
Total liabilities 2,820,091 2,406,429
Stockholders' equity 208,615 195,544
---------- ----------
Total liabilities and stockholders' equity $3,028,707 $2,601,974
---------- ----------
Net interest income $18,281 $18,630
------- -------
Interest rate spread 2.17% 2.64%
------ ------
Net interest income as a percent of average
earning assets 2.61% 3.07%
------ ------
Average interest-earning assets to average
interest-bearing liabilities 116.37% 112.51%
------ ------
PROVISION FOR LOAN LOSSES Provision for loan losses was $379,000 and
$647,000 during the three months ended March 31, 2003 and 2002, respectively. In
response to a second straight quarterly decline in loans held for investment,
the Corporation did not record any loan loss provisions over-and-above its
actual charge-off activity in the first quarter of 2003. Also affecting the most
recent quarter was the recapture of a specific loss provision that was
established in the fourth quarter of 2002 on a business loan relationship that
paid off during the period. On an annualized basis, net charge-offs were 0.10%
and 0.09% of average loans outstanding during the three-month periods ended
March 31, 2003 and 2002, respectively.
As of March 31, 2003, and December 31, 2002, the Corporation's allowance
for loan losses was $11.5 million and $11.7 million, respectively, or 0.56% and
0.55% of loans held for investment, respectively. The allowance for loan losses
was 183% and 217% of non-performing loans as of the same dates, respectively.
Although management believes that the Corporation's present level of allowance
for loan losses is adequate, there can be no assurance that future adjustments
to the allowance will not be necessary, which could adversely affect the
Corporation's results of operations. For additional discussion, refer to
"Financial Condition--Non-Performing Assets".
11
NON-INTEREST INCOME Non-interest income for the three months ended March
31, 2003 and 2002, was $17.9 million and $12.9 million, respectively. These
amounts represented 50% and 41% of the Corporation's total revenue during such
periods. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their changes from 2002 to 2003.
COMMUNITY BANKING REVENUE Community banking revenue increased by $1.5
million or 20.8% during the three months ended March 31, 2003, as compared to
the same period in the previous year. The following table shows the
Corporation's community banking revenue for the three-month periods ended March
31, 2003 and 2002.
THREE MONTHS ENDED MARCH 31
---------------------------
Dollars in thousands 2003 2002
---- ----
Overdraft fees $4,383 $3,405
ATM and debit card fees 2,547 2,089
Account service charges 621 491
Other fee income 408 341
------ ------
Total deposit account revenue 7,959 6,326
------ ------
Consumer loan insurance premiums and commissions 170 210
Other consumer loan fees 106 84
------ ------
Total consumer loan revenue 276 294
------ ------
Investment services revenue 593 686
------ ------
Total community banking revenue $8,828 $7,306
------ ------
Overdraft fees increased by $978,000 or approximately 29% during the
three months ended March 31, 2003, as compared to the same period in the
previous year. This increase was due in part to growth of 13.2% in the number of
checking accounts serviced by the Corporation between these periods. Also
contributing to the growth in community banking revenue was a $458,000 or 21.9%
increase in fees from customers' use of debit cards and ATMs during the three
months ended March 31, 2003, as compared to the same period in the previous
year.
Consumer loan revenue declined by $18,000 or 6.1% during the three
months ended March 31, 2003, as compared to the same period in the previous
year. The Corporation's principal sources of consumer loan revenue consist of
sales of credit life and disability insurance policies to consumer loan
customers. During the three months ended March 31, 2003, increased premium and
commission revenue associated with increased originations was substantially
offset by increased losses on insurance claims. The Bank's wholly-owned
reinsurance subsidiary, First Reinsurance, Inc. ("FRI"), assumes the first level
of risk on these credit life and disability policies.
Investment services revenue decreased by $93,000 or 13.6% during the
three months ended March 31, 2003, as compared to the same period in the
previous year. The Corporation's principal sources of investment services
revenue consist of commissions from sales of tax-deferred annuities, mutual
funds, and other debt and equity securities. The decline in investment services
revenue was due primarily to lower sales of tax-deferred annuity products caused
principally by a shift in customer preferences to other shorter-term investment
alternatives.
MORTGAGE BANKING REVENUE Mortgage banking revenue increased by $3.6
million or over 70% during the three months ended March 31, 2003, as compared to
the same period in the previous year. The following table shows the
Corporation's mortgage banking revenue for the three-month periods ended March
31, 2003 and 2002.
THREE MONTHS ENDED MARCH 31
---------------------------
Dollars in thousands 2003 2002
---- ----
Gross servicing fees $ 2,524 $ 2,351
Mortgage servicing rights amortization (8,695) (4,118)
Mortgage servicing rights valuation (loss) recovery (1,800) 1,850
------- ------
Total loan servicing fees, net (7,971) 83
------- ------
Gain on sale of mortgage loans 16,110 4,617
Other mortgage-related income 373 237
------- ------
Total mortgage banking revenue $ 8,512 $ 4,937
------- ------
12
Gross servicing fees increased by $173,000 or 7.4% during the three
months ended March 31, 2003, as compared to the same period in the previous
year. This increase was due primarily to $309.8 million or 11.4% growth in
average loans serviced for others, compared to the year-ago period. This growth
was caused by a significant increase in the origination and sale of fixed-rate
mortgage loans, as described in a later paragraph.
Amortization of mortgage servicing rights was $8.7 million and $4.1
million during the three months ended March 31, 2003 and 2002, respectively.
With market interest rates at historically low levels in 2003, loan prepayment
activity increased dramatically as borrowers refinanced older, higher-rate
residential mortgage loans, into lower-rate loans. As a result of this activity,
the Corporation recorded significantly more amortization of mortgage servicing
rights in 2003 than it did in the year-ago period.
Management expects that interest rates will remain at historically low
levels in the near future. If this trend continues, the Corporation will most
likely continue to experience high levels of amortization on its MSRs as a
result of high levels of loan prepayment activity. Such amortization, however,
will most likely be offset by high levels of gains on sales of mortgage loans,
although there can be no assurances. It should be noted, however, that declines
in market interest rates may also expose the Corporation to unfavorable
mark-to-market adjustments against its portfolio of MSRs--primarily because of
increases in market expectations for future prepayments. Although management
believes that most of the Corporation's loans that prepay are replaced by a new
loan to the same customer or even a different customer (thus preserving the
future servicing cash flow), GAAP requires mark-to-market losses resulting from
increases in market expectations for future prepayments to be recorded in the
current period. However, the offsetting gain on the sale of the new loan, if
any, cannot be recorded until the customer actually prepays the old loan and the
new loan is sold in the secondary market. As of March 31, 2003, the Corporation
had recorded $5.2 million in unfavorable mark-to-market adjustments against its
mortgage servicing rights, of which $1.8 million was recorded through earnings
in 2003 as a result of an increase in future prepayment expectations in the
first quarter. If interest rates increase, management expects that future
prepayment expectations will decline. If such occurs, the Corporation may be
required to recapture through earnings some or all of the mark-to-market
adjustment on its MSRs. During the first quarter of last year, the Corporation
recaptured $1.9 million in previously established mark-to-market adjustments as
a result of a decline in future prepayment expectations during that period.
At March 31, 2003, and 2002, loans serviced for others were $3.1
billion and $2.7 billion, respectively. As of the same dates, mortgage servicing
rights were $27.8 million and $31.5 million, respectively, net of the
mark-to-market adjustment.
Gains on sales of loans increased by $11.5 million from $4.6 million
during the three months ended March 31, 2002, to $16.1 million during the same
period in 2003. This increase was primarily attributable to a $454 million or
more than 200% increase in the Corporation's mortgage loan sales. This increase
was due to a historically low interest rate environment that resulted in
increased originations and sales of fixed-rate mortgage loans in the secondary
market. Also contributing to the increase in gains on sales of mortgage loans
during the most recent period was an increase in the average gain on individual
sales of such loans. During the three-month period in 2003, the average gain was
2.42% compared to 2.09% in 2002. This increase was caused by a wider spread
between the mortgage rates charged to borrowers by the Corporation and the yield
demanded by investors in the secondary market.
Market interest rates have remained at historically low levels in
recent months. Although there can be no assurances, management expects this
trend to continue in the near future. As such, management expects the
Corporation's gains on sales of mortgage loans to remain high by historical
standards. These gains, however, may be offset to some degree by increased
amortization of MSRs and/or unfavorable mark-to-market adjustments on MSRs, as
more fully described in a previous paragraph.
Other mortgage-related income increased by $136,000 or more than 55%
during the three months ended March 31, 2003, as compared to the same period in
the previous year. This increase was due mostly to increases in fees received on
loans originated as agent for the Wisconsin State Veterans Administration and
the Wisconsin Housing and Economic Development Authority.
13
LOSS ON SALES OF INVESTMENTS Loss on sales of investments and other
assets was zero and $166,000, during the three months ended March 31, 2003 and
2002, respectively. The loss in 2002 was due to the sale of $35.5 million in
callable securities issued by various agencies of the U.S. government. Despite
the loss on the sale, the holding period return on these securities was
comparable to a money market yield, which was the Corporation's minimum
expectation when it purchased the securities.
OTHER NON-INTEREST INCOME Other non-interest income decreased by
$236,000 or 28% during the three months ended March 31, 2003, as compared to the
same period in the previous year. This decrease was primarily due to the receipt
in the prior year of a special dividend related to the Corporation's ownership
in its primary ATM network provider.
NON-INTEREST EXPENSE Non-interest expense for the three months ended March
31, 2003 and 2002, was $23.1 million and $19.1 million, respectively, which was
3.05% and 2.94% of average assets during such periods, respectively. The
following paragraphs discuss the principal components of non-interest expense
and the primary reasons for their changes from 2002 to 2003.
COMPENSATION AND EMPLOYEE BENEFITS Compensation and employee benefits
increased by $1.9 million or 15.9% during the three months ended March 31, 2003,
as compared to the same period in the previous year. In general, the increase
was due to normal annual merit increases, as well as growth in the number of
banking facilities operated by the Corporation and the resulting increase in the
number of employees. Since March 31, 2002, the Corporation has increased the
number of its banking facilities from 81 to 91. In April 2002, the Corporation
completed the purchase of three banking locations from another financial
institution in Rochester, Minnesota. In September 2002, the Corporation acquired
four banking facilities in south-eastern Minnesota from another financial
institution. As of March 31, 2003, the Corporation had 1,240 full-time
equivalent employees. This compared to 1,213 and 1,116 as of December 31, 2002,
and March 31, 2002, respectively.
Also contributing to the increase in compensation and employee
benefits in 2003 were increased salaries to employees hired over the past year
to support the roll out of the Corporation's business banking product line.
During the most recent quarter, the Corporation began offering business banking
products in its Oshkosh, Wisconsin, market. The Corporation intends to expand
its offering of business banking products in up to three additional markets in
2003, although there can be no assurances.
Compensation and employee benefits in the first quarter of 2003 was
also impacted by an increase in employee pension costs. Such costs rose by
$224,000 or over 135% during the three months ended March 31, 2003, as compared
to the same period in the previous year. Management recently completed a review
of the Corporation's pension plan established for the benefit of its full-time
employees. As a result of changes in assumptions implemented in conjunction with
the review, as well as certain amendments to the pension plan, management
believes that the Corporation's pension expense will be substantially higher in
2003. Pension expense for 2003 is expected to approximate $1.6 million compared
to $734,000 in 2002. Furthermore, management has reduced the assumption for the
expected return on plan assets to 8.50% in 2003, which compares to 9.00% in
2002.
OCCUPANCY AND EQUIPMENT Occupancy and equipment expense increased by
$722,000 or 30% during the three months ended March 31, 2003, compared to the
same period in the previous year. This increase was primarily attributable to
growth in the number of banking facilities operated by the Corporation, as well
as increases in the number of full-time equivalent employees and in the number
of customers served by the Corporation.
COMMUNICATIONS, POSTAGE, AND OFFICE SUPPLIES Communications, postage,
and office supplies expense increased by $454,000 or approximately 33% during
the three months ended March 31, 2003, as compared to the same period in the
previous year. This increase was also caused principally by growth in the number
of banking facilities operated by the Corporation, as well as increases in the
number of full-time equivalent employees and in the number of customers served
by the Corporation.
14
ATM AND DEBIT CARD TRANSACTION COSTS ATM and debit card transaction
costs increased by $249,000 or nearly 30% during the three months ended March
31, 2003, as compared to the same period in the previous year. This increase can
be attributed to increased use by the Corporation's customers of ATM and debit
card networks, as well as an increase in the number of ATMs operated by the
Corporation. The Corporation currently operates 117 ATMs in over 40 communities
throughout Wisconsin, northern Illinois, and south-eastern Minnesota.
ADVERTISING AND MARKETING Advertising and marketing costs increased by
$116,000 or 20.5% during the three months ended March 31, 2003, as compared to
the same period in the previous year. This increase can be attributed to growth
in the number of banking facilities operated by the Corporation, as previously
described, as well as an increase in the number of market areas served by the
Corporation.
AMORTIZATION OF INTANGIBLES Amortization of intangible assets, which
consists primarily of deposit-based intangibles, increased by $53,000 or more
than 40% during the three months ended March 31, 2003, as compared to the same
period in the previous year. The increase was caused by increased amortization
of the deposit-based intangibles recorded in connection with the Corporation's
acquisitions in the second and third quarters of 2002.
OTHER NON-INTEREST EXPENSE Other non-interest expense increased by
$482,000 or nearly 28% during the three months ended March 31, 2003, as compared
to the same period in the previous year. This increase was caused by a variety
of factors, the most significant of which was increased costs related to
servicing of loans for the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Bank of Chicago ("FHLB"). Under the terms of the servicing
agreements with these agencies, the Corporation is required to pay a full
month's interest when certain loans are repaid, regardless of the actual date of
the loan payoff. A declining interest rate environment and increased prepayment
activity in 2003 resulted in increased payment of loan pay-off interest to FNMA
and FHLB. This development was partially offset by recoveries related to items
in process of collection from customers and dispositions of foreclosed real
estate.
INCOME TAX EXPENSE Income tax expense for the three months ended March 31,
2003 and 2002, was $4.7 million and $4.1 million, respectively, or 37.0% and
34.8% of pretax income, respectively. The Corporation's effective tax rate has
increased in recent periods due principally to a higher mix of taxable earnings
in the States of Wisconsin, Minnesota, and Illinois, relative to the State of
Nevada, where the Corporation has established a wholly-owned investment
subsidiary and which has no corporate state income tax.
SEGMENT INFORMATION The following paragraphs contain a discussion of the
financial performance of each of the Corporation's reportable segments
(hereafter referred to as "profit centers") for the three month periods ended
March 31, 2003 and 2002. Refer to the table in Note 5 of the Corporation's
Unaudited Consolidated Financial Statements, included herein under Part I, Item
I, "Financial Statements", for a summary of the after-tax profit (loss) of each
of the Corporation's profit centers.
MORTGAGE BANKING Profits from the Corporation's mortgage banking
activities were $4.5 million in the first quarter of 2003 compared to $1.2
million in the first quarter of 2002. Loan origination volumes and mortgage
servicing fees are the principal drivers of performance in this profit center.
In the first three months of 2003, the Corporation's mortgage banking operation
originated $728 million in single-family residential loans compared to $258
million in the same period of the previous year. As a result of this increase,
revenues from loan origination activities improved relative to the same period
in 2002. In addition, the profit center experienced an increase in the average
gain on sales of mortgage loans, for reasons described elsewhere in this report.
However, these improvements were offset by a substantial increase in
amortization of MSRs. Beginning in 2001 and continuing through 2003, market
interest rates for mortgage loans declined dramatically and have remained at
historically low levels. As a result, amortization of MSRs has increased
relative to prior periods. Refer to "Results of Operations--Non-Interest Income"
for additional discussion.
RESIDENTIAL LOANS Profits from the Corporation's residential loan
portfolio decreased by $886,000 or 45% during the three month period ended March
31, 2003, compared to the same period in the previous
15
year. This decline was largely due a decrease in interest rate spread. The yield
on the profit center's single-family residential loans declined by 140 basis
points between the periods. This profit center is funded by a mix of deposit
liabilities and wholesale borrowings. The Corporation's average cost of
interest-bearing liabilities declined by 72 basis points between the three month
period in 2003 and the same period in 2002. The decline in interest rate spread
was partially offset by a 6.7% increase in average assets assigned to the profit
center compared to the same period in the previous year. A $105,000 increase in
origination cost amortization also contributed to the decrease in profits for
this profit center between these same periods due to increased prepayment
activity.
COMMERCIAL REAL ESTATE LENDING Profits from commercial real estate
lending increased by $369,000 or 16.2% during the three months ended March 31,
2003, compared to the same period in 2002 even though average assets declined by
$38 million or 6.9%. This improvement was principally the result of a
significant increase in the profit center's interest rate spread in the most
recent quarter, compared to the same period in the previous year. This profit
center is primarily funded by deposit liabilities and, to a lesser extent, by
wholesale borrowings. The Corporation's average cost of interest-bearing
liabilities declined by 72 basis points between the first quarter of 2003 and
the same period in 2002. The yield on commercial real estate loans, however,
declined by only 6 basis points between these same periods. Despite a declining
interest rate environment, the yield on commercial real estate loans has
remained stable in recent periods due to an increase in prepayment fees. These
higher fees are the result of an increase in prepayment activity in the
portfolio.
During the three months ended March 31, 2003, this profit center
originated $32.1 million in commercial real estate loans. This compares to $18.7
million in the same period last year. However, average assets assigned to this
profit center declined by $38 million or 6.9% due to an increase in prepayment
activity in the portfolio.
CONSUMER LENDING Profits from the Corporation's consumer lending
activities increased by $183,000 or 15.0% during the three month period ended
March 31, 2003, compared to the same period in the previous year. This increase
was attributable to a 26% increase in average assets assigned to the profit
center since the first quarter of 2002. During the three months ended March 31,
2003, this profit center originated $108 million in consumer loans. This
compares to $75.4 million in the same period last year.
A decline in the profit center's interest rate spread in the most
recent period, compared to the same timeframe in the previous year partially
offset the impact of the increase in average assets. Similar to commercial real
estate loans, this profit center is principally funded by deposit liabilities
and, to a lesser extent, by wholesale borrowings. The Corporation's average cost
of interest-bearing liabilities declined by 72 basis points between the first
quarter of 2003 and the same quarter in 2002. The yield on consumer loans,
however, declined by 112 basis points between these same periods.
EDUCATION LENDING Profits from education lending decreased by $465,000
or 62% during the first quarter of 2003 compared to the same period in 2002.
This decline was chiefly the result of a decline in the profit center's interest
rate spread. The average cost of the Corporation's money market accounts, which
are the primary funding source for this profit center, declined by 76 basis
points during the most recent quarter compared to the same quarter in 2002. In
contrast, the yield on education loans declined by 196 basis points between
these same periods.
During the three months ended March 31, 2003, the average assets
assigned to this profit center decreased by $4.7 million or 2.1% compared to the
same period last year. During the most recent quarter, this profit center
originated $21.5 million in education loans. This compares to $15.5 million in
the same quarter of 2002.
BUSINESS BANKING Loss from the Corporation's business banking
operations was $157,000 for the three months ended March 31, 2003. The results
of this profit center include costs associated with the development of business
banking services and the expansion of business banking into additional
geographic markets. The financial results of this profit center have not been
reported separately for 2002 due to efforts to design these products on the
Corporation's systems, as well as efforts to develop departmental allocations of
costs and revenues necessary to fairly present the operating results of this
line of business.
16
INVESTMENT AND MORTGAGE-RELATED SECURITIES Profits from the
Corporation's investment securities portfolio decreased by $1.1 million during
the three months ended March 31, 2003, as compared to the same period in 2002.
This decrease was due to a decline in interest rate spread. This profit center
is principally funded by deposit liabilities and, to a lesser extent, by
wholesale borrowings. The Corporation's average cost of interest-bearing
liabilities declined by 72 basis points between the first quarter of 2003 and
the same quarter in the previous year. However, the yield on the investment
securities portfolio declined by 185 basis points between these same periods due
to accelerated prepayments of higher yielding securities, as well as the buildup
of overnight investments in the profit center.
Average assets assigned to the profit center increased by $151 million
or 29% in the most recent quarter compared to the same quarter in the previous
year. In 2002, the performance of this profit center was adversely impacted by a
$166,000 loss on the sale of certain investment securities.
OTHER SEGMENTS This segment consists of the parent holding company and
certain of the Bank's wholly-owned subsidiaries. In addition, in 2002 this
profit center contained the preliminary results of the Corporation's new line of
business--business banking. The financial results of this profit center were not
reported separately in 2002 due to continuing efforts to develop the
departmental allocations of costs and revenues necessary to fairly present the
operating results of this line of business.
NON-GAAP ADJUSTMENTS Non-GAAP adjustments were ($816,000) in the first
quarter of 2003 compared to ($98,000) in the first quarter of 2002. The change
between these periods was due to a $1.2 million increase in MSR amortization on
loans serviced for portfolio that was included in the mortgage banking profit
center, but excluded from the operating results of the Corporation. This
adjustment was partially offset by a $560,000 decrease in mark-to-market gains
on loans held for sale that were included in the computation of the operating
results for the Corporation, but ignored in the product profitability model.
NET COST TO ACQUIRE AND MAINTAIN DEPOSIT LIABILITIES In addition to
the after-tax performance of the aforementioned profit centers, management of
the Corporation closely monitors the net cost to acquire and maintain deposit
liabilities. The Corporation's profit centers are allocated a share of the net
cost to acquire and maintain deposit liabilities according to their
proportionate use of such deposits as a funding source. As such, changes in the
net cost to acquire and maintain deposit liabilities will impact most of the
Corporation's profit centers.
The net cost to acquire and maintain deposit liabilities was 1.39% and
1.27% of average deposit liabilities outstanding during the three months ended
March 31, 2003 and 2002, respectively. The increase in cost between these
periods was principally the result of the acquisition of branches in Minnesota
in 2002, as well as the investment in infrastructure to support the acquisition
and maintenance of business deposits.
17
FINANCIAL CONDITION
OVERVIEW The Corporation's total assets increased by $67.5 million or 2.2%
during the three months ended March 31, 2003. This increase was due primarily to
an increase in mortgage-related securities, which was funded by an increase in
deposit liabilities, as well as the proceeds from declines in overnight
investments and loans held for investment.
OVERNIGHT INVESTMENTS Interest-bearing deposits with banks, which consist
of overnight investments at the FHLB, short-term money market accounts, and
federal funds purchased, decreased by $69.1 million or almost 40% from $180
million at December 31, 2002, to $111 million at March 31, 2003. This decrease
was the result of the reinvestment of proceeds from loan sales and increases in
deposit liabilities into other interest-earning assets such as mortgage-related
securities.
MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios increased by
$194 million or over 45% during the three months ended March 31, 2003. During
this period, the Corporation's purchased $327 million in short- and medium-term,
fixed- and adjustable-rate collateralized mortgage obligations ("CMOs"). This
development was offset in part by the repayment of $132 million in
mortgage-backed and related securities.
LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
decreased by $47.7 million or 2.3% during the three months ended March 31, 2003.
During 2002 and continuing into 2003, the interest rate environment has a
significant impact on the ability of the Corporation to maintain its
internally-originated portfolio of loans held for investment. This situation has
developed because low interest rates tend to increase customer preference for
fixed-rate mortgage loans, as opposed to adjustable-rate loans. In addition, a
low interest rate environment encourages borrowers to refinance their existing
adjustable-rate residential loans into fixed-rate loans to "lock-in" a lower
long-term rate. Given the Corporation's policy of selling these types of loans
in the secondary market, its internally-originated portfolio of adjustable-rate
residential loans declined in the most recent period.
The Corporation will continue to explore alternatives to maintain growth in
its interest-earning assets in the near term. These alternatives include, but
are not limited to, the purchase of adjustable-rate residential mortgage loans
from third-party financial institutions, the purchase of mortgage-backed and
related securities, and the retention of certain fixed-rate loans that are
currently sold by the Corporation in the secondary market. However, there are
many considerations involved in such decisions and there can be no assurances
that the Corporation will elect to continue any of these strategies to increase
its interest-earning assets.
MORTGAGE SERVICING RIGHTS The Corporation's mortgage servicing rights, net
of valuation allowances, were $27.8 million and $30.2 million as of March 31,
2003, and December 31, 2002, respectively. These amounts were 0.91% and 1.02% of
the outstanding principal of loans serviced for others, which amounted to $3.1
billion and $3.0 billion at March 31, 2003, and December 31, 2002, respectively.
The valuation allowance for MSR losses was $5.2 million and $3.4 million at
March 31, 2003, and December 31, 2002, respectively.
DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$84.7 million or 3.6% during the three months ended March 31, 2003. The
Corporation's deposit liabilities were impacted by a $47.9 million or nearly 35%
increase in custodial deposit accounts during 2003. The Corporation maintains
borrowers' principal and interest payments in such accounts on a temporary basis
pending their remittance to the third-party owners of the loans. Balances in
these accounts increased substantially in 2003 due to significant increases in
loan prepayment activity
FHLB ADVANCES The Corporation's FHLB advances decreased by $24.4 million or
6.1% during the three months ended March 31, 2003. During 2003, the Corporation
did not incur any new borrowings with the FHLB. This funding source was replaced
by increases in deposit liabilities, as previously described.
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 $9.3 million
18
or 0.30% of total assets at March 31, 2003, compared to $9.1 million or 0.30% of
total assets at December 31, 2002. The Corporation's allowance for loan and real
estate losses was 127% and 130% of total non-performing assets as of the same
dates, respectively.
In addition to non-performing assets, at March 31, 2003, management was
closely monitoring $18.7 million in assets, which it had classified as doubtful
or substandard, but which were performing in accordance with their terms. This
compares to $22.6 million in such assets at December 31, 2002. The decrease from
2002 was due primarily to a decline in the number of mortgage and consumer loans
past due. It is the Corporation's policy to classify loans that are 60 days or
more past due as substandard.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits obtained through
its branch office network, borrowings from the FHLB and other sources,
amortization, maturity, and prepayment of outstanding loans and investments, and
sales of loans and other assets. During the first quarter of 2003, the
Corporation used these sources of funds to fund loan commitments, purchase
mortgage-related securities, and cover maturing liabilities and deposit
withdrawals. Management believes that the Corporation has adequate resources to
fund all of its obligations or commitments, that all of its obligations or
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.
The Corporation's stockholders' equity ratio as of March 31, 2003, was
6.83% of total assets. The Corporation's long-term goal is to maintain its
stockholders' equity ratio at approximately 7.0%, which is consistent with the
Corporation's long-term objectives for return on equity of at least 15% per year
and return on assets of at least 1% per year. The Corporation's tangible
stockholders' equity ratio was 5.50% as of March 31, 2003.
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 March 31, 2003, the Bank's regulatory capital exceeded all regulatory minimum
requirements as well as the amount required to be classified as a "well
capitalized" institution.
The Corporation paid cash dividends of $2.6 million and $2.4 million during
the three months ended March 31, 2003 and 2002, respectively. These amounts
equated to dividend payout ratios of 32.0% and 31.6% 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, which is
consistent with the Corporation's long-term earnings and asset growth rate
objectives of 10% per year, as well as its return on equity objective of 15% per
year. However, the Corporation's dividend policy and/or dividend payout ratio
will be impacted by considerations such as the level of stockholders' equity in
relation to the Corporation's stated goal, as previously described, regulatory
capital requirements for the Bank, as previously described, and certain dividend
restrictions in effect for the Bank. Furthermore, unanticipated or non-recurring
fluctuations in earnings may impact the Corporation's ability to pay dividends
and/or maintain a given dividend payout ratio.
On April 23, 2003, the Corporation's Board of Directors declared a regular
quarterly dividend of $0.14 per share payable on June 5, 2003, to shareholders
of record on May 15, 2003.
During the three-month period ending March 31, 2003, the Corporation
repurchased 24,551 shares under its 2000 stock repurchase plan (the "2000 Plan")
at a cost of approximately $474,000. In April 2002, the Corporation's Board of
Directors adopted another stock repurchase plan (the "2002 Plan") that
authorizes the repurchase of up to 1,001,678 shares or approximately 5% of the
Corporation's outstanding common stock. The 2002 Plan has a twelve-month term
and authorizes the Corporation to repurchase shares from time-to-time in
open-market transactions as, in the opinion of management, market conditions
warrant. The repurchased shares will be held as treasury stock and will be
available for general corporate purposes. In April 2003, the Corporation's Board
of Directors extended the 2000 Plan and the 2002 Plan for another twelve months.
19
During the three-month period ending March 31, 2003, the Corporation
reissued 27,227 shares of common stock out of its inventory of treasury stock
with a cost basis of approximately $541,000. In general, these shares were
issued upon the exercise of stock options by, or the issuance of restricted
stock to, employees and directors of the Corporation.
OTHER MATTERS
On April 10, 2003, the Corporation entered into a definitive agreement to
acquire Liberty Bancshares, Inc. ("Liberty"), the parent company of Liberty
State Bank, headquartered in St. Paul, Minnesota. According to the terms of the
agreement, Liberty will merge into the Corporation, with Liberty shareholders
receiving a combination of 37% cash and 63% shares of the Corporation's stock.
The transaction will be accounted for using the purchase method of accounting.
The amount of goodwill recorded in connection with this transaction will depend
on the estimated fair value that will be assigned to the identifiable tangible
and intangible assets and liabilities of Liberty including a deposit-based
intangible asset. Management has not completed a deposit portfolio valuation
analysis as of the date of this report or estimated the fair value of Liberty's
tangible assets and liabilities. As such, management is not able to estimate the
value of the deposit-based intangible or goodwill at this time.
The acquisition, which has been approved by the boards of directors of each
company, is expected to close during the third quarter of 2003, subject to
regulatory approvals, and various other conditions of closing.
20
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk" or "market risk") by monitoring its ratios
of interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates (i.e., its one- and three-year
"gaps"). Management has sought to control the Corporation's one- and three-year
gaps, thereby limiting the affects of changes in interest rates on its future
earnings, by selling substantially all of its long-term, fixed-rate,
single-family mortgage loan production, investing in adjustable-rate
single-family mortgage loans, investing in consumer, education, and commercial
business loans, which generally have shorter terms to maturity and/or floating
rates of interest, and investing in commercial real estate loans, which also
tend to have shorter terms to maturity and/or floating rates of interest. The
Corporation also invests from time-to-time in adjustable-rate and short- and
medium-term fixed- and adjustable-rate CMOs and MBSs. As a result of this
strategy, the Corporation's exposure to interest rate risk is significantly
impacted by its funding of the aforementioned asset groups with deposit
liabilities and FHLB advances that tend to have average terms to maturity of
less than one year or carry floating rates of interest.
In general, it is management's long-term goal to maintain the Corporation's
one-year gap in a range of +/- 30% and its three-year gap in a range of +/- 10%,
although typically the Corporations' one- and three-year gaps will be negative.
Management believes this strategy takes advantage of the fact that market yield
curves tend to be upward sloping, which increases the spread between the
Corporation's earning assets and interest-bearing liabilities. Furthermore,
management of the Corporation does not believe that this strategy exposes the
Corporation to unacceptable levels of interest rate risk as evidenced by the
fact that the Corporation's three-year gap is generally maintained in a narrow
band around zero, which implies that the Corporation is exposed to little
interest rate risk over a three-year horizon. In addition, it should be noted
that for purposes of its gap analysis, the Corporation classifies its
interest-bearing checking, savings, and money market deposits in the shortest
category, due to their potential to reprice. However, it is the Corporation's
experience that these deposits do not reprice as quickly or to the same extent
as other financial instruments, especially in a rising rate environment. In
addition, the Corporation classifies certain FHLB advances that are redeemable
prior to maturity (at the option of the FHLB) according to their redemption
dates, which are earlier than their maturity dates.
Although management believes that its asset/liability management strategies
reduce the potential effects of changes in interest rates on the Corporation's
operations, material and prolonged increases in interest rates may adversely
affect the Corporation's operations because the Corporation's interest-bearing
liabilities which mature or reprice within one year are greater than the
Corporation's interest-earning assets which mature or reprice within the same
period. Alternatively, material and prolonged decreases in interest rates may
benefit the Corporation's operations.
The Corporation is also required by the OTS to estimate the sensitivity of
its net portfolio value of equity ("NPV") to immediate and sustained changes in
interest rates and to measure such sensitivity on at least a quarterly basis.
NPV is defined as the estimated net present value of an institution's existing
assets, liabilities, and off-balance sheet instruments at a given level of
market interest rates. In general, it is management's goal to limit estimated
changes in the Corporation's NPV under specified interest rate scenarios such
that the Corporation will continue to be classified by the OTS as an institution
with minimal exposure to interest rate risk.
As of March 31, 2003, the Corporation was in compliance with its management
polices with respect to exposure to interest rate risk. Furthermore, there was
no material change in its interest rate risk exposure since December 31, 2002.
21
ITEM 4--CONTROLS AND PROCEDURES
An evaluation of the Corporation's disclosure controls and procedures (as
defined in Rules 13a-14(c) of the Securities Exchange Act of 1934 (the "Act"))
was carried out under the supervision and with the participation of the
Corporation's Chief Executive Officer, Chief Financial Officer, Controller, and
several other members of the Corporation's senior management within the 90-day
period preceding the filing date of this quarterly report. The Corporation's
Chief Executive Officer, Chief Financial Officer, and Controller concluded that
the Corporation's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Corporation in the reports it files or submits under the Act is (i) accumulated
and communicated to the Corporation's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. In the quarter ended March 31, 2003, the Corporation did
not make any significant changes in, nor take any corrective actions regarding,
its internal controls or other factors that could significantly affect these
controls.
22
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
Refer to Note 4 of the Corporation's Consolidated Financial Statements.
ITEM 2--CHANGES IN SECURITIES
None.
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Corporation held its Annual Meeting of Shareholders on April 23, 2003.
The following matter was voted upon at that meeting:
The election of three nominees for the Board of Directors, who will serve
for a three-year term, was voted upon by the Corporation's shareholders. The
nominees, all of whom were elected, are set forth in the table below. The
Inspector of Election certified the following vote tabulations:
Nominee Votes For Votes Withheld
------- --------- --------------
David W. Kruger 17,007,294 121,504
Richard T. Lommen 17,008,160 120,638
Phillip J. Quillin 16,952,193 176,604
ITEM 5--OTHER INFORMATION
None.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
None.
Exhibit Index
Item No. Description
Exhibit 99.1 - Section 906 Certification.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST FEDERAL CAPITAL CORP
/s/ Jack C. Rusch May 15, 2003
Jack C. Rusch
President and Chief Executive Officer
(duly authorized officer)
/s/ Michael W. Dosland May 15, 2003
Michael W. Dosland
Senior Vice President and
Chief Financial Officer
/s/ Kenneth C. Osowski May 15, 2003
Kenneth C. Osowski
Vice President and Controller
24
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jack C. Rusch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Capital Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rule 13a-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Jack C. Rusch
Jack C. Rusch
President and Chief Executive Officer
(duly authorized officer)
25
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael W. Dosland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Capital Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Michael W. Dosland
Michael W. Dosland
Senior Vice President and
Chief Financial Officer
26
CERTIFICATION OF CONTROLLER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth C. Osowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Capital Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Kenneth C. Osowski
Kenneth C. Osowski
Vice President and Controller
27
EXHIBIT INDEX
Item No. Description
- -------- -----------
Exhibit 99.1 Section 906 Certification.
28