SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
F O R M 1 0 - Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-27982
FIRST NORTHERN CAPITAL CORP.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1830142
- - -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 North Monroe Avenue
P.O. Box 23100
Green Bay, Wisconsin 54305-3100
(920) 437-7101
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal
executive offices)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK, $1.00 PAR VALUE
PER SHARE, WAS 8,784,945,
AT OCTOBER 30, 1998.
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial
Condition as of September 30, 1998
and December 31, 1997 3
Unaudited Consolidated Statements of Income
for the Three Months Ended
September 30, 1998 and September 30, 1997 4
Unaudited Consolidated Statements of Income
for the Nine Months Ended
September 30, 1998 and September 30, 1997 5
Unaudited Consolidated Statement of
Changes in Stockholders' Equity
for the Nine Months Ended
September 30, 1998 and September 30, 1997 6
Unaudited Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1998 and September 30, 1997 7
Notes to Unaudited Consolidated
Financial Statements 8 - 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11 - 25
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 27
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 December 31, 1997
------------------ -----------------
(In Thousands)
ASSETS
Cash $ 4,450 $ 640
Interest-earning deposits 8,724 324
-------- --------
CASH AND CASH EQUIVALENTS 13,174 964
Securities available-for-sale, at fair value
Investment securities 8,879 6,799
Mortgage-related securities 932
Securities held-to-maturity
Investment securities
(estimated fair value of $25,783,000 -
1998; $21,313,000 - 1997) 25,530 21,231
Mortgage-related securities
(estimated fair value of $9,239,000 -
1998; $10,689,000 - 1997) 9,168 10,675
Loans held for sale 3,935 2,119
Loans receivable 617,981 593,529
Accrued interest receivable 3,727 3,646
Foreclosed properties and repossessed assets 150 153
Office properties and equipment 7,660 8,004
Federal Home Loan Bank stock 5,250 5,250
Prepaid expenses and other assets 14,974 14,394
-------- --------
$710,428 $667,696
======== ========
LIABILITIES
Deposits $524,431 $481,788
Borrowings 96,098 103,277
Advance payments by borrowers for taxes
and insurance 10,059 3,861
Other liabilities 4,422 4,953
-------- --------
TOTAL LIABILITIES 635,010 593,879
STOCKHOLDERS' EQUITY
Cumulative preferred stock, $1 par value;
10,000,000 shares authorized;
none outstanding
Common stock, $1 par value; 30,000,000
shares authorized; shares issued:
9,134,735 - 1998; 9,136,104 - 1997
shares outstanding: 8,801,945 - 1998;
8,845,676 - 1997 9,135 9,136
Additional paid-in capital 9,126 9,438
Unrealized gains on securities
available-for-sale, net of taxes 769 614
Treasury stock at cost (332,790 shares - 1998;
290,428 shares - 1997) (3,289) (2,316)
Retained earnings 59,677 56,945
-------- --------
TOTAL STOCKHOLDERS' EQUITY 75,418 73,817
-------- --------
$710,428 $667,696
======== ========
See Notes to Unaudited Consolidated Financial Statements
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30
1998 1997
-------- --------
(In Thousands,
Except Per Share Amounts)
Interest income:
Mortgage loans $ 8,439 $ 7,923
Consumer loans 3,386 3,248
Investment securities 581 478
Interest-earning deposits 50 11
Mortgage-related securities 145 197
------- -------
TOTAL INTEREST INCOME 12,601 11,857
Interest expense:
Deposits 5,954 5,500
Borrowings 1,434 1,256
Advance payments by borrowers
for taxes and insurance 50 46
------- -------
TOTAL INTEREST EXPENSE 7,438 6,802
------- -------
NET INTEREST INCOME 5,163 5,055
Provision for loan losses 105 90
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,058 4,965
Non-interest income:
Fees on serviced loans 56 76
Loan fees and service charges 70 63
Deposit account service charges 343 308
Insurance commissions 61 79
Gains on sales of loans 202 76
Other 315 250
------- -------
TOTAL NON-INTEREST INCOME 1,047 852
Non-interest expense:
Compensation, payroll taxes
and other employee benefits 1,892 1,764
Federal insurance premiums 76 74
Occupancy 210 201
Data processing 361 349
Furniture and equipment 119 122
Telephone and postage 101 112
Marketing 100 103
Other 552 545
------- -------
TOTAL NON-INTEREST EXPENSE 3,411 3,270
------- -------
INCOME BEFORE INCOME TAXES 2,694 2,547
Income taxes 920 961
------- -------
NET INCOME $ 1,774 $ 1,586
======= =======
BASIC NET INCOME PER SHARE $0.20 $0.18
===== =====
DILUTED NET INCOME PER SHARE $0.20 $0.17
===== =====
CASH DIVIDENDS PAID PER SHARE $0.09 $0.08
===== =====
See Notes to Unaudited Consolidated Financial Statements
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
September 30
1998 1997
-------- --------
(In Thousands,
Except Per Share Amounts)
Interest income:
Mortgage loans $24,913 $23,272
Consumer loans 9,938 9,159
Investment securities 1,582 1,355
Interest-earning deposits 92 33
Mortgage-related securities 472 547
------- -------
TOTAL INTEREST INCOME 36,997 34,366
Interest expense:
Deposits 17,234 15,834
Borrowings 4,328 3,555
Advance payments by borrowers for
taxes and insurance 91 88
------- -------
TOTAL INTEREST EXPENSE 21,653 19,477
------- -------
NET INTEREST INCOME 15,344 14,889
Provision for loan losses 315 230
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,029 14,659
Non-interest income:
Fees on serviced loans 156 243
Loan fees and service charges 206 200
Deposit account service charges 958 902
Insurance commissions 230 248
Gains on sales of loans 656 199
Other 921 580
------- -------
TOTAL NON-INTEREST INCOME 3,127 2,372
Non-interest expense:
Compensation, payroll taxes and
other employee benefits 5,563 5,329
Federal insurance premiums 227 208
Occupancy 658 661
Data processing 1,096 1,050
Furniture and equipment 347 371
Telephone and postage 337 359
Marketing 337 282
Other 1,732 1,641
------- -------
TOTAL NON-INTEREST EXPENSE 10,297 9,901
------- -------
INCOME BEFORE INCOME TAXES 7,859 7,130
Income taxes 2,726 2,700
------- -------
NET INCOME $ 5,133 $ 4,430
======= =======
BASIC NET INCOME PER SHARE $0.58 $0.50
===== =====
DILUTED NET INCOME PER SHARE $0.56 $0.49
===== =====
CASH DIVIDENDS PAID PER SHARE $0.27 $0.24
===== =====
See Notes to Unaudited Consolidated Financial Statements
[CAPTION]
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized Gain
on Securities
Additional Available-
Common Paid-In for-Sale, Treasury Retained
Stock Capital Net of Taxes Stock Earnings Total
-------------------------------------------------------------
(In Thousands)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
- - --------------------------------------------
Balance at December 31, 1997 $9,136 $9,438 $614 $(2,316) $56,945 $73,817
Comprehensive income:
Net income 5,133 5,133
Other Comprehensive Income:
Change in net unrealized gain
on securities available-for-
sale, net of income taxes 155 155
------ ------ ---- ------- ------- -------
Total comprehensive income 155 5,133 5,288
Cash dividends ($.27 per share) (2,401) (2,401)
Retirement of common stock (1) (17) (18)
Purchase of treasury stock (1,912) (1,912)
Exercise of stock options (295) 939 644
------ ------ ---- ------- ------- -------
Balance at September 30, 1998 $9,135 $9,126 $769 $(3,289) $59,677 $75,418
====== ====== ==== ======= ======= =======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
- - --------------------------------------------
Balance at December 31, 1996 $9,136 $9,841 $385 $(2,873) $53,735 $70,224
Comprehensive income:
Net income 4,430 4,430
Other Comprehensive Income:
Change in net unrealized gain
on securities available-for-
sale, net of income taxes 132 132
------ ------ ---- ------- ------- -------
Total comprehensive income 132 4,430 4,562
Cash dividends ($.24 per share) (2,119) (2,119)
Purchase of treasury stock (441) (441)
Exercise of stock options (371) 946 575
------ ------ ---- ------- ------- -------
Balance at September 30, 1997 $9,136 $9,470 $517 $(2,368) $56,046 $72,801
====== ====== ==== ======= ======= =======
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
1998 1997
----------- -----------
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 5,133 $ 4,430
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for losses on loans and real estate 315 230
Provision for depreciation and amortization 641 656
Gains on sales of loans (656) (199)
Loans originated for sale (40,598) (12,850)
Proceeds from loan sales 41,371 12,229
Increase in interest receivable (81) (213)
Increase in interest payable 436 207
Other (1,001) (231)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,560 4,259
------- --------
INVESTING ACTIVITIES:
Proceeds from maturities
of investment securities 9,169 4,800
Purchases of investment securities (15,286) (9,474)
Principal repayments of
mortgage-related securities 2,439 955
Purchases of mortgage-related securities (1,977)
Loan originations and purchases (165,158) (134,594)
Loan principal repayments 138,354 104,047
Purchases of office properties and equipment (297) (417)
Purchase of Federal Home Loan Bank stock (750)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (30,779) (37,410)
FINANCING ACTIVITIES:
Net increase in deposits 42,207 19,816
Net increase (decrease) in short-term borrowings (26,454) 7,475
Proceeds from long term borrowings 33,675 38,275
Repayments of long term borrowings (14,000) (31,400)
Proceeds from securities sold under
agreement to repurchase 1,400
Maturity of security sold under
agreement to repurchase (400) (2,000)
Cash dividends paid (2,401) (2,119)
Purchase of treasury stock (1,912) (441)
Retirement of common stock (18)
Proceeds from exercise of stock options 534 478
Net increase in advance payments by borrowers
for taxes and insurance 6,198 4,271
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,429 35,755
INCREASE IN CASH AND CASH EQUIVALENTS 12,210 2,604
Cash and cash equivalents at beginning of period 964 3,563
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,174 $ 6,167
======== ========
Supplemental Information to the Statement of Cash Flows:
Interest credited and paid on deposits $16,882 $15,627
Interest paid on borrowings 4,293 3,462
Payments for federal and state income taxes 3,125 2,272
Loans transferred to foreclosed
properties and repossessed assets 299 220
See Notes to Unaudited Consolidated Financial Statements
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
(1) The consolidated financial statements include the
accounts of First Northern Capital Corp. ("First
Northern" or the "Company") and its wholly-owned
subsidiary First Northern Savings Bank, S.A. and its
subsidiaries (collectively, the "Savings Bank"): Great
Northern Financial Services Corporation ("GNFSC"), First
Northern Investments Incorporated ("FNII"), Keystone
Financial Services, Incorporated ("Keystone") and First
Northern Financial Services, Incorporated. All
significant intercompany balances and transactions have
been eliminated according to generally accepted
accounting principles. The Savings Bank's ownership of
Savings Financial Corporation ("SFC"), a 50% owned
subsidiary, is accounted for by the equity method.
(2) The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information, Rule 10-01
of Regulation S-X and the instructions to Form 10-Q. The
financial statements do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial information.
In the opinion of First Northern, the accompanying
Unaudited Consolidated Statements of Financial Condition,
Unaudited Consolidated Statements of Income, Unaudited
Consolidated Statement of Changes in Stockholders' Equity
and Unaudited Consolidated Statements of Cash Flows
contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the consolidated
financial position of the Company and subsidiaries at
September 30, 1998 and December 31, 1997, the results of
their income for the three and nine months ended
September 30, 1998 and 1997, the changes in stockholders'
equity for the nine months ended September 30, 1998 and
1997, and their cash flows for the nine months ended
September 30, 1998 and 1997. The accompanying Unaudited
Consolidated Financial Statements and related notes
should be read in conjunction with First Northern's 1997
Annual Report on Form 10-K.
(3) Where applicable, the historical financial information
has been adjusted for the August 18, 1997 two-for-one
stock split in the form of a 100% stock dividend.
(4) Securities Available-for-Sale
The amortized cost and estimated fair values of
securities available-for-sale are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------
(In Thousands)
At September 30, 1998:
Asset Management Funds $ 527 $ 3 $ 530
Federal Home Loan Mortgage
Corporation stock 33 1,158 1,191
U.S. government and
agency securities 7,044 114 7,158
------ ------ ----- ------
$7,604 $1,275 $ $8,879
====== ====== ===== ======
At December 31, 1997:
Asset Management Funds $ 505 $ ( 5) $ 500
Federal Home Loan Mortgage
Corporation stock 33 $ 974 1,007
U.S. government and
agency securities 5,240 55 (3) 5,292
------ ------ ---- ------
5,778 1,029 (8) 6,799
Mortgage-related securities 932 932
------ ------ ---- ------
$6,710 $1,029 $ (8) $7,731
====== ====== ==== ======
(5) Securities Held-to-Maturity
The amortized cost and estimated fair values of
investment securities held-to-maturity, which consist of
U.S. government and agency securities, are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
(In Thousands)
At September 30, 1998 $25,530 $254 $(1) $25,783
======= ==== === =======
At December 31, 1997 $21,231 $101 $(19) $21,313
======= ==== ==== =======
At September 30, 1998, these investment securities have the
following maturities:
Amortized Estimated
Cost Fair Value
---------- -----------
(In Thousands)
Due in one year or less $ 6,752 $ 6,771
Due after one year through 5 years 12,777 12,987
Due after 5 years through 10 years 6,001 6,025
------- -------
$25,530 $25,783
======= =======
The amortized cost and estimated fair values of mortgage-related
securities held-to-maturity are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-----------------------------------------
(In Thousands)
At September 30, 1998:
Federal Home Loan
Mortgage Corporation $5,774 $58 $ (6) $5,826
Federal National
Mortgage Association 3,394 24 (5) 3,413
------ --- ---- ------
$9,168 $82 $(11) $9,239
====== === ==== ======
At December 31, 1997:
Federal Home Loan
Mortgage Corporation $ 7,028 $59 $(36) $ 7,051
Federal National
Mortgage Association 3,647 19 (28) 3,638
------- --- ---- -------
$10,675 $78 $(64) $10,689
======= === ==== =======
(6) Loans Receivable
Loans receivable consist of the following:
September 30 December 31
1998 1997
------------ -----------
(In Thousands)
First mortgage loans:
One to four family residential $405,198 $393,563
Five or more family residential 29,404 24,506
Commercial real estate 6,917 9,269
Construction-residential 28,321 19,192
Construction-commercial 5,884 2,156
Other 2,700 2,226
-------- --------
478,424 450,912
Consumer loans:
Consumer 19,242 18,200
Second mortgage 69,324 68,596
Automobile 72,572 70,276
-------- --------
161,138 157,072
-------- --------
639,562 607,984
Less:
Undisbursed loan proceeds 17,234 10,290
Allowance for losses 3,442 3,177
Unearned loan fees 905 988
-------- --------
21,581 14,455
-------- --------
$617,981 $593,529
======== ========
(7) The weighted average number of shares outstanding, including common
stock equivalents, for the three months ended September 30, 1998 and
1997, were 9,050,296 and 9,118,053, respectively and for the nine
months ended September 30, 1998 and 1997 were 9,112,521 and
9,051,007, respectively.
(8) Certain amounts in 1997 financial statements have been reclassified
to conform to the 1998 presentations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY FACTORS
This 10-Q contains various forward-looking statements concerning the Company's
prospects that are based on the current expectations and beliefs of
management. Forward-looking statements may also be made by the Company from
time to time in other reports and documents as well as oral presentations.
When used in written documents or oral statements, the words "anticipate,"
"believe," "estimate," "expect," "objective" and similar expressions are
intended to identify forward-looking statements. The statements contained
herein and such future statements involve or may involve certain assumptions,
risks and uncertainties, many of which are beyond the Company's control, that
could cause the Company's actual results and performance to differ materially
from what is expected. In addition to the assumptions and other factors
referenced specifically in connection with such statements, the following
factors could impact the business and financial prospects of the Company:
general economic conditions; legislative and regulatory initiatives; monetary
and fiscal policies of the federal government; deposit flows;
disintermediation; the cost of funds; general market rates of interest;
interest rates or investment returns on competing investments; demand for loan
products; demand for financial services; changes in accounting policies or
guidelines; and changes in the quality or composition of the Savings Bank's
and FNII's loan and investment portfolios.
FINANCIAL CONDITION
BALANCE SHEET
CASH AND CASH EQUIVALENTS. Cash and cash equivalents were $12.2 million
greater at September 30, 1998, as compared to December 31, 1997, primarily as
the result of month end customer deposits made to demand deposit accounts on
September 30, 1998; the sale of fixed interest rate mortgage loans; and the
overall growth in the deposit portfolio. Any cash that is not immediately
needed to fund loans or operations is invested in overnight interest-earning
deposits or used to repay short-term borrowings.
SECURITIES AVAILABLE-FOR-SALE. Investment securities available-for-sale
increased approximately $2.1 million as of September 30, 1998, as compared to
December 31, 1997, primarily as the result of purchases of U.S. Agency
securities and increases in the market value of some investment securities.
Mortgage-related securities available-for-sale decreased $0.9 million at
September 30, 1998, as compared to December 31, 1997, as a result of
prepayments and repayments of the underlying mortgage loans.
SECURITIES HELD-TO-MATURITY. Investment securities held-to-maturity increased
$4.3 million primarily as a result of purchases of U.S. Government and agency
securities.
Mortgage-related securities held-to-maturity decreased $1.5 million as a
result of prepayments and repayments of the underlying mortgage loans.
LOANS HELD FOR SALE. At September 30, 1998, First Northern had $3.9 million
of fixed interest rate mortgage and education loans classified as held for
sale. First Northern originates and sells most of its thirty (30) year fixed
interest rate mortgage loans and all of its education loans. Fifteen (15)
year fixed interest rate mortgage loan originations are retained in First
Northern's loan portfolio and in the first quarter of 1997, First Northern
began to retain its twenty (20) year fixed interest rate mortgage loan
originations. The retention of the twenty year fixed interest rate mortgage
loans enhances interest income while fitting into First Northern's overall
asset/liability management.
Loans Receivable. Loans receivable increased $24.5 million at September 30,
1998, as compared to December 31, 1997, as a result of mortgage loan
originations and purchases. Loan originations and purchases are as follows:
LOAN ORIGINATIONS AND PURCHASES
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
-------- ------- ------- --------
(In Thousands) (In Thousands)
Mortgage loans originated and purchased:
Construction $13,091 $12,088 $ 30,891 $ 22,002
Loans on existing property 13,752 13,840 44,547 38,491
Refinancing 27,038 11,536 90,232 27,760
Other loans 636 1,008 1,259 1,985
------- ------- -------- --------
Total mortgage loans originated
and purchased 54,517 38,472 166,929 90,238
Consumer loans originated and purchased:
Consumer 2,530 2,171 8,479 7,263
Second mortgage 10,050 9,944 30,265 28,738
Automobile 12,307 15,989 36,296 38,183
Education 829 935 1,863 1,987
------- ------- -------- --------
Total consumer loans originated
and purchased 25,716 29,039 76,903 76,171
------- ------- -------- --------
Total loans originated
and purchased $80,233 $67,511 $243,832 $166,409
======= ======= ======== ========
Mortgage loan originations and purchases substantially increased for the third
quarter of 1998 and the nine months ended September 30, 1998, as compared to
the same periods in 1997 primarily as the result of increased refinancing of
existing First Northern mortgage loans; purchases of mortgage loans originated
by others; and increased construction lending. These increased originations
are the result of the overall low mortgage loan interest rates of fixed
interest rate mortgage loans and the favorable economy in First Northern's
market area.
Consumer loan originations and purchases decreased $3.3 million in the third
quarter of 1998 and increased $0.7 million for the nine months ended September
30, 1998, as compared to the same periods in 1997. The decreased originations
and purchases in the third quarter of 1998 was primarily the result of reduced
indirect auto originations at SFC. SFC is experiencing increased competition
and experienced a reduced number of loans believed to have resulted from a
shortage of new cars due to the prolonged General Motors strike. It is
anticipated that automobile originations will remain below 1997 levels for the
fourth quarter of 1998.
Consumer loan originations and purchases increased for the nine months ended
September 30, 1998, as compared to the same period in 1997 primarily as the
result of direct marketing of existing First Northern customers for second
mortgages and the redesign of the second mortgage product early in 1998.
LOAN SALES
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------- ------- -------- --------
(In Thousands) (In Thousands)
Mortgage Loans $11,211 $4,333 $38,451 $ 9,634
Education Loans 25 64 2,264 2,396
------- ------ ------- -------
Total Loans Sold $11,236 $4,397 $40,715 $12,030
======= ====== ======= =======
First Northern retains all adjustable interest rate mortgage loan originations
in its portfolio; whereas, most 30 year fixed interest rate mortgage loan
originations are sold in the secondary market. First Northern is
contractually committed to sell its existing education loan portfolio and to
sell its ongoing education loan originations.
PREPAID EXPENSES AND OTHER ASSETS. "Prepaid expenses and other assets," which
is primarily composed of bank owned life insurance ("BOLI") increased $0.6
million at September 30, 1998, as compared to December 31, 1997. This
increase was the result of increased cash surrender value of the BOLI. First
Northern's BOLI cash surrender value at September 30, 1998, was $12.3 million
as compared to $11.7 million at December 31, 1997.
DEPOSITS. Deposits increased $42.6 million for the first nine months of 1998
as a result of offering competitive interest rates, the acquisition of "jumbo"
(certificates of deposit in excess of $100,000) deposits and increased demand
deposits. Jumbo deposits consist of wholesale, retail and municipal deposits
and at times, jumbo deposits are a cheaper source of funds than retail
deposits or borrowing. First Northern's jumbo deposits increased $14.4
million in the first nine months of 1998.
BORROWINGS. Federal Home Loan Bank ("FHLB") borrowings decreased $7.2 million
in the nine months of 1998, primarily as the result of increased loan sales
and increased deposits. First Northern will borrow monies if the borrowing
interest rate is a less costly form of funding for loans and investments than
acquiring deposits. At September 30, 1998, all of the borrowings are fixed
interest rate borrowings. First Northern anticipates that it will continue to
utilize borrowings in the fourth quarter of 1998 if borrowings incrementally
add to the overall profitability of the Company.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE. Advance payments by
borrowers for taxes and insurance ("escrow") increased $6.2 million at
September 30, 1998, as compared to December 31, 1997. The increase in escrow
dollars was the result of payments received for customers' escrow accounts and
the increased number of loans in portfolio and the corresponding escrow
accounts.
STOCKHOLDERS' EQUITY. First Northern paid a cash dividend of $0.09 per share
on August 14, 1998, to stockholders of record on July 30, 1998. The increase
of $0.01 per share represents a 12.5% increase over the third quarter of 1997
cash dividend of $0.08 per share.
On March 20, 1998, First Northern approved a third stock repurchase program to
repurchase up to 446,101 shares (5% of total shares outstanding) through the
open market. These repurchased shares will be used to satisfy exercises of
stock options. At September 30, 1998, 142,500 shares had been purchased at an
average price of $13.42 per share.
ASSET QUALITY
First Northern currently classifies any loan on which a payment is 90 days or
more past due as non-performing. The following table summarizes
non-performing loans and assets:
NON-PERFORMING LOANS AND ASSETS
At September 30 At December 31
1998 1997
--------------- -------------
(Dollars in Thousands)
Non-accrual mortgage loans $315 $333
Non-accrual consumer loans 130 107
---- ----
Total non-performing loans 445 440
Properties subject to foreclosure 119 135
Foreclosed properties and
repossessed assets 31 18
---- ----
Total non-performing assets $595 $593
total loans ==== ====
.07% .07%
=== ===
Non-performing assets as a percent
of total assets .08% .08%
=== ===
Total non-performing loans increased slightly as of September 30, 1998, as
compared to December 31, 1997, primarily as a result of an increase in
non-performing consumer loans. Management believes non-performing loans and
assets, expressed as a percentage of total loans and assets, are far below
state and national averages for financial institutions. There are no
accruing, material loans which, at September 30, 1998, management has reason
to believe will become non-performing or result in potential losses.
In addition, management believes that the Savings Bank's allowances for loan
losses are adequate. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowances may
be necessary based on changes in economic conditions. Furthermore, various
regulatory agencies, as an integral part of their examination process,
periodically review First Northern's allowances for losses on loans and real
estate owned. Such agencies may require First Northern to recognize additions
to the allowances based on the agencies' judgment of information available to
them at the time of their examination.
All of First Northern's loans are domestic meaning the loans are secured by
real estate or collateral located in the continental United States.
A summary of the allowance for losses is shown below.
LOAN LOSS ALLOWANCES
At and for the At and for the
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ ------------------
(Dollars in Thousands)
Mortgage Loans:
Balance at the beginning
of the period $1,624 $1,453
Provisions for the period 81 170
Recoveries:
One to four family residential 4
Commercial real estate 1
------ ------
Balance at the end of the period 1,709 1,624
Consumer Loans:
Balance at the beginning
of the period 1,553 1,484
Provisions for the period 234 150
Charge-offs:
Consumer (33) (44)
Automobile (40) (57)
Recoveries:
Consumer 6 8
Automobile 13 12
------ ------
Balance at the end of the period 1,733 1,553
------ ------
Total loan loss allowances at the
end of the period $3,442 $3,177
====== ======
Allowance as a percent of
total loans .55% .53%
=== ===
Allowance as a percent of
non-performing loans 773.48% 722.05%
====== ======
Allowance as a percent of
total assets .48% .48%
=== ===
Allowance as a percent of
non-performing assets 578.49% 535.75%
====== ======
IMPACT OF YEAR 2000
Computer programs generally abbreviated dates by eliminating the century
digits of the year. Many resources, such as software, hardware, telephones,
voicemail, heating, ventilating and air conditioning, alarms, etc. ("Systems")
are affected. These Systems were designed to assume a century value of "19"
to save memory and disk space within their programs.
In addition, many Systems use a value of "99" in a year or "99/99/99" in a
date to indicate "no date" or "any date" or even a default expiration date.
As the year 2000 approaches, this abbreviated date mechanism within Systems
threatens to disrupt the function of computer software at nearly every
business, including First Northern, which relies heavily on computer systems
for account and other record keeping functions. If the millennium issue is
ignored, system failures or miscalculations could occur, causing disruptions
of operations, including among other things, a temporary inability to process
transactions or engage in similar normal business activities. First Northern
outsources a majority of its data processing functions to a Milwaukee,
Wisconsin--based company, Fiserv, Inc. ("Fiserv"). Because year 2000 problems
could affect Fiserv, and hence the Savings Bank through its relationship with
Fiserv, the Savings Bank has been engaged in ongoing discussions with Fiserv
concerning potential year 2000 problems. These discussions have kept the
Savings Bank abreast of Fiserv's progress in anticipating and avoiding year
2000 problems that could affect First Northern's operations. At September 30,
1998, Fiserv has advised First Northern that it has fully tested or renovated
their systems for year 2000 issues. Client testing, which First Northern
participated in as of October 11, 1998, revealed no significant issues.
Due to the interdependence of First Northern's Systems with other third party
systems, there are risks of specific service outages if these parties do not
sufficiently secure their systems from year 2000 issues. First Northern is
corresponding with these vendors regarding the year 2000 status of their
Systems. In addition to internal testing, where possible, coordinated year
2000 testing will take place with the third party service providers that have
systems interfaced with First Northern's Systems. These third parties
include, but are not limited to, telephone/data service providers, public
utilities, the Federal Reserve, credit bureaus, credit card servicers, ATM
networks, etc.
Based on recent assessments, First Northern has determined that it will be
required to modify or replace certain portions of its internal software and
hardware so that its Systems will function properly with respect to dates on
or after September 9, 1999 ("9/9/99"). It is currently anticipated that the
cost of these modifications will not exceed a total of $170,000 (pre-tax).
At September 30, 1998, approximately $100,000 has been spent on new equipment,
software or other expenses for year 2000. First Northern presently believes
that with these modifications, the year 2000 will not pose significant
operational problems for its Systems. However, if such modifications and
conversions are not made, or are not completed in a timely manner, the year
2000 could have a material adverse impact on the operations of First Northern.
First Northern has currently completed the awareness, inventory and assessment
phases of its year 2000 project. The analysis, conversion, implementation and
testing phases are expected to be completed by the fourth quarter of 1998 or
the first quarter of 1999. At this time, the analysis phase is approximately
98% completed and the conversion, implementation and testing phases are
approximately 53% completed. The post implementation phase, which includes
contingency planning, is 25% completed and is anticipated to be completed in
the fourth quarter of 1998 or first quarter of 1999. First Northern expects
to primarily use internal resources to reprogram, upgrade or replace and test
its internal Systems including that of SFC.
Percent Time
Year 2000 Initiative Complete Frame
- - ---------------------------- -------- -------------
Inventory and Assessment 100% 11/97 - 4/98
Analysis 98% 1/98 - 12/98
Renovation 81% 3/98 - 3/99
Testing 53% 5/98 - 3/99
Contingency Planning 25% 6/98 - 3/99
The categories of inventory and assessment, analysis, renovations, testing and
contingency planning are consistent with the Office of Thrift Supervision
("OTS") definitions for these categories.
First Northern expects to use internal resources to reprogram, upgrade or
replace and test its internal Systems. Internal resources are also being used
to renovate SFC, a partially owned subsidiary operating in Milwaukee,
Wisconsin.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications, are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
anticipated.
RESULTS OF OPERATIONS
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets, the resultant
yields, and the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were
made. Average balances are derived from average daily balances. The yields
and rates are established by dividing income or expense dollars by the average
balance of the asset or liability. The yields and rates for the nine months
ended September 30, 1998 and 1997 have been annualized.
Nine Months Ended September 30
1998 1997
------------------------ -----------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------- ------- ------ -------- ------- ------
(Dollars In Thousands)
Interest-earning assets (1):
Mortgage loans $450,648 $24,913 7.37% $422,892 $23,272 7.34%
Consumer loans 160,250 9,938 8.27 145,407 9,159 8.40
Investment securities (2) 34,087 1,582 6.19 28,628 1,355 6.31
Interest-earning deposits 2,301 92 5.33 740 33 5.95
Mortgage-related
securities (2) 10,051 472 6.26 11,428 547 6.38
-------- ------- ---- -------- ------- ----
TOTAL 657,337 36,997 7.50 609,095 34,366 7.52
Interest-bearing liabilities:
Passbook accounts 63,156 1,032 2.18 59,904 981 2.18
NOW and variable rate
insured money
market accounts 116,627 2,155 2.46 103,711 1,872 2.41
Time deposits 322,892 14,047 5.80 305,439 12,981 5.67
Advance payments by
borrowers for taxes and
insurance 5,225 91 2.32 5,279 88 2.22
Borrowings 98,576 4,328 5.85 80,181 3,555 5.91
-------- ------- ---- -------- ------- ----
TOTAL 606,476 21,653 4.76 554,514 19,477 4.68
-------- ------- ---- -------- ------- ----
Net interest-earning assets
balance and interest
rate spread $ 50,861 2.74% $ 54,581 2.84%
======== ==== ======== ====
Average interest-earning
assets, net interest income
and net yield on average
interest-earning assets $657,337 $15,344 3.11% $609,095 $14,889 3.26%
======== ======= ==== ======== ======= ====
Average interest-earning
assets to interest-bearing
liabilities 108.4% 109.8%
===== =====
- - -------------------------
(1) For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
(2) For the purpose of these computations, the available-for-
sale investment securities and mortgage-related
securities are presented and yields calculated based upon
the historical cost basis.
Year Ended December 31
1997
---------------------------
Interest
Average Earned/ Yield/
Balance Paid Rate
-------- -------- -------
(Dollars In Thousands)
Interest-earning assets (1):
Mortgage loans $426,748 $31,443 7.37%
Consumer loans 148,614 12,529 8.43
Investment securities (2) 29,154 1,844 6.33
Interest-earning deposits 762 45 5.91
Mortgage-related securities (2) 11,558 735 6.36
-------- ------ ----
TOTAL 616,836 46,596 7.55
Interest-bearing liabilities:
Passbook accounts 60,057 1,322 2.20
NOW and variable rate insured
money market accounts 104,665 2,536 2.42
Time deposits 307,423 17,579 5.72
Advance payments by borrowers
for taxes and insurance 6,652 149 2.24
Borrowings 82,644 4,905 5.94
-------- ------- ----
TOTAL 561,441 26,491 4.72
-------- ------- ----
Net interest-earning assets
balance and interest
rate spread $ 55,395 2.83%
======== ====
Average interest-earning
assets, net interest income
and net yield on average
interest-earning assets $616,836 $20,105 3.26%
======== ======= ====
Average interest-earning assets
to interest-bearing liabilities 109.9%
=====
- - ---------------------
(1) For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
(2) For the purpose of these computations, the available-for-
sale investment securities and mortgage-related
securities are presented and yields calculated based upon
the historical cost basis.
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
The interaction of changes in volume and rates earned or paid with regard to
interest-earning assets and interest-bearing liabilities has a significant
impact on net income between periods. The volume of interest-earning dollars
in loans and investments compared to the volume of interest-bearing dollars in
deposits and borrowings combined with the interest rate spread produces the
changes in net interest income between periods.
The following table sets forth the relative contribution of changes in volume
and effective interest rates on changes in net interest income for the periods
indicated.
Nine Months Ended September 30
1998 vs 1997
-------------------------------------
Increase(decrease) due to:
-------------------------------------
(In Thousands)
Rate/
Rate Volume Volume Total
-------- -------- -------- -------
Interest-earning assets:
Mortgage loans $ 95 $1,540 $ 6 $1,641
Consumer loans (142) 935 (14) 779
Investment securities (26) 258 (5) 227
Interest-earning deposits (3) 69 (7) 59
Mortgage-related securities (10) (66) 1 (75)
----- ------ ---- ------
TOTAL $ (86) $2,736 $(19) 2,631
===== ====== ==== ------
Interest-bearing liabilities:
Passbook accounts $ 51 51
NOW and variable rate
insured money market accounts $ 39 239 $ 5 283
Time deposits 298 751 17 1,066
Advance payments by borrowers
for taxes and insurance 4 (1) 3
Borrowings (36) 817 (8) 773
---- ------ ---- ------
TOTAL $305 $1,857 $ 14 2,176
==== ====== ==== ------
Net change in net interest
income $ 455
======
Nine Months Ended September 30
1998 vs 1997
-------------------------------------
Increase(decrease) due to:
-------------------------------------
(In Thousands)
Rate/
Rate Volume Volume Total
-------- -------- -------- -------
Interest-earning assets:
Mortgage loans $ 763 $1,801 $ 48 $2,612
Consumer loans (88) 1,908 (16) 1,804
Investment securities 15 245 2 262
Interest-earning deposits 6 (25) (2) (21)
Mortgage-related securities (14) 79 (2) 63
----- ------ ---- ------
TOTAL $ 682 $4,008 $ 30 4,720
===== ====== ==== ------
Interest-bearing liabilities:
Passbook accounts $ (23) $ 33 $ (1) 9
NOW and variable rate
insured money market accounts 92 54 2 148
Time deposits 175 852 9 1,036
Advance payments by borrowers
for taxes and insurance (2) (11) (13)
Borrowings 77 1,976 55 2,108
----- ------ ---- ------
TOTAL $ 319 $2,904 $ 65 3,288
===== ====== ==== ------
Net change in net interest
income $1,432
======
STATEMENTS OF OPERATIONS AND INCOME
GENERAL. Net income increased 11.9% and 15.9% for the third quarter of 1998
and the first nine months of 1998 respectively, as compared to the same
periods in 1997. The increase was primarily the result of increased
interest-earning assets outstanding, non-interest income and gains on sales of
loans.
INTEREST INCOME. Interest income on mortgage loans increased $516,000 in the
third quarter of 1998 and $1,641,000 for the first nine months of 1998, as
compared to the same periods in 1997 as a result of the increased dollar
amount of mortgage loans outstanding and the increased average yield on the
mortgage portfolio. Average mortgage loans outstanding for the nine months
ended September 30, 1998, increased $27.8 million as compared to the same
period in 1997.
However, since the beginning of 1998, First Northern has been reducing the
level of upward interest rate adjustments or in some cases, de-escalating
interest rate adjustable mortgage loans in response to the current interest
rates on fixed and adjustable mortgage loans. The current interest rate
environment also has made fixed interest rate mortgage loans more popular. In
the first nine months of 1998, $84.2 million of fixed interest rate mortgage
loans were originated as compared to $17.6 million in the first nine months of
1997.
Interest income on consumer loans increased $138,000 in the third quarter of
1998 and $779,000 in the first nine months of 1998 as compared to the same
periods in 1997, as a result of increased consumer loans outstanding. Average
consumer loans outstanding increased $14.8 million in the first nine months of
1998 as compared to the same period in 1997. This increase in average
consumer loans outstanding is the result of continued purchases of indirect
automobile loans from SFC, increased second mortgage loan originations ( a
result of redesigning the open line-of-credit second mortgage loan product and
mailings) and increased originations of other consumer loans. However, the
average yield on consumer loans decreased for the first nine months of 1998 as
compared to the same in 1997 as a result of overall market interest rates
declining.
Average investment securities outstanding increased $5.5 million for the first
nine months of 1998 as compared to the first nine months of 1997 which
resulted in an increase in investment securities income of $227,000. Interest
income on investment securities increased $103,000 for the third quarter of
1998 as compared to the same period in 1997 as a result of increased
investment securities outstanding. First Northern purchases investment
securities when it incrementally adds to the overall profitability of the
Company and to aid in its asset and liability management.
Interest income on interest-earning deposits increased $39,000 in the third
quarter of 1998 and $59,000 for the nine months ended September 30, 1998, as
compared to the same periods in 1997 as a result of dollars being invested
overnight and short-term. In recent history, First Northern has not had
dollars available to invest short-term and has borrowed overnight funds to
meet its loan funding and expense needs. Most recently, in particular
beginning in the third quarter of 1998, deposit gains along with the sale of
fixed interest rate mortgage loans has developed cash which has been invested
overnight or short-term.
Interest income on mortgage-related securities decreased $52,000 in the third
quarter of 1998 and $75,000 for the nine months ended September 30, 1998, as
compared to same periods in 1997 as a result of decreased mortgage-related
securities outstanding. Mortgage-related securities outstanding decreased as
a result of pre-payments to the mortgage loans underlying the securities.
INTEREST EXPENSE. Interest expense on deposits increased $454,000 in the
third quarter of 1998 and $1.4 million for the first nine months of 1998 as
compared to the same periods in 1997 as a result of increased deposits
outstanding and increased cost of deposits. First Northern has utilized
various time deposit terms and "special" interest rates on those various time
deposit terms to attract new deposits. In addition, the Savings Bank has
acquired jumbo deposits to aid its deposit growth (See Financial Condition --
Balance Sheet -- Deposits).
Interest expense on borrowing increased $178,000 in the third quarter of 1998
and $773,000 for the nine months ended September 30, 1998, as compared to the
same periods in 1997 as a result of increased average borrowings outstanding.
First Northern anticipates it will continue to emphasize growth in
interest-earning assets and will fund a portion of this growth with borrowings
if it incrementally adds to the profitability to the Company. First Northern
primarily borrows from the Federal Home Loan Bank of Chicago and staggers the
borrowings' maturities from overnight to 10 years.
PROVISION FOR LOAN LOSSES. First Northern increased its provision for loan
losses in the third quarter of 1998 and the first nine months of 1998 as a
result of changes within the composition of the loan portfolio and growth in
the loan portfolio. The loan loss allowance as of September 30, 1998, was
$3,442,000 or .55% of total loans and 773.5% of non-performing loans.
Management believes that the current loan loss allowance is adequate; however,
the adequacy of the loan loss allowance is reviewed as historical loan loss
experience changes, the size and composition of the loan portfolio changes,
changes occur in the general economy and as may otherwise be deemed necessary.
NON-INTEREST INCOME. Fees on serviced loans for the third quarter of 1998 and
the first nine months of 1998 decreased primarily as a result of the
amortization of the mortgage servicing asset in accordance with generally
accepted accounting principles. As the principal of a mortgage loan which
was sold (with servicing retained), repays or prepays, the mortgage servicing
asset is reduced and netted from fees on serviced loans, thereby reducing the
income on the serviced loans.
Deposit account service charges increased $35,000 in the third quarter of 1998
and $56,000 for the nine months ended September 30, 1998, primarily as a
result of debit card fee income. Each time First Northern's debit card is
used, a fee, which varies with each merchant, is paid to the Savings Bank by
the debit card company. The Savings Bank promotes the use of its debit card
by direct mail.
Gains on the sale of loans increased substantially in the third quarter of
1998 and the nine months ended September 30, 1998, as compared to the same
period in 1997 as a result of increased loan sales. (See Financial
Condition--Balance Sheet--Loans Receivable)
Other non-interest income increased $65,000 in the three months ended
September 30, 1998 and $341,000 in the first nine months of 1998, as compared
to the same periods in 1997, primarily as the result of BOLI. In December of
1997, First Northern purchased $7.4 million of life insurance to partially
offset the future cost of employee benefits.
NON-INTEREST EXPENSE. Compensation expense increased $128,000 in the third
quarter of 1998 and $234,000 for the nine months ended September 30, 1998, as
a result of salary increases, overtime wages paid to loan origination
personnel and accruals for the directors deferred retirement plan and officers
supplemental retirement plan.
Occupancy expenses increased slightly for the third quarter and decreased
slightly for first nine months of 1998 as compared to the same periods in 1997
primarily as the result of the reduced amount of landscape maintenance. In
1997, landscape maintenance expense was increased as a result of refurbishing
the landscape at a number of offices.
Data processing expense increased $12,000 in the third quarter of 1998 and
$46,000 in the first nine months of 1998 primarily as the result of the PC
based teller system installed in 1997 and the related expenses to the PC based
teller system.
Furniture and equipment expense decreased $3,000 in the three months ended
September 30, 1998 and $24,000 in the nine months ended September 30, 1998,
primarily as a result of a reduction in furniture and equipment depreciation.
A number of pieces of furniture were fully depreciated in the fourth quarter
of 1997, thereby reducing the depreciation expense on an ongoing basis.
Marketing expense for the third quarter and the first nine months of 1998
increased substantially as a result of increased advertising and marketing of
deposits and loan products. First Northern believes that growth in lending
and deposit volumes necessitates increased marketing of those products and
hence, increased marketing costs.
Other expenses increased for the three and nine months ended September 30,
1998, as compared to the same periods in 1997 primarily as a result of
increased costs associated with the operations of SFC, professional fees and
costs associated with the debit-card.
INCOME TAXES. The effective income tax rate for the third quarter of 1998 was
34.1% as compared to 37.7% in the third quarter of 1997 and 34.7% for the nine
months ended September 30, 1998, as compared to 37.9% for the nine months
ended September 30, 1997. The decrease in effective income tax rate in the
third quarter of 1998 and the first nine months of 1998 was the result of the
purchase of BOLI. Since the Company intends to hold the life insurance
policies until the participants death, BOLI interest income is not taxable.
In addition, First Northern moved its indirect automobile loan portfolio to
FNII at the beginning of the second quarter of 1998 which has reduced state
franchise taxes.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Federal regulations historically have required the Savings Bank to maintain
minimum levels of liquid assets. The required percentage has varied from time
to time based upon economic conditions and savings flows, and is currently 5%
of net withdrawable deposits and borrowings payable on demand or in one year
or less during the preceding calendar month. Liquid assets for purposes of
this ratio include cash, certain time deposits, U.S. Government and agency
securities and other obligations generally having remaining maturities of less
than five years. The Savings Bank has historically maintained its liquidity
ratio at a level in excess of that required by the Office of Thrift
Supervision ("OTS"). The Savings Bank's monthly average liquidity ratio at
September 30, 1998, was 6.46%, as compared to 5.67% at December 31, 1997.
The liquidity ratio increased slightly as compared to the liquidity ratio at
December 31, 1997, as a result of the purchase of investment securities and an
increase in cash and cash equivalents. The Savings Bank believes that its
maintenance of excess liquidity, above the 5% federally required total
liquidity ratio, is an appropriate strategy to aid in proper asset and
liability management.
Liquidity management is both a daily and long-term responsibility of
management. The Savings Bank adjusts its investments in liquid assets based
upon managements' assessment of: (i) expected loan demand; (ii) expected
deposit flows; (iii) yields available on interest-earning deposits; and
(iv) the objectives of its asset and liability management program. Excess
liquidity is invested generally in interest-earning overnight deposits and
other short-term government and agency obligations. When the Savings Bank
requires funds beyond its ability to generate them internally, it can borrow
funds from the FHLB of Chicago or other sources. The FHLB of Chicago limits
advances to member institutions to an aggregate amount not to exceed 35% of
the member institution's total assets. Wisconsin law permits First Northern,
without the prior written approval of the Wisconsin Department of Financial
Institutions --- Division of Savings Institutions, to borrow an aggregate
amount not to exceed 50% of its total assets.
CAPITAL RESOURCES AND REGULATORY INFORMATION
First Northern's net worth to total assets ratio at September 30, 1998, for
State of Wisconsin regulatory requirements was 10.20% or 4.20% over the
Wisconsin minimum legal requirement of 6.00% of total assets established by
the Division of Savings Institutions of the Department of Financial
Institutions, which regulates First Northern. The OTS capital rules require
savings associations to meet three separate capital standards: (i)Tangible
capital equal to 1.5% of adjusted total assets; (ii) Core capital equal to 3%
of adjusted total assets; and (iii) Risk-based capital equal to 8.0% of the
value of risk weighted assets.
As of September 30, 1998, the most recent notification from the OTS
categorized the Savings Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Savings Bank must maintain minimum tangible, core and risk based ratios as
set forth in the table. As a state-chartered savings institution, the Savings
Bank is also subject to a minimum capital requirement of the State of
Wisconsin. Management believes, as of September 30, 1998, that the Savings
Bank exceeds all capital adequacy requirements to which it is subject. There
are no conditions or events since that notification that management believes
have changed the Savings Bank's categorization as well capitalized.
The Savings Bank's required and actual capital amounts and ratios are
presented in the following table.
To Be Well
Maximum Capitalized
Required Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------ -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of September 30, 1998:
Tangible Capital $67,678 9.6% $10,628 1.5% N/A N/A
(to Tangible Assets)
Core Capital 67,678 9.6% 21,255 3.0% $35,425 5.0%
(to Tangible Assets)
Risk-Based Capital 71,120 15.7% 36,254 8.0% 45,317 10.0%
(to Risk-Weighted Assets)
State of Wisconsin Capital 72,256 10.2% 42,623 6.0% 42,623 6.0%
(to Total Assets)
As of December 31, 1997:
Tangible Capital $68,073 10.2% $ 9,988 1.5% N/A N/A
(to Tangible Assets)
Core Capital 68,073 10.2% 19,976 3.0% $33,293 5.0%
(to Tangible Assets)
Risk-Based Capital 71,250 16.7% 34,232 8.0% 42,790 10.0%
(to Risk-Weighted Assets)
State of Wisconsin Capital 72,318 10.8% 40,062 6.0% 40,062 6.0%
(to Total Assets)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
See Item 7A. Quantitative and Qualitative Disclosures
about Market Risk in 1997 Form 10-K which will be
updated in the 1998 Form 10-K.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index following the signature page of this report,
which is incorporated herein by reference.
(b) Reports on Form 8-K:
No Form 8-K was filed during the quarter for which this report is
filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NORTHERN CAPITAL CORP.
----------------------------------
(Registrant)
Date: November 12, 1998 /s/ Rick B. Colberg
------------------- -------------------------------
Rick B. Colberg
Vice President and
Chief Financial Officer
(Mr. Colberg is also duly
authorized to sign on behalf
of registrant)
FIRST NORTHERN CAPITAL CORP.
(the "Registrant")
Commission File No. 0-27982
* * * * *
EXHIBIT INDEX
TO
THIRD QUARTER 1998 REPORT ON FORM 10-Q
Exhibit Incorporated Herein Filed or Submitted
Number Description By Reference To Herewith
- - -------------------------------------------------------------------------------
11.1 Statement regarding computation
of per share earnings X
27.1 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange
Commission for information
only and not filed. X
27.2 Restated Financial Data Schedule for the
nine months ended September 30, 1997, due to the
adoption of FAS 128 in fiscal year 1998,
which is submitted electronically to the
Securities and Exchange Commission
for information only and not filed. X
Exhibit 11.1
First Northern Capital Corp.
Computation of Net Income Per Common Share
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
--------- --------- --------- ---------
BASIC:
Weighted average common
shares outstanding during
each period 8,822,095 8,838,294 8,863,039 8,821,139
========= ========= ========= =========
DILUTED:
Weighted average common shares
outstanding during
each period 8,822,095 8,838,294 8,863,039 8,821,139
Incremental shares relating to:
Dilutive stock options
outstanding at end of
each period (1) 228,201 279,759 249,482 229,868
--------- --------- --------- ---------
9,050,296 9,118,053 9,112,521 9,051,007
========= ========= ========= =========
NET INCOME FOR EACH PERIOD $1,773,740 $1,585,879 $5,133,241 $4,430,065
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PER COMMON SHARE AMOUNTS:
Basic net income $0.20 $0.18 $0.58 $0.50
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Diluted net income $0.20 $0.17 $0.56 $0.49
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Notes:
(1) Based on treasury stock method using average
market price.