FTFC First Federal Capital (MM)

First Federal Reports Quarterly Earnings -- Record net interest income, up 52% over previous year -- Operating results impacted by loan loss provisions and MSR valuation allowance LA CROSSE, Wis., April 21 /PRNewswire-FirstCall/ -- First Federal Capital Corp , parent company of First Federal Capital Bank, reported net income for the three months ended March 31, 2004, of $8.04 million or $0.36 per diluted share, which compares to $8.01 million or $0.40 per diluted share in the same quarter last year. Excluding the after-tax impact of $1.0 million in loss provisions on two commercial loan relationships and a $631,000 loss provision on mortgage servicing rights ("MSRs"), First Federal's earnings would have been $9.1 million or $0.41 per share in the most recent quarter, an increase of 14%. Net interest income in the first quarter reached a record level, increasing $9.5 million or 52% from the first quarter of 2003. This increase was due in part to a significant increase in earning assets as a result of loan growth, security purchases, and the acquisition of Liberty Bancshares, Inc., in the fourth quarter of last year. Also contributing was a 109 basis point improvement in interest rate spread, from 2.17% in the first quarter of 2003 to 3.26% in this year's first quarter. The most recent quarter represented the third straight period in which the Corporation's interest rate spread has improved, increasing by another four basis points from the previous quarter. Jack C. Rusch, First Federal President and CEO noted, "Our net interest income improved as expected in the most recent quarter. Looking ahead, we expect market rates to trend higher the rest of the year as the economy recovers. We believe we will be able to maintain our interest rate spread at or near current levels in this environment. As I noted in last quarter's earnings release, the key to improving our results in 2004 will be our ability to grow loans and deposits. We are pleased with the growth in both of these areas in the first quarter and are confident that demand will continue to improve, which will enable us to meet our asset and earnings growth goals for the year." During the first quarter, First Federal purchased $305 million in medium- term collateralized mortgage obligations ("CMOs") with a weighted average life of 3.0 years. These purchases were funded by term Federal Home Loan Bank advances with a weighted average life of 2.4 years. The pre-tax spread on these transactions was over 200 basis points and is expected to contribute over $5.0 million to net interest income in 2004. These purchases were made to maintain the Corporation's capital ratio at a level deemed appropriate by management. Additional leveraged purchases of CMOs are not expected in the immediate future, although there can be no assurances. In addition to the aforementioned CMO purchases, First Federal acquired $102 million in shorter-term CMOs during the first quarter. These securities were funded out of general liquidity and had a weighted average life of 2.1 years and a yield of approximately 3.5%. Non-interest income was down $2.3 million or 13% in the first quarter of 2004 compared to the previous year's quarter. Mortgage banking revenue, which consists of gains on sales of mortgage loans and loan servicing fees, decreased by $3.8 million or 45%. This decrease was principally the result of a significant decline in loan originations and sales in the most recent quarter, due to a more favorable interest rate environment for loan refinance activity in the first quarter of last year. Loan sales declined from $666 million in last year's quarter to $205 million in the most recent quarter, resulting in a $12.4 million or 77% decline in gains on sales of loans. In addition, the average gain on sale of loans was 2.42% in the first quarter of 2003 compared to 1.83% in the most recent quarter. This decline, which was in line with expectations, was caused by a smaller spread between the primary and secondary markets for mortgage loans. The decline in gains on sales of loans was partially offset by an $8.5 million improvement in loan servicing fee income, net of MSR amortization and loss provisions. MSR amortization in the first quarter of 2003 was significantly higher than the first quarter of 2004 because of increased loan refinance activity in 2003. In addition, the first quarter of 2003 included a $1.8 million loss provision on MSRs compared to only $631,000 in the most recent quarter. Commenting on mortgage banking revenues, Rusch stated, "The dip in interest rates during the first quarter resulted in more originations and sales of single-family mortgage loans than we had anticipated for the period. Rates are up slightly since the end of the quarter, but the lag effects of the first quarter dip could sustain mortgage banking revenues into the second quarter. "Although interest rates remain low by historical standards, we don't think the mortgage business will see the lows in rates that we experienced last summer or in the first quarter. As a result, we continue to expect mortgage banking revenue in 2004 to be significantly lower than it was in 2003. In addition, revenue mix will shift from gains on sales of loans to loan servicing fees." The increase in rates since the end of the first quarter could result in the recapture of most of the $631,000 loss provision First Federal established on its MSRs in the first quarter. In addition, amortization of MSRs is expected to be lower because of reduced refinance activity in a higher rate environment. Despite management's expectations for interest rates in 2004, a decline in rates may require First Federal to establish additional valuation allowances on its mortgage servicing rights as a result of a likely increase in loan prepayment expectations. Management anticipates that such valuation allowances would be offset by an increase in gains on sales of loans, although there can be no assurances. Community banking revenue, which consists of deposit account fees, investment services income, and premiums and commissions on sales of insurance, partially offset the decline in mortgage banking revenue in the first quarter of 2004, increasing by $1.5 million or 17% compared to the same quarter in 2003. Rusch commented, "Community banking revenues continue to experience double-digit growth at First Federal. This important source of income increased by 17% over the first quarter of last year and is running ahead of our budget for the year. Combined with mortgage banking revenue, this growth resulted in non-interest income equal to 36% of our total revenue in the first quarter. Although down quite a bit from 2003, we continue to out-pace our banking peers by a wide margin in this ratio." Non-interest expense increased by $6.2 million or 27% in the first quarter compared to the same period last year. The increase is primarily attributable to an increase in the number of new banking facilities opened or acquired in the past year, and an increase in employees. Furthermore, during the fourth quarter of 2003, the Corporation completed the acquisition of Liberty, which averaged $2.6 million in non-interest expense per quarter during 2003. Also contributing was a $341,000 increase in amortization of intangibles due to the Liberty acquisition. Since March 31, 2003, the number of banking locations operated by the Corporation has increased by four. The number of full-time equivalent employees of the Corporation increased by 13% from 1,240 at March 31, 2003 to 1,396 at the most recent quarter end. Rusch said, "Our first quarter non-interest expense increased by only 4% from the fourth quarter and was in line with budget expectations for the period. We believe increases in non-interest expense should be seen as a measure of our commitment to build the infrastructure necessary to support the rollout of our business banking services to the rest of our major markets. We began offering business banking products in the Appleton, Wisconsin market in the most recent quarter and are moving ahead with plans to extend these product offerings into additional markets in 2004. With the recent announcement of a market president for the Madison, Wisconsin market, we expect business services to be available there during the second quarter of 2004." The Corporation's provision for loan losses increased from $379,000 in the first quarter of 2003 to $1.6 million in the first quarter of 2004. During the most recent quarter, the Corporation charged off $642,000 relating to a $2.6 million loan on a hotel property located in the Twin Cities. The hotel is currently in bankruptcy and is in process of foreclosure. Although the Corporation does not expect to incur an additional loss on this loan, there can be no assurances at this time. In addition to this loan, the Corporation charged off a $385,000 loan to another financial institution, which was deemed insolvent during the period. These two losses reduced after-tax earnings per share by $0.03. Despite these recent losses, the Corporation's total non- performing assets have declined since December 31, 2003. In addition, commercial business loans classified in the Corporation's three highest risk categories remained stable in the most recent quarter after improving steadily during the later half of 2003. The Corporation continues to monitor a $2.7 million loan on an apartment complex located in Indiana. Although the loan is current, the property has suffered from low occupancy for an extended period of time. Although management believes it is possible the Corporation may incur a loss on the future resolution of this loan, such loss is not yet probable nor is it estimable at this time. Asset quality remains strong with the ratio of non-accrual loans to total loans of 0.37% at March 31, 2004 compared to 0.31% at March 31, 2003. The Corporation's allowance for loan losses to total non-performing loans stood at 146% as of March 31, 2004 down from 183% one year ago. The Corporation's ratio of allowance for loan losses to total loans was 0.54% at March 31, 2004, compared to 0.56% on the same date last year. At March 31, 2004, the Corporation's assets totaled $3.7 billion, up from $3.1 billion a year ago. Loans held for investment were $2.6 billion compared to $2.1 billion a year ago, an increase of 25%. Deposits totaled $2.7 billion, an increase of $232 million or 10% over the previous year. First Federal's first quarter annualized return on average equity (ROE) was 11.5% compared to 15.4% for the same period a year ago. Annualized return on average assets (ROA) for the quarter was 0.93%, compared to 1.06% twelve months prior. Stockholders' equity totaled $284 million, or $12.66 per share. About First Federal First Federal's banking subsidiary, First Federal Capital Bank, is headquartered in La Crosse, Wisconsin. Established in 1934, First Federal is a community bank serving businesses and consumers through 49 supermarket banks, 42 brick and mortar locations, three stand-alone loan production offices, a high school banking office and more than 140 ATMs located in over 45 communities in Wisconsin, northern Illinois, and Minnesota. The Company serves more than 250,000 households with checking, savings, investment and loan products. In addition, First Federal provides commercial real estate lending services and holds a dominant market share position for residential mortgage lending in many of its markets. The Company offers business banking products in Rochester and St. Paul, Minnesota, as well as La Crosse, Wausau, Oshkosh and Appleton, Wisconsin, and is moving ahead with plans to extend these product offerings to additional markets in 2004. Certain matters in this press release are "forward-looking statements" intended to qualify for the safe harbors from liability as established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include words and phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends to," or similar expressions. Similarly, statements that describe First Federal's future plans, objectives or goals are also forward-looking statements. First Federal wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date of this press release, and to advise readers that various factors could affect First Federal's financial performance and could cause actual results for future periods to differ materially from those anticipated or projected. Such factors include, but are not limited to: (i) general market interest rates, (ii) general economic conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or composition of First Federal's loan and investment portfolios, (vi) demand for loan products, (vii) deposit flow, (viii) competition, (ix) demand for financial services in First Federal's markets, and (x) changes in accounting principles, policies or guidelines. FIRST FEDERAL CAPITAL CORP STATEMENT OF FINANCIAL CONDITION March 31 December 31 March 31 2004 2003 2003 ASSETS Cash and due from banks $85,782,964 $94,535,753 $88,137,004 Interest-bearing deposits with banks 8,014,625 6,444,374 110,619,132 Mortgage-backed and related securities: Available for sale, at fair value 448,839,953 386,862,372 580,455,994 Held for investment, at cost 296,946,310 613,076 9,476,827 Loans held for sale 37,795,579 16,113,217 48,708,133 Loans held for investment, net 2,572,865,312 2,518,683,388 2,052,934,722 Federal Home Loan Bank stock 60,596,000 59,634,800 56,325,100 Accrued interest receivable, net 17,327,935 15,802,753 16,807,760 Office properties and equipment 54,222,170 53,020,583 36,934,376 Mortgage servicing rights, net 37,944,402 36,340,856 27,789,420 Goodwill 78,063,720 78,168,866 38,546,438 Other intangible assets 12,836,291 13,358,976 5,089,842 Other assets 31,861,953 28,745,265 21,294,521 Total assets $3,743,097,213 $3,308,324,280 $3,093,119,269 LIABILITIES AND STOCKHOLDERS' EQUITY Deposit liabilities $2,672,071,943 $2,552,837,027 $2,439,880,689 Federal funds purchased 46,200,000 24,500,000 - Federal Home Loan Bank advances 650,200,000 373,075,000 376,250,000 Other borrowings 36,861,913 43,624,308 13,521,180 Advance payments by borrowers for taxes and insurance 4,944,540 1,484,734 4,435,531 Accrued interest payable 2,676,798 2,234,905 2,818,283 Other liabilities 46,045,110 33,979,161 44,953,235 Total liabilities 3,459,000,304 3,031,735,135 2,881,858,918 Common stock, $.10 par value 2,243,867 2,239,477 2,021,593 Additional paid-in capital 87,901,722 87,323,995 46,577,431 Retained earnings 193,508,742 188,319,179 170,956,527 Treasury stock, at cost (80,400) - (10,180,511) Unearned restricted stock - - (18,333) Accumulated non-owner adjustments to equity, net 522,978 (1,293,508) 1,903,644 Total stockholders' equity 284,096,909 276,589,144 211,260,351 Total liabilities and stockholders' equity $3,743,097,213 $3,308,324,280 $3,093,119,269 Actual number of shares outstanding at end of period, net of treasury stock 22,435,114 22,394,773 19,702,712 Average shares outstanding used to compute: Diluted earnings per share 22,627,330 20,597,675 19,958,412 Basic earnings per share 22,393,370 20,352,640 19,698,621 FIRST FEDERAL CAPITAL CORP RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share amounts) Three Months Mar Mar 2004 2003 Interest on loans $35,547 $32,426 Interest on mortgage-backed and related securities 4,921 3,479 Interest and dividends on investments 993 1,253 Total interest income 41,461 37,158 Interest on deposit liabilities 10,371 13,657 Interest on FHLB advances and other borrowings 3,339 5,220 Total interest expense 13,709 18,877 Net interest income 27,752 18,281 Provision for loan losses 1,606 379 Net interest income after provision for loan losses 26,145 17,902 Community banking revenue 10,313 8,828 Mortgage banking revenue 4,674 8,512 Other income 638 601 Total non-interest income 15,626 17,941 Compensation and employee benefits 18,554 13,996 Occupancy and equipment 3,578 3,125 Communications, postage, and office supplies 1,754 1,848 ATM and debit card transaction costs 1,349 1,090 Advertising and marketing 780 680 Amortization of intangible assets 523 182 Other expenses 2,740 2,204 Total non-interest expense 29,279 23,125 Income before income taxes 12,492 12,718 Income tax expense 4,451 4,704 Net income $8,041 $8,014 Per share information Diluted earnings per share $0.36 $0.40 Basic earnings per share 0.36 0.41 Dividends paid per share 0.14 0.13 FIRST FEDERAL CAPITAL CORP INCOME STATEMENT DETAIL (Dollar amounts in thousands) Three Months Mar Mar 2004 2003 COMMUNITY BANKING REVENUE Overdraft fees $5,117 $4,383 ATM and debit card fees 3,026 2,547 Account service charges 732 621 Other fee income 437 408 Total deposit account revenue 9,312 7,959 Consumer loan insurance premiums and commissions 144 170 Other consumer loan fees 99 106 Total consumer loan revenue 243 276 Investment services revenue 758 593 Total community banking revenue $10,313 $8,828 MORTGAGE BANKING REVENUE Gross servicing fees $2,905 $2,524 Mortgage servicing rights amortization (1,790) (8,695) Mortgage servicing rights valuation (loss) recovery (631) (1,800) Total loan servicing fees, net 484 (7,971) Gain on sale of mortgage loans 3,759 16,110 Other mortgage-related revenue 431 373 Total mortgage banking revenue $4,674 $8,512 FIRST FEDERAL CAPITAL CORP SELECTED FINANCIAL DATA Three Months Mar Mar 2004 2003 Stock price at end of period $21.32 $20.41 High stock price during period $23.48 $21.08 Low stock price during period $20.48 $19.13 Book value per share at end of period $12.66 $10.72 Tangible book value per share at end of period $8.61 $8.51 Return on average assets 0.93% 1.06% Return on average equity 11.47% 15.37% Equity capital as percent of total assets at end of period 7.59% 6.83% Tangible equity capital as percent of tangible assets at end of period 5.29% 5.50% Interest rate spread during period 3.26% 2.17% Net interest income as a percent of average earning assets during period 3.50% 2.61% Average interest-earning assets to average interest-bearing liabilities during period 113.84% 116.37% Yields on interest-earning assets during period: Single-family mortgage loans 5.30% 5.22% Commercial real estate loans 5.98% 7.71% Business loans 5.04% 5.09% Consumer loans 6.20% 6.86% Education loans 3.21% 3.92% Total loans 5.53% 6.10% Mortgage-backed and related securities 3.75% 3.27% Interest-bearing deposits with banks 1.29% 1.17% Other earning assets 6.23% 4.94% Total interest-earning assets 5.23% 5.30% Cost of interest-bearing liabilities during period: Regular savings accounts 0.25% 0.25% Checking accounts 0.47% 0.25% Money market accounts 1.21% 0.87% Certificates of deposits 2.64% 3.54% Total interest-bearing deposits 1.87% 2.73% FHLB advances 2.45% 5.28% Other borrowings 1.56% 2.06% Total interest-bearing liabilities 1.97% 3.14% Non-interest income to total revenue (a) 36.02% 49.53% Ratio of non-interest expense to average assets during period (b) 3.35% 3.07% Efficiency ratio during period (c) 66.29% 63.34% Banking facilities at end of period 95 91 Full-time equivalent employees at end of period 1,396 1,240 (a) Total revenue equals net interest income plus non-interest income. (b) Excludes impact of gains (losses) on real estate owned. (c) Excludes amortization of intangible assets and gains (losses) on sales of investment securities and real estate investments, if any. FIRST FEDERAL CAPITAL CORP SELECTED FINANCIAL DATA (Dollar amounts in thousands)Three Months Mar Mar 2004 2003 Activity in the allowance for loan losses during period: Balance at beginning of period $13,882 $11,658 Provision for losses 1,606 379 Charge-offs: Single-family mortgage loans - (33) Commercial real estate mortgage loans (642) - Consumer loans (457) (476) Business loans (533) - Education loans (14) (12) Total loans charged-off (1,646) (521) Recoveries 58 14 Charge-offs net of recoveries (1,588) (507) Balance at end of period $13,901 $11,530 Net annualized charge-offs as a percentage of average loans outstanding 0.25% 0.10% Ratio of allowance to total loans held for investment at end of period 0.54% 0.56% Summary of non-performing assets Mar 31 Dec 31 Mar 31 at end of period: 2004 2003 2003 Non-accrual loans: Single-family mortgage loans $3,198 $3,148 $2,713 Commercial real estate loans 2,938 2,649 103 Consumer loans 2,794 2,540 2,432 Business loans 571 1,226 1,054 Total non-accrual loans 9,501 9,563 6,302 Real estate owned and in judgement 3,642 4,068 2,949 Total non-performing assets $13,143 $13,631 $9,251 Ratio of non-accrual loans to loans held for investment at end of period 0.37% 0.38% 0.31% Ratio of total non-performing assets to total assets at end of period 0.35% 0.41% 0.30% Ratio of allowance for loan losses to total non-accrual loans 146% 145% 183% Portfolio of loans held for investment Mar 31 Dec 31 Mar 31 at end of period: 2004 2003 2003 First mortgage loans: Single-family real estate $761,243 $759,490 $663,307 Non-residential real estate 452,975 426,644 274,036 Multi-family real estate 267,335 284,991 241,669 Construction 125,667 119,196 99,299 Consumer loans: Second mortgage and home equity 414,706 396,581 356,081 Automobile 145,661 146,677 124,668 Other consumer 35,198 36,401 28,023 Education loans 205,352 195,052 201,224 Business loans 171,002 158,761 68,964 Subtotal 2,579,139 2,523,793 2,057,270 Unearned discount, premiums, and net deferred loan fees and costs 7,627 8,772 7,195 Allowance for loan losses (13,901) (13,882) (11,530) Total loans held for investment $2,572,865 $2,518,683 $2,052,935 FIRST FEDERAL CAPITAL CORP SELECTED FINANCIAL DATA (Dollar amounts in thousands) Three Months Mar Mar Loan origination activity: 2004 2003 Real estate loan originations: Single-family mortgage loans $91,244 $86,267 Commercial real estate loans 39,789 32,119 Decrease (increase) in loans in process 16,386 5,385 Total real estate loans originated 147,419 123,771 Consumer loan originations: Second mortgage and home equity loans 54,802 65,189 Automobile loans 23,930 18,748 Other consumer loans 4,436 5,052 Total consumer loans originated 83,168 88,989 Education loan originations 23,081 21,514 Business loan originations 24,695 25,114 Total loans originated for investment $278,362 $259,388 Single-family mortgage loans originated for sale $209,062 $633,625 Deposit liabilities at Mar Dec Mar end of period: 2004 2003 2003 Checking accounts: Non-interest bearing $424,309 $345,698 $427,418 Interest bearing 183,975 187,368 137,372 Money market accounts 521,722 469,097 243,334 Regular savings accounts 257,004 256,658 175,713 Time deposits 1,285,061 1,294,016 1,456,044 Total deposit liabilities $2,672,072 $2,552,837 $2,439,881 Mar 2004 Weighted Balance Average Rate Time deposits maturing within ..... Three months $122,421 2.14% Four to six months 205,213 2.72% Seven to twelve months 333,789 2.44% More than twelve months 623,638 3.21% Total time deposits $1,285,061 2.83% FHLB advances and all other borrowings maturing within ..... Three months $286,250 1.39% Four to six months 58,450 2.78% Seven to twelve months 58,450 2.53% More than twelve months 330,112 2.91% Total FHLB advances and all other borrowings $733,262 2.28% DATASOURCE: First Federal Capital Corp CONTACT: Jack C. Rusch, President and Chief Executive Officer of First Federal Capital Corp, +1-608-781-4636

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