First Federal Reports Strong Second Quarter - Net income of $10.4 million, up 19% over previous year LA CROSSE, Wis., July 22 /PRNewswire-FirstCall/ -- First Federal Capital Corp (NASDAQ:FTFC), parent company of First Federal Capital Bank, reported net income for the three months ended June 30, 2004, of $10.4 million or $0.46 per diluted share, compared to $8.8 million or $0.44 per diluted share in the same quarter last year. For the six months ended June 30, 2004, the company had net income of $18.4 million or $0.81 per diluted share, compared to $16.8 million or $0.84 per diluted share a year ago, a 4% decrease. Excluding the impact of $1.2 million in merger-related expenses, earnings would have been $11.6 million or $0.51 per diluted share for the quarter. For the year, earnings would have been $19.6 million or $0.86 per diluted share, a 2% increase over the previous year. Jack C. Rusch, First Federal President and CEO noted, "We are pleased with the excellent earnings in the second quarter. Despite significant merger- related expenses in connection with our pending merger with Associated Banc- Corp (NASDAQ:ASBC), net income remains strong. We attribute the excellent quarter to improved net interest income and increased community banking revenue. In addition, while mortgage banking revenue declined from last year's second quarter, results were stronger than expected." On April 27, 2004 First Federal and Associated Banc-Corp announced the signing of a definitive agreement in which Associated will acquire First Federal in a stock and cash transaction. The transaction, which is contingent on regulatory approvals and First Federal shareholder approval, is expected to close early in the fourth quarter of 2004. Net interest income in the second quarter reached a record level, increasing $9.6 million or 52% from the second 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 92 basis point improvement in interest rate spread, from 2.13% in the second quarter of 2003 to 3.05% in this year's second quarter. Net interest margin was 3.30% for the second quarter of 2004 compared to 2.61% for the previous year's quarter. Contributing favorably to net interest income year-to-date was loan growth of 4.5%. The Bank has experienced increases in its consumer loan and business loan portfolios of 9.1% and 13.0% respectively. Rusch noted, "We are pleased with our growth in net interest income year- to-date. The key to meeting projections in 2004 will be our ability to grow loans and deposits. Our retail banking, business and residential lending staff are to be commended for growing loans by 4.5% year-to-date and deposits by 5.4%. Assuming the economy continues to strengthen, we believe demand will further improve, enabling us to meet our asset and earnings growth goals for the year." Net interest income for the quarter and year-to-date benefited from the first quarter purchase of $407 million in collateralized mortgage obligations ("CMOs"). 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. Non-interest income was down $759,000 or 3.7% in the second 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 $2.2 million or 22%. This decrease was principally the result of a significant decline in loan originations and sales in the most recent quarter, and a more favorable interest rate environment for loan refinance activity in the previous year. Loan sales declined from $856 million in last year's quarter to $294 million in the most recent quarter, resulting in a 67% decline in gains on sales of loans. The decline in gains on sales of loans was partially offset by a $10.0 million improvement in loan servicing fee income, net of mortgage servicing rights ("MSRs") amortization and loss provisions. MSR amortization in the second quarter of 2004 was significantly lower than the second quarter of 2003 because of increased loan refinance activity in 2003. Mitigating the decrease in non-interest income for the second quarter was the recapture of a $631,000 loss allowance on mortgage servicing rights. This allowance had been established in the previous quarter as a result of declining mortgage rates. The recapture was triggered by an increase in rates, which lowered market expectations for future prepayment activity, a key component in the valuation of MSRs. Higher rates also resulted in a lower level of amortization on MSRs in the quarter, due to a decline in actual prepayment activity. Commenting on mortgage banking revenues, Rusch stated, "Our results benefited from a first quarter dip in interest rates that produced a lag effect into the second quarter. Going forward, we expect interest rates will remain low by historical standards, but do not expect that the mortgage business will see the lows in rates we experienced last summer or in the first quarter. As a result, in light of potentially increasing interest rates, we 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." 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 second quarter of 2004, increasing by $1.3 million or 13% compared to the same quarter in 2003. Year-to-date, community banking revenue is up $2.8 million or 15% over the previous year. Rusch commented, "Community banking revenues continue to perform well with double-digit growth. It is gratifying to see continued increases, as this revenue source is ongoing and not interest rate sensitive. Combined with mortgage banking revenue, community banking revenue resulted in non-interest income equal to 41% of our total revenue in the second quarter. Although down a bit from 2003, we continue to out-pace our banking peers by a wide margin in this ratio." Non-interest expense increased by $5.0 million or 20% in the second quarter compared to the same period last year. The increase is primarily attributable to an increase in the number of new banking facilities opened in the past year, an increase in the number of employees, and merger-related expenses. Additionally, during the fourth quarter of 2003, the Corporation completed the acquisition of Liberty State Bank, which averaged $2.6 million in non-interest expense per quarter during 2003. Since June 30, 2003 the number of banking locations operated by the Corporation has increased by three. The number of full-time equivalent employees of the Corporation increased by 10% from 1,269 at June 30, 2003 to 1,400 at the most recent quarter end. The Corporation's provision for loan losses declined to $809,000 in the second quarter of 2004 compared to $1.6 million in the first quarter of this year. For the comparable period one year ago, the provision for loan losses was $139,000. Asset quality remains strong with the ratio of non-accrual loans to total loans of 0.34% at June 30, 2004 compared to 0.31% at June 30, 2003. The Corporation's allowance for loan losses to total non-performing loans stood at 158% as of June 30, 2004 down from 178% one year ago. The Corporation's ratio of allowance for loan losses to total loans was 0.54% at June 30, 2004, compared to 0.55% on the same date last year. At June 30, 2004, the Corporation's assets totaled $3.7 billion, up from $3.2 billion a year ago. Loans held for investment were $2.6 billion compared to $2.0 billion a year ago, an increase of 30%. Deposits totaled $2.7 billion, an increase of $190 million or 8% over the previous year. First Federal's second quarter annualized return on average equity (ROE) was 15.2% compared to 16.3% for the same period a year ago. Annualized return on average assets (ROA) for the quarter was 1.12%, compared to 1.14% twelve months prior. Excluding merger-related expenses, quarterly ROE and ROA would have been 16.8% and 1.25% respectively. Stockholders' equity totaled $284 million, or $12.63 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 138 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. 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. Attached: Statements of Financial Condition, Statements of Operations, and Selected Financial Data FIRST FEDERAL CAPITAL CORP STATEMENT OF FINANCIAL CONDITION June 30 December 31 June 30 2004 2003 2003 ASSETS Cash and due from banks $90,083,698 $94,535,753 $84,181,935 Interest-bearing deposits with banks 12,596,108 6,444,374 133,807,232 Mortgage-backed and related securities: Available for sale, at fair value 370,501,921 386,862,372 639,608,938 Held for investment, at cost 267,376,318 613,076 2,663,281 Loans held for sale 18,085,165 16,113,217 84,860,663 Loans held for investment, net 2,631,959,157 2,518,683,388 2,025,233,473 Federal Home Loan Bank stock 61,486,100 59,634,800 57,222,200 Accrued interest receivable, net 16,546,470 15,802,753 16,129,770 Office properties and equipment 54,540,216 53,020,583 38,069,139 Mortgage servicing rights, net 40,841,443 36,340,856 26,181,528 Goodwill 78,063,720 78,168,866 38,546,438 Other intangible assets 12,345,572 13,358,976 4,887,061 Other assets 30,319,728 28,745,265 25,705,462 Total assets $3,684,745,616 $3,308,324,280 $3,177,097,120 LIABILITIES AND STOCKHOLDERS' EQUITY Deposit liabilities $2,690,177,909 $2,552,837,027 $2,499,811,344 Federal funds purchased - 24,500,000 - Federal Home Loan Bank advances 643,200,000 373,075,000 376,250,000 Other borrowings 22,083,790 43,624,308 15,278,940 Advance payments by borrowers for taxes and insurance 8,407,401 1,484,734 8,088,173 Accrued interest payable 2,528,726 2,234,905 2,565,540 Other liabilities 33,908,656 33,979,161 54,968,742 Total liabilities 3,400,306,482 3,031,735,135 2,956,962,739 Common stock, $.10 par value 2,251,749 2,239,477 2,021,593 Additional paid-in capital 89,266,193 87,323,995 46,577,431 Retained earnings 199,472,671 188,319,179 175,709,179 Treasury stock, at cost - - (8,510,179) Unearned restricted stock - - (4,583) Accumulated non-owner adjustments to equity, net (6,551,480) (1,293,508) 4,340,940 Total stockholders' equity 284,439,134 276,589,144 220,134,381 Total liabilities and stockholders' equity $3,684,745,616 $3,308,324,280 $3,177,097,120 Actual number of shares outstanding at end of period, net of treasury stock 22,517,493 22,394,773 19,786,912 Average shares outstanding used to compute: Diluted earnings per share 22,707,311 20,597,675 19,967,668 Basic earnings per share 22,441,047 20,352,640 19,732,813 FIRST FEDERAL CAPITAL CORP RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share amounts) Three Months Six Months June June June June 2004 2003 2004 2003 Interest on loans $35,658 $30,792 $71,205 $63,217 Interest on mortgage-backed and related securities 6,068 4,619 10,989 8,098 Interest and dividends on investments 927 1,202 1,921 2,455 Total interest income 42,654 36,612 84,115 73,771 Interest on deposit liabilities 10,497 12,977 20,868 26,634 Interest on FHLB advances and other borrowings 4,051 5,136 7,389 10,356 Total interest expense 14,548 18,114 28,257 36,990 Net interest income 28,106 18,499 55,858 36,780 Provision for loan losses 809 139 2,415 518 Net interest income after provision for loan losses 27,297 18,360 53,443 36,262 Community banking revenue 11,376 10,048 21,690 18,876 Mortgage banking revenue 7,650 9,867 12,324 18,380 Other income 685 555 1,323 1,156 Total non-interest income 19,711 20,470 35,337 38,411 Compensation and employee benefits 18,021 14,759 36,575 28,755 Occupancy and equipment 3,665 3,300 7,244 6,425 Communications, postage, and office supplies 1,783 1,675 3,537 3,524 ATM and debit card transaction costs 1,330 1,176 2,679 2,265 Advertising and marketing 989 998 1,770 1,678 Amortization of intangible assets 491 203 1,013 385 Merger-related expenses 1,164 - 1,164 - Other expenses 2,376 2,739 5,117 4,943 Total non-interest expense 29,819 24,850 59,098 47,975 Income before income taxes 17,190 13,980 29,682 26,698 Income tax expense 6,781 5,210 11,232 9,913 Net income $10,408 $8,771 $18,449 $16,785 Per share information Diluted earnings per share $0.46 $0.44 $0.81 $0.84 Basic earnings per share 0.46 0.44 0.82 0.85 Dividends paid per share 0.15 0.14 0.29 0.27 FIRST FEDERAL CAPITAL CORP INCOME STATEMENT DETAIL (Dollar amounts in thousands) Three Months Six Months June June June June 2004 2003 2004 2003 COMMUNITY BANKING REVENUE Overdraft fees $5,780 $5,050 $10,897 $9,433 ATM and debit card fees 3,518 2,924 6,544 5,471 Account service charges 712 587 1,444 1,208 Other fee income 452 416 889 825 Total deposit account revenue 10,462 8,977 19,774 16,937 Consumer loan insurance premiums and commissions 42 287 186 457 Other consumer loan fees 124 79 223 185 Total consumer loan revenue 166 366 409 642 Investment services revenue 748 705 1,506 1,298 Total community banking revenue $11,376 $10,048 $21,690 $18,876 MORTGAGE BANKING REVENUE Gross servicing fees $2,836 $2,631 $5,741 $5,155 Mortgage servicing rights amortization (2,566) (10,739) (4,356) (19,434) Mortgage servicing rights valuation (loss) recovery 631 (1,000) - (2,800) Total loan servicing fees, net 901 (9,108) 1,385 (17,080) Gain on sale of mortgage loans 6,025 18,393 9,784 34,503 Other mortgage-related revenue 724 582 1,155 957 Total mortgage banking revenue $7,650 $9,867 $12,324 $18,380 FIRST FEDERAL CAPITAL CORP SELECTED FINANCIAL DATA Three Months Six Months June June June June 2004 2003 2004 2003 Stock price at end of period $27.83 $19.85 $27.83 $19.85 High stock price during period $28.11 $20.57 $28.11 $21.08 Low stock price during period $20.10 $18.50 $20.10 $18.50 Book value per share at end of period $12.63 $11.13 $12.63 $11.13 Tangible book value per share at end of period $8.62 $8.93 $8.62 $8.93 Return on average assets 1.12% 1.14% 1.03% 1.10% Return on average equity 15.15% 16.25% 13.30% 15.81% Equity capital as percent of total assets at end of period 7.72% 6.93% 7.72% 6.93% Tangible equity capital as percent of tangible assets at end of period 5.40% 5.64% 5.40% 5.64% Interest rate spread during period 3.05% 2.13% 3.15% 2.15% Net interest income as a percent of average earning assets during period 3.30% 2.61% 3.40% 2.61% Average interest-earning assets to average interest-bearing liabilities during period 114.91% 118.75% 114.38% 117.56% Yields on interest-earning assets during period: Single-family mortgage loans 5.04% 5.22% 5.17% 5.22% Commercial real estate loans 5.92% 6.76% 5.95% 7.22% Business loans 5.16% 5.14% 5.10% 5.11% Consumer loans 6.08% 6.68% 6.14% 6.77% Education loans 3.34% 3.91% 3.27% 3.91% Total loans 5.42% 5.86% 5.47% 5.98% Mortgage-backed and related securities 3.45% 3.14% 3.58% 3.19% Interest-bearing deposits with banks 1.32% 1.29% 1.30% 1.21% Other earning assets 5.85% 6.37% 6.04% 5.66% Total interest-earning assets 5.01% 5.16% 5.12% 5.23% Cost of interest-bearing liabilities during period: Regular savings accounts 0.25% 0.25% 0.25% 0.25% Checking accounts 0.58% 0.37% 0.52% 0.31% Money market accounts 1.27% 0.78% 1.24% 0.82% Certificates of deposits 2.61% 3.43% 2.62% 3.49% Total interest-bearing deposits 1.85% 2.61% 1.86% 2.67% FHLB advances 2.39% 5.35% 2.41% 5.31% Other borrowings 1.60% 1.51% 1.59% 1.76% Total interest-bearing liabilities 1.96% 3.03% 1.97% 3.08% Non-interest income to total revenue (1) 41.22% 52.53% 38.75% 51.08% Ratio of non-interest expense to average assets during period (2) 3.09% 3.23% 3.22% 3.15% Efficiency ratio during period (3) 58.90% 63.25% 62.42% 63.29% Banking facilities at end of period 95 92 95 92 Full-time equivalent employees at end of period 1,400 1,269 1,400 1,269 (1) Total revenue equals net interest income plus non-interest income. (2) Excludes impact of gains (losses) on real estate owned and merger- related expenses, if any. (3) Excludes amortization of intangible assets and gains (losses) on sales of investment securities, real estate investments, and merger- related expenses, if any. FIRST FEDERAL CAPITAL CORP SELECTED FINANCIAL DATA (Dollar amounts in thousands) Three Months Six Months June June June June 2004 2003 2004 2003 Activity in the allowance for loan losses during period: Balance at beginning of period $13,901 $11,530 $13,882 $11,658 Provision for losses 809 139 2,415 518 Charge-offs: Single-family mortgage loans - (13) - (46) Commercial real estate mortgage loans - - (642) - Consumer loans (539) (602) (995) (1,078) Business loans (17) (3) (550) (3) Education loans (6) (11) (20) (23) Total loans charged-off (562) (629) (2,207) (1,150) Recoveries 64 18 122 32 Charge-offs net of recoveries (498) (611) (2,085) (1,118) Balance at end of period $14,212 $11,058 $14,212 $11,058 Net annualized charge-offs as a percentage of average loans outstanding 0.08% 0.12% 0.16% 0.11% Ratio of allowance to total loans held for investment at end of period 0.54% 0.55% 0.54% 0.55% Summary of non-performing assets June 30 Dec 31 June 30 at end of period: 2004 2003 2003 Non-accrual loans: Single-family mortgage loans $3,668 $3,148 $2,773 Commercial real estate loans 2,230 2,649 59 Consumer loans 2,779 2,540 2,228 Business loans 308 1,226 1,168 Total non-accrual loans 8,985 9,563 6,228 Real estate owned and in judgement 3,178 4,068 4,158 Total non-performing assets $12,163 $13,631 $10,386 Ratio of non-accrual loans to loans held for investment at end of period 0.34% 0.38% 0.31% Ratio of total non-performing assets to total assets at end of period 0.33% 0.41% 0.33% Ratio of allowance for loan losses to total non-accrual loans 158% 145% 178% Portfolio of loans held for June 30 Dec 31 June 30 investment at end of period: 2004 2003 2003 First mortgage loans: Single-family real estate $772,154 $759,490 $614,095 Non-residential real estate 482,973 426,644 280,771 Multi-family real estate 249,197 284,991 258,036 Construction 121,216 119,196 91,948 Consumer loans: Second mortgage and home equity 442,675 396,581 365,726 Automobile 151,862 146,677 126,775 Other consumer 37,808 36,401 27,908 Education loans 202,146 195,052 195,690 Business loans 179,475 158,761 69,115 Subtotal 2,639,506 2,523,793 2,030,063 Unearned discount, premiums, and net deferred loan fees and costs 6,665 8,772 6,228 Allowance for loan losses (14,212) (13,882) (11,058) Total loans held for investment $2,631,959 $2,518,683 $2,025,233 FIRST FEDERAL CAPITAL CORP SELECTED FINANCIAL DATA (Dollar amounts in thousands) Three Months Six Months Loan origination June June June June activity: 2004 2003 2004 2003 Real estate loan originations: Single-family mortgage loans $172,545 $106,594 $263,789 $192,861 Commercial real estate loans 32,241 30,890 72,030 63,009 Decrease (increase) in loans in process 1,859 (11,673) 18,245 (6,288) Total real estate loans originated 206,645 125,811 354,064 249,582 Consumer loan originations: Second mortgage and home equity loans 82,706 74,435 137,508 139,624 Automobile loans 31,526 24,328 55,456 43,076 Other consumer loans 8,356 5,622 12,792 10,674 Total consumer loans originated 122,588 104,384 205,756 193,373 Education loan originations 6,041 5,575 29,122 27,089 Business loan originations 12,447 37,011 20,107 62,125 Total loans originated for investment $347,721 $272,781 $609,049 $532,169 Loans purchased for investment: Single-family residential loans - $36,509 - $36,509 Commercial real estate loans $10,428 - $13,740 - Consumer loans - - - - Business loans - 3,271 - 3,271 Total loans purchased for investment $10,428 $39,780 $13,740 $39,780 Single-family mortgage loans originated for sale $262,686 $867,054 $471,748 $1,500,679 Deposit liabilities June 30 Dec 31 June 30 at end of period: 2004 2003 2003 Checking accounts: Non-interest bearing $408,764 $345,698 $530,025 Interest bearing 183,706 187,368 142,024 Money market accounts 588,710 469,097 247,445 Regular savings accounts 248,853 256,658 181,134 Time deposits 1,260,144 1,294,016 1,399,183 Total deposit liabilities $2,690,178 $2,552,837 $2,499,811 June 2004 Weighted Balance Average Rate Time deposits maturing within ... Three months $214,990 2.64% Four to six months 164,018 2.51% Seven to twelve months 358,126 2.20% More than twelve months 523,010 3.43% Total time deposits $1,260,144 2.83% FHLB advances and all other borrowings maturing within ... Three months $276,725 1.71% Four to six months 25,000 3.91% Seven to twelve months 33,450 1.50% More than twelve months 330,109 2.91% Total FHLB advances and all other borrowings $665,284 2.38% 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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