1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
----------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
WISCONSIN 39-1747461
----------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
----------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(262) 787-8700
--------------------------------
(Registrant's Telephone Number, Including Area Code)
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.
(1) Yes X No
--------- ----------
(2) Yes X No
--------- ----------
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,331,721 at July 31, 2001.
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Unaudited Consolidated Financial Statements................................................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 31
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 31
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 31
ITEM 3. Defaults Upon Senior Securities..................................................................... 31
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 31
ITEM 5. Other Information................................................................................... 31
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 31
SIGNATURES.................................................................................................... 32
2
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
June 30, September 30,
2001 2000
----------------- ------------------
(In thousands, except share data)
ASSETS
Cash and due from banks ......................................................... $ 41,960 $ 33,777
Federal funds sold and overnight deposits ....................................... 5,185 970
----------- -----------
Cash and cash equivalents ....................................................... 47,145 34,747
----------- -----------
Assets available for sale, at fair value:
Debt and equity securities .................................................. 46,278 213,848
Mortgage-backed and related securities ...................................... 656,957 777,918
Mortgage loans held for sale, at lower of cost or market ........................ 27,029 8,066
Securities held to maturity, at amortized cost:
Debt securities (fair value of $522 at September 30, 2000) .................. - 510
Mortgage-backed and related securities (fair values of $93,350
and $26,479, respectively) .................................................. 92,833 27,088
Loans receivable, net ........................................................... 1,241,507 1,297,302
Federal Home Loan Bank stock, at cost ........................................... 32,170 30,418
Accrued interest receivable ..................................................... 10,844 14,171
Foreclosed properties ........................................................... 239 241
Real estate held for investment ................................................. 26,222 27,145
Premises and equipment, net ..................................................... 28,715 30,283
Other assets .................................................................... 34,292 31,346
----------- -----------
Total assets .................................................................... $ 2,244,231 $ 2,493,083
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ........................................................................ $ 1,469,134 $ 1,471,881
Short term borrowings ........................................................... 499,092 758,581
Long term borrowings ............................................................ 95,895 106,095
Advances from borrowers for taxes and insurance ................................. 7,730 10,667
Accrued interest payable and other liabilities .................................. 18,318 14,936
----------- -----------
Total liabilities ............................................................... 2,090,169 2,362,160
----------- -----------
Commitments and contingencies ................................................... - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued ................................................................. - -
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 9,339,421 and 9,437,197 shares, respectively ................... 146 146
Additional paid-in-capital ...................................................... 88,799 88,799
Accumulated other comprehensive loss ............................................ (3,606) (18,923)
Treasury stock at cost (5,239,819 and 5,142,043 shares, respectively) ........... (71,402) (69,498)
Retained earnings, substantially restricted ..................................... 140,125 130,399
----------- -----------
Total shareholders' equity ...................................................... 154,062 130,923
----------- -----------
Total liabilities and shareholders' equity ...................................... $ 2,244,231 $ 2,493,083
=========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements
3
4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Nine months ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------- ------------- -------------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans ....................................................... $ 79,234 $ 74,455 $ 25,217 $ 25,849
Mortgage-backed and related securities ...................... 37,274 44,074 11,055 14,428
Debt and equity securities .................................. 6,866 9,820 1,093 3,257
Federal funds sold and overnight deposits ................... 143 48 71 19
Federal Home Loan Bank stock ................................ 1,690 1,701 521 539
Trading account securities .................................. 8 42 - 10
--------- --------- --------- ---------
Total interest and dividend income ............................... 125,215 130,140 37,957 44,102
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits .................................................... 53,110 53,302 15,577 18,236
Advances and other borrowings ............................... 33,021 35,334 8,691 12,460
--------- --------- --------- ---------
Total interest expense ........................................... 86,131 88,636 24,268 30,696
--------- --------- --------- ---------
Net interest income before provision for loan losses ............. 39,084 41,504 13,689 13,406
Provision for loan losses ........................................ 4,619 1,506 3,310 506
--------- --------- --------- ---------
Net interest income .............................................. 34,465 39,998 10,379 12,900
--------- --------- --------- ---------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees ........................ 2,567 2,063 897 859
Depository fees and service charges ......................... 3,905 3,675 1,320 1,298
Securities gains (losses) ................................... 751 (5) 275 (8)
Gain on sales of loans ...................................... 3,742 721 1,642 363
Insurance, annuity and brokerage commissions ................ 930 1,065 329 351
Gain (loss) on foreclosed properties ........................ (16) 1 (6) (13)
Income from real estate held for investment ................. 2,259 2,219 753 721
Other income ................................................ 1,265 746 689 286
--------- --------- --------- ---------
Total other operating income, net ................................ 15,403 10,485 5,899 3,857
--------- --------- --------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits .................... 16,327 22,955 5,938 5,479
Occupancy expenses, including depreciation .................. 3,530 3,368 1,117 1,198
Furniture and equipment, including depreciation ............. 3,174 3,295 1,024 1,173
Real estate held for investment expenses .................... 2,329 2,339 800 774
Other general and administrative expenses ................... 7,498 7,159 2,562 2,541
--------- --------- --------- ---------
Total general and administrative expenses ........................ 32,858 39,116 11,441 11,165
--------- --------- --------- ---------
Income before income tax expense and cumulative effect of
change in accounting principle ............................... 17,010 11,367 4,837 5,592
Income tax expense ............................................... 4,410 4,221 1,365 1,611
--------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle .................................................... $ 12,600 $ 7,146 $ 3,472 $ 3,981
Cumulative effect of a change in accounting for derivative
instruments and hedging activities (net of income taxes
of $55)....................................................... (84) - - -
--------- --------- --------- ---------
Net income ....................................................... $ 12,516 $ 7,146 $ 3,472 $ 3,981
========= ========= ========= =========
Basic earnings per share:
Before cumulative effect of change in accounting principle ... $ 1.34 $ 0.72 $ 0.37 $ 0.40
Cumulative effect of change in accounting principle .......... (0.01) - - -
--------- --------- --------- ---------
$ 1.33 $ 0.72 $ 0.37 $ 0.40
========= ========= ========= =========
Diluted earnings per share:
Before cumulative effect of change in accounting principle ... $ 1.31 $ 0.71 $ 0.36 $ 0.40
Cumulative effect of change in accounting principle .......... (0.01) - - -
--------- --------- --------- ---------
$ 1.30 $ 0.71 $ 0.36 $ 0.40
========= ========= ========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements
4
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
(Unaudited)
Shares of
Common Additional Unearned
Stock Common Paid-In ESOP
Outstanding Stock Capital Compensation
-------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding and per share data)
Nine months ended June 30, 2000
Balance at September 30, 1999............... 10,156,770 $ 146 $ 82,426 $ (2,260)
Net income.................................. - - - -
Change in unrealized loss on securities
available for sale..................... - - - -
Reclassification adjustment for losses
realized in net income................ - - - -
Incomes taxes............................... - - - -
Comprehensive loss..........................
Cash dividend - $0.27 per share............. - - - -
Purchase of treasury stock.................. (491,488) - - -
Exercise of stock options, net.............. 49,815 - - -
Amortization of unearned compensation....... - - 6,113 2,260
-------------- --------- ----------- -----------
Balance at June 30, 2000.................... 9,715,097 $ 146 $ 88,539 $ -
============== ========= =========== ===========
Nine months ended June 30, 2001
Balance at September 30, 2000............... 9,437,197 $ 146 $ 88,799 $ -
Net income.................................. - - - -
Change in unrealized loss on securities
available for sale..................... - - - -
Reclassification adjustment for gains
realized in net income................ - - - -
Incomes taxes............................... - - - -
Comprehensive income........................
Cash dividend - $0.30 per share............. - - - -
Purchase of treasury stock.................. (113,776) - - -
Exercise of stock options, net.............. 16,000
-------------- --------- ----------- -----------
Balance at June 30, 2001.................... 9,339,421 $ 146 $ 88,799 $ -
============== ========= =========== ===========
Accumulated
Other
Comprehensive
Retained Income/ Treasury
Earnings (Loss) Stock Total
-----------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding and per share data)
Nine months ended June 30, 2000
Balance at September 30, 1999............... $ 123,193 $ (13,057) $(58,934) $ 131,514
Net income.................................. 7,146 - 7,146
-
Change in unrealized loss on securities
available for sale..................... - (17,629) - (17,629)
Reclassification adjustment for losses
realized in net income................ - 5 - 5
Incomes taxes............................... - 6,600 - 6,600
------------
Comprehensive loss.......................... (3,878)
Cash dividend - $0.27 per share............. (2,715) - - (2,715)
Purchase of treasury stock.................. - - (7,113) (7,113)
Exercise of stock options, net.............. (339) - 663 324
Amortization of unearned compensation....... - - - 8,373
----------- ----------- ---------- ------------
Balance at June 30, 2000.................... $ 127,285 $ (24,081) $(65,384) $ 126,505
=========== =========== ========== ============
Nine months ended June 30, 2001
Balance at September 30, 2000............... $ 130,399 $ (18,923) $(69,498) $ 130,923
Net income.................................. 12,516 - 12,516
-
Change in unrealized loss on securities
available for sale..................... - 25,719 - 25,719
Reclassification adjustment for gains
realized in net income................ - (751) - (751)
Incomes taxes............................... - (9,651) - (9,651)
------------
Comprehensive income........................ 27,833
Cash dividend - $0.30 per share............. (2,821) - - (2,821)
Purchase of treasury stock.................. - - (2,121) (2,121)
Exercise of stock options, net.............. 31 217 248
----------- ----------- ---------- ------------
Balance at June 30, 2001.................... $ 140,125 $(3,606) $(71,402) $ 154,062
=========== =========== ========== ============
See accompanying Notes to Unaudited Consolidated Financial Statements
5
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Nine months ended
June 30,
----------------------------------------
2001 2000
------------------ ------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 12,516 $ 7,146
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ..................................................... 4,619 1,506
Depreciation, accretion and amortization ...................................... 5,724 5,387
Deferred income taxes ......................................................... (5,932) 3,393
Securities (gains) losses ..................................................... (751) 5
Originations of loans held for sale ........................................... (320,209) (81,173)
Proceeds from sales of loans held for sale .................................... 304,988 75,487
ESOP expense .................................................................. 125 8,373
Gain on sale of loans ......................................................... (3,742) (721)
Dividends received on Federal Home Loan Bank stock ............................ (1,752) -
Other, net .................................................................... (7,287) (1,118)
----------- -----------
Net cash provided by (used in) operating activities ................................. (11,701) 18,285
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity .................... - 300
Purchases of mortgage-backed and related securities held to maturity ............ (72,533) -
Principal repayments on mortgage-backed and related securities held to maturity.. 6,788 10,347
Proceeds from sales of mortgage-backed securities available for sale ............ 59,451 19,098
Principal repayments on mortgage-backed securities available for sale ........... 80,923 79,162
Purchase of debt and equity securities available for sale ....................... (261) -
Proceeds from sales of debt and equity securities available for sale ............ 30,663 1,785
Proceeds from maturities of debt and equity securities available for sale ....... 143,232 426
Purchases of Federal Home Loan Bank stock ....................................... - (2,052)
Redemption of Federal Home Loan Bank stock ...................................... - 3,000
Purchase of loans ............................................................... (137,518) (65,638)
(Increase) decrease in loans, net of loans held for sale ........................ 193,313 (83,487)
Increase in real estate held for investment ..................................... (93) (132)
Purchases of premises and equipment, net ........................................ (1,036) (358)
----------- -----------
Net cash provided by (used in) investing activities ................................. 302,929 (37,549)
----------- -----------
See accompanying Notes to Unaudited Consolidated Financial Statements
6
7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
Nine months ended
June 30,
----------------------------------------
2001 2000
------------------ ------------------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ............................................ (1,510) 14,878
Proceeds from advances and other borrowings .................................... 562,096 1,039,552
Repayments on advances and other borrowings .................................... (627,823) (1,082,112)
Increase (decrease) in securities sold under agreements to repurchase .......... (203,962) 62,903
Decrease in advances from borrowers for taxes and insurance .................... (2,937) (1,295)
Dividends paid ................................................................. (2,821) (2,715)
Stock option transactions ...................................................... 248 324
Purchase of treasury stock ..................................................... (2,121) (7,113)
----------- -----------
Net cash provided by (used in) financing activities ................................ (278,830) 24,422
----------- -----------
Increase in cash and cash equivalents .............................................. 12,398 5,158
Cash and cash equivalents:
Beginning of period .......................................................... 34,747 32,562
----------- -----------
End of period ................................................................ $ 47,145 $ 37,720
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ..................................................................... $ 86,880 $ 88,302
Income taxes ................................................................. 14,612 2
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans securitized as mortgage-backed securities ..................... $ 1,432 $ 9,821
Transfer from loans to foreclosed properties ................................. 372 840
Transfer of mortgage loans to mortgage loans held for sale ................... 62,579 11,536
See accompanying Notes to Unaudited Consolidated Financial Statements
7
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances
of St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with accounting principles generally accepted
in the United States of America. However, in the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the consolidated financial statements have been
included. Operating results for the nine and three month periods ended
June 30, 2001 are not necessarily indicative of the results which may
be expected for the entire year ending September 30, 2001. For further
information refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended September 30, 2000.
Certain previously reported balances have been reclassified to conform
with the 2001 presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
The contractual or notional amounts of off-balance sheet financial
instruments are as follows:
Contractual or Notional Amount(s)
June 30, September 30,
2001 2000
----------------- ------------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans..................................... $ 20,136 $ 4,790
Variable-rate loans.................................. 20,151 42,293
Mortgage loans sold with recourse........................ 17,202 28,148
Guarantees under IRB issues.............................. 37,691 32,582
Interest rate swap agreements (notional amount).......... 145,000 400,000
Commitments to:
Purchase mortgage-backed securities..................... 10,000 -
Unused and open-ended lines of credit:
Consumer.............................................. 223,277 199,515
Commercial............................................. 19,868 60,408
Open option contracts written:
Short-call options..................................... 29,000 -
Commitments to fund equity investments................... 2,050 -
8
9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates of 45 days
or less or other termination clauses and may require a fee. Fixed rate
loan commitments as of June 30, 2001 have interest rates ranging from
6.625% to 8.0%. Because some commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent cash
requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained
consists primarily of one- to four-family residences and other
residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans
that are sold to secondary market agencies, primarily Federal National
Mortgage Association ("FNMA"), with the servicing of these loans being
retained by the Company. The Company's exposure on loans sold with
recourse is the same as if the loans remained in the Company's loan
portfolio. The Company receives a larger servicing spread on those
loans being serviced than it would if the loans had been sold without
recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party. Potential
loss on a guarantee is the notional amount of the guarantee less the
value of the real estate collateral. At June 30, 2001, appraised values
of the real estate collateral exceeded the amount of the guarantees.
Interest rate swap agreements generally involve the exchange of fixed
and variable rate interest rate payments without the exchange of the
underlying notional amount on which the interest rate payments are
calculated. The notional amounts of these agreements represent the
amounts on which interest payments are exchanged between the
counterparties. The notional amounts do not represent direct credit
exposures. The Company is exposed to credit-related losses in the event
of nonperformance by the counterparties on interest rate payments, but
does not expect any counterparty to fail to meet their obligations. The
fixed receive-floating pay agreements were entered into as hedges of
the interest rates on fixed rate certificates of deposit. Interest
receivable or payable on interest rate swaps is recognized using the
accrual method. The use of interest rate swaps enables the Company to
synthetically alter the repricing characteristics of designated
interest-bearing assets and liabilities.
At June 30, 2001, the Company had $145 million in fixed
receive-floating pay agreements with maturity dates ranging from 2005
to 2009 and are all callable from July to December 2001. The agreements
have fixed interest rates ranging from 5.85% to 7.13% and variable
interest rates ranging from 3.62% to 4.71%.
Commitments to buy/sell mortgage-backed securities are contracts which
represent notional amounts to buy/sell mortgage-backed securities at a
future date and specified price. Such commitments generally have fixed
settlement dates.
The unused and open consumer lines of credit are conditional
commitments issued by the Company for extensions of credit such as home
equity, auto, credit card, or other similar consumer-type financing.
Furthermore, the unused and open commercial lines of credit are also
conditional commitments issued by the Company for extensions of credit
such as working capital, agricultural production, equipment or other
similar commercial type financing. The credit risk involved in
extending these lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for
these commitments may include, but may not be limited to, real estate,
investment securities, equipment, accounts receivable, inventory and
Company deposits.
The open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage backed
securities (FNMA) at a future date and specified price. The Company
receives a premium/fee for option contracts written which gives the
purchaser the right, but not the obligation, to buy or sell
mortgage-backed securities within a specified time period for a
contracted price. Because these contracts can expire without being
drawn upon, the total commitment amounts do not necessarily represent
cash requirements.
The commitments to fund equity investments represent amounts St.
Francis Equity Properties ("SFEP"), a subsidiary of the Bank, is
committed to invest in low-income housing projects, which would qualify
for tax credits under Section 42 of the Internal Revenue Code (the
"Code"). The investment in the low-income housing projects is included
in the Company's balance sheet as real estate held for investment.
9
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at
June 30, 2001 were as follows:
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains (Losses) Value
------------ ------------ ------------- -------------
(In thousands)
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and obligations of
U.S. Government Agencies................ $ 46,498 $ 16 $ (575) $ 45,939
Marketable equity securities............... 339 - - 339
------------ ------------ ------------- -------------
TOTAL DEBT AND EQUITY SECURITIES............. $ 46,837 $ 16 $ (575) $ 46,278
============ ============ ============= =============
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC..................................... $ 367 $ - $ - $ 367
FNMA...................................... 28,958 - (386) 28,572
Private issue............................. 17,674 - (709) 16,965
REMICs:
FHLMC..................................... 103,890 301 (1,981) 102,210
FNMA...................................... 12,935 84 - 13,019
Private issue............................. 498,298 1,595 (4,105) 495,788
CMO residual................................ 36 - - 36
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................. $662,158 $ 1,980 $(7,181) $ 656,957
============ ============ ============= =============
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains (Losses) Value
------------ ------------ ------------- -------------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
GNMA...................................... $ 9,881 $ 22 $ - $ 9,903
REMICs:
Private issue............................. 82,952 495 - 83,447
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................ $ 92,833 $ 517 $ - $ 93,350
============ ============ ============= =============
During the nine month periods ended June 30, 2001 and 2000, gross
proceeds from the sale of securities available for sale totaled
approximately $90.1 million and $20.9 million, respectively. The gross
realized gains on such sales totaled approximately $593,000 and $41,000
for the nine month periods ended June 30, 2001 and 2000, respectively.
The gross realized losses on such sales totaled approximately $50,000
and $53,000 for the nine month periods ended June 30, 2001 and 2000,
respectively.
During the three month periods ended June 30, 2001 and 2000, gross
proceeds from the sale of securities available for sale totaled
approximately $48.3 million and zero, respectively. The gross realized
gains on such sales totaled approximately $226,000 and zero for the
three month periods ended June 30, 2001 and 2000, respectively. The
gross realized losses on such sales totaled approximately $1,000 and
zero for the three month periods ended June 30, 2001 and 2000,
respectively.
At June 30, 2001, $443.5 million of mortgage-related securities were
pledged as collateral for Federal Home Loan Bank ("FHLB") advances.
10
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(5) Loans
Loans receivable are summarized as follows:
June 30, September 30,
2001 2000
-----------------------------------------------------------------------------------------------------------
(In thousands)
First mortgage -- one- to four-family ...................................... $ 336,412 $ 404,505
First mortgage -- residential construction ................................. 68,115 62,260
First mortgage -- multi-family ............................................. 107,914 130,002
Commercial real estate ..................................................... 355,524 306,778
Home equity ................................................................ 211,949 188,349
Commercial and agriculture ................................................. 145,151 152,526
Consumer secured by real estate ............................................ 73,836 80,881
Interim financing and consumer loans ....................................... 16,091 13,307
Indirect auto .............................................................. 19,099 30,722
Education .................................................................. 2,658 1,615
----------- -----------
Total gross loans ...................................................... 1,336,749 1,370,945
----------- -----------
Less:
Loans in process ....................................................... 56,076 54,679
Unearned insurance premiums ............................................ 156 194
Deferred loan and guarantee costs (fees) ............................... 353 (359)
Purchased loan discount ................................................ 582 659
Allowance for loan losses .............................................. 11,046 10,404
----------- -----------
Total deductions ....................................................... 68,213 65,577
----------- -----------
Total loans receivable ..................................................... 1,268,536 1,305,368
Less: First mortgage loans held for sale .................................. 27,029 8,066
----------- -----------
Loans receivable, net ...................................................... $ 1,241,507 $ 1,297,302
=========== ===========
11
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Nine months ended Three months ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- -------------- ------------- --------------
(In thousands)
Beginning Balance.................................. $ 10,404 $ 9,356 $ 11,379 $ 10,102
Charge-offs:
Real estate - mortgage........................... (27) (124) - (50)
Commercial loans................................. (3,638) (831) (3,514) (831)
Home equity loans................................ (95) (102) (25) (15)
Consumer......................................... (264) (316) (129) (146)
------------- -------------- ------------- --------------
Total charge-offs.................................. (4,024) (1,373) (3,668) (1,042)
------------- -------------- ------------- --------------
Recoveries:
Real estate - mortgage........................... - 31 - -
Commercial loans................................. 10 - 2 -
Home equity loans................................ 12 10 12 -
Consumer......................................... 25 49 11 13
-------------- ------------- -------------- -------------
Total recoveries................................... 47 90 25 13
-------------- -------------- ------------- -------------
Net charge-offs.................................... (3,977) (1,283) (3,643) (1,029)
------------- -------------- ------------- --------------
Provision.......................................... 4,619 1,506 3,310 506
------------- -------------- ------------- --------------
Ending balance..................................... $ 11,046 $ 9,579 $ 11,046 $ 9,579
============= ============== ============= ==============
(7) Earnings Per Share
Basic earnings per share of common stock for the nine and three month
periods ended June 30, 2001 and 2000, have been determined by dividing
net income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the nine and three month periods ended June 30,
2001 and 2000, have been determined by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options. Book value per share of common stock at June
30, 2001 and September 30, 2000, has been determined by dividing total
shareholders' equity by the number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options at the respective dates. Stock options are
regarded as potential common stock and are, therefore, considered in
per share calculations if not considered to be antidilutive. Total
shares outstanding for the nine and three month periods ended June 30,
2000 for earnings per share calculation purposes have been reduced by
the Employee Stock Ownership Plan ("ESOP") shares that had not been
released. The Company incurred an additional expense in the nine and
three month periods ended June 30, 2000 related to the voluntary
acceleration of loan principal owed to the Company's ESOP, which
accounted for a charge to diluted earnings per share of approximately
$0.63 and $0.06, respectively.
12
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
Nine months ended Three months ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Income before cumulative effect of change in
accounting principle .............................................. $ 12,600,000 $ 7,146,000 $ 3,472,000 $ 3,981,000
Cumulative effect of change in accounting principle ................... (84,000) - - -
------------ ------------ ------------ ------------
Net income for the period ............................................. $ 12,516,000 $ 7,146,000 $ 3,472,000 $ 3,981,000
============ ============ ============ ============
Common shares issued .................................................. 14,579,240 14,579,240 14,579,240 14,579,240
Weighted average treasury shares ...................................... 5,178,408 4,537,722 5,192,235 4,708,281
Weighted average unallocated ESOP shares .............................. - 161,341 - 36,431
------------ ------------ ------------ ------------
Weighted average common shares
outstanding during the period ..................................... 9,400,832 9,880,177 9,387,005 9,834,528
Effect of dilutive stock options outstanding .......................... 205,427 187,894 372,259 82,849
------------ ------------ ------------ ------------
Diluted weighted average common shares
Outstanding during the period ..................................... 9,606,259 10,068,071 9,759,264 9,917,377
============ ============ ============ ============
Basic earnings per share:
Before cumulative effect of change in accounting principle ........ $ 1.34 $ 0.72 $ 0.37 $ 0.40
Cumulative effect of change in accounting principle ............... (0.01) - - -
------------ ------------ ------------ ------------
$ 1.33 $ 0.72 $ 0.37 $ 0.40
============ ============ ============ ============
Diluted earnings per share:
Before cumulative effect of change in accounting principle ........ $ 1.31 $ 0.71 $ 0.36 $ 0.40
Cumulative effect of change in accounting principle ............... (0.01) - - -
------------ ------------ ------------ ------------
$ 1.30 $ 0.71 $ 0.36 $ 0.40
============ ============ ============ ============
The computation of book value per common share is as follows:
June 30, September 30,
2001 2000
------------------- -------------------
Common shares outstanding at the end of the period .......................... 9,339,421 9,437,197
Incremental shares relating to dilutive stock
options outstanding at the end of the period ............................. 460,801 136,313
------------ ------------
9,800,222 9,573,510
============ ============
Total shareholders' equity at the end of the period ......................... $154,062,000 $130,923,000
Book value per common share ................................................. $ 15.72 $ 13.68
13
14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less
than the fair value of the underlying common stock as of the date of
the option grant, and the maximum term cannot exceed ten years. Stock
options awarded to directors may be exercised at any time or on a
cumulative basis over varying time periods, provided the optionee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At June 30, 2001, 39,450 shares were reserved for future grants.
Further information concerning the options is as follows:
Nine months ended June 30,
------------------------------------------------------------------
2001 2000
------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------------
Outstanding at beginning of period ............... 1,700,148 $ 15.78 1,565,682 $ 15.70
Granted .......................................... 10,000 21.75 189,548 14.09
Canceled ......................................... (44,650) 18.48 (4,800) 18.88
Exercised ........................................ (16,000) 15.59 (50,282) 6.62
---------- ------------- ---------- -------------
Outstanding at end of period ..................... 1,649,498 $ 15.75 1,700,148 $ 15.78
========== ============= ========== =============
Options exercisable .............................. 867,894 $5.00 - 22.00 746,785 $5.00 - 21.31
========== ============= ========== =============
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
Nine months ended Three months ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------ -------------
(In thousands)
Federal income tax expense at statutory rate of 35%.... $ 5,954 $ 3,979 $ 1,742 $ 1,958
State income taxes, net of Federal income tax benefit.. 74 33 10 23
Tax exempt interest.................................... (70) (90) (21) (28)
Non-deductible compensation............................ -- 2,070 - 224
Acquisition intangible amortization.................... 171 161 57 54
Affordable housing credits............................. (1,956) (1,957) (652) (663)
Other, net............................................. 237 25 229 43
------------- ------------- ------------ -------------
$ 4,410 $ 4,221 $ 1,365 $ 1,611
============= ============= ============ =============
14
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(10) Derivative and Hedging Activities
Effective October 1, 2000, the Company adopted Financial Accounting
Statement 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes new rules for the recognition and
measurement of derivatives and hedging activities. The Company utilizes
derivative hedging instruments in the course of its asset/liability
management. The hedging instruments primarily used by the Company are
interest rate swap agreements which are used to convert fixed-rate
payments or receipts to variable-rate payments or receipts and thus
hedge the Company's fair market value of the item being hedged. The
items being hedged generally expose the Company to variability in fair
value in rising or declining interest rate environments. In converting
the fixed payment or receipt to a variable payment or receipt, the
interest rate swaps effectively reduce the variability of the fair
market value of the items being hedged.
The Company utilizes interest rate swaps to hedge the fair value of
brokered certificates of deposit ("CD's"). Hedges on brokered CD's
account for the large majority of the Company's hedging activity, with
hedges on other items being relatively nominal. The interest rate swaps
that hedge brokered CD's are matched with the CD as to final maturity,
interest payment dates and call features. The interest rate swaps are a
floating pay-fixed receive instrument and as such, they convert the
fixed rate payment on the brokered CD's to a floating rate and thus
hedge the fair value of the brokered CD's from changes in interest
rates.
The Company measures the effectiveness of its' hedges on a periodic
basis. Any difference between the fair value change of the hedge versus
the fair value change of the hedged item is considered to be the
"ineffective" portion of the hedge. The ineffective portion of the
hedge is recorded as an increase or decrease in the related income
statement classification of the item being hedged. For example, the
ineffectiveness of a brokered CD hedge would be recorded as an
adjustment to interest expense on deposits. If the ineffectiveness of a
hedge exceeds certain levels as described in the accounting standard,
the derivative would no longer be eligible for hedge treatment and
future changes in fair value of the derivative would be recorded on the
income statement.
The Company's commitments to originate mortgage loans held-for-sale is
considered a derivative under the accounting standards. As such, the
change in fair value of such commitments, are recorded as an adjustment
to the gains on the sale of loans. Since most loan commitments are sold
forward by the Company, the change in fair value on loan commitments is
expected to be minimal.
As of the adoption date of Statement 133, the Company had two interest
rate swap agreements that were not considered hedges under the
accounting standard. Both agreements were terminated during the quarter
ended December 31, 2000. The fair value of the agreements as of October
1, 2000 is included in the cumulative effect of an accounting change
and the change in fair value during the quarter is included in
securities gains (losses) in the income statement.
Under Statement 133, the Company was allowed a one-time opportunity to
reclassify investment assets from held to maturity to available for
sale. The Company reclassified all municipal securities held upon the
adoption of FAS 133 as available for sale. The amortized cost and fair
value of the securities transferred was $510,000 and $522,000. During
the quarter ended March 31, 2001, all municipal securities held by the
Company were sold.
Upon adoption of Statement 133, the Company recorded the cumulative
effect of an accounting change in an amount equal to the accounting
effects of the statement as of the beginning of the fiscal year. The
cumulative effect, net of taxes, was a decrease in net income of
$84,000.
15
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(11) Current Accounting Developments
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities"--a replacement
of FASB Statement No. 125. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. This Statement is to be applied
prospectively with certain exceptions. Therefore, earlier or
retroactive application of this Statement is not permitted. Adoption of
this standard is not expected to materially effect the results of
operations or financial position of the Company.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement
of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. SFAS No. 142 is
effective January 1, 2002 for calendar year companies, however, any
acquired goodwill or intangible assets recorded in transactions closed
subsequent to June 30, 2001 will be subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. As
required under SFAS No. 142, the Company will discontinue the
amortization of goodwill with an expected net carrying value of $13.4
million at October 1, 2001 and annual amortization of $1.2 million that
resulted from business combinations prior to the adoption of SFAS No.
141. However, the Company continues to evaluate the additional effect,
if any, that adoption of SFAS No. 141 and SFAS No. 142 will have on the
Company's consolidated financial statements.
(12) Segment Information
The Company's operations include four strategic business segments:
Retail Banking, Commercial Banking, Mortgage Banking and Investments.
Financial performance is primarily based on the individual segments'
direct contribution to Company net income. The segments do not include
the operations of the Company as a holding company, nor the operations
of the Bank's operating subsidiaries. Capital is not allocated to the
segments and thus net interest income related to the free funding
associated with capital is not included in the individual segments. The
Company only charges the segments with direct expenses. Costs
associated with administrative and centralized back-office support
areas of the Bank are not allocated to the segments. Income taxes are
allocated to the segments based on the Bank's effective tax rate prior
to the consolidation with its affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits,
branch and ATM network, consumer lending operations, annuity and
brokerage services and call center. The segment includes a much higher
level of interest-bearing liabilities than earning assets. The Company
views this segment as a significant funding vehicle for the other
lending segments. The Company's transfer pricing model has the effect
of viewing this segment as a comparison to the cost of wholesale funds.
The Commercial Banking segment consists of the Bank's commercial,
commercial real estate and multifamily lending operations. It also
includes the lending aspects of the Company's affordable housing
subsidiary.
The Mortgage Banking segment consists of the Bank's single-family
mortgage lending operation. Single-family lending consists of three
primary operations: portfolio lending, lending for sale in the
secondary market and loan servicing.
The Investment segment consists of the Company's portfolio of
mortgage-backed and related securities, its debt and equity securities
and other short-term investments. This segment also includes the
Company's wholesale sources of funding including FHLB advances,
brokered certificates of deposits, reverse repurchase agreements and
federal funds purchased.
16
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
---------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
---------------------------------------------------------------------------------------------------------------------------
(In thousands)
NINE MONTHS ENDED JUNE 30, 2001
Net interest income .............................. $ 16,630 $ 11,071 $ 5,805 $ 2,623 $ 36,129
Provision for loan losses ........................ 664 3,584 371 -- 4,619
Other operating income ........................... 5,478 817 4,037 616 10,947
General and administrative expenses .............. 16,087 2,179 3,072 745 22,083
Income taxes ..................................... 1,587 2,556 1,902 739 6,784
--------------------------------------------------------------------
Segment profit ................................... $ 3,769 $ 3,570 $ 4,498 $ 1,755 $ 13,591
====================================================================
Segment average assets ........................... $ 321,534 $ 597,942 $ 408,333 $ 974,703 $ 2,302,512
====================================================================
NINE MONTHS ENDED JUNE 30, 2000
Net interest income .............................. $ 18,240 $ 10,732 $ 5,347 $ 5,245 $ 39,563
Provision for loan losses ........................ 592 710 204 -- 1,506
Other operating income ........................... 5,318 743 1,235 (8) 7,288
General and administrative expenses .............. 15,816 2,122 2,762 577 21,277
Income taxes ..................................... 2,706 3,271 1,371 1,764 9,111
--------------------------------------------------------------------
Segment profit ................................... $ 4,444 $ 5,372 $ 2,245 $ 2,896 $ 14,957
====================================================================
Segment average assets ........................... $ 311,857 $ 542,206 $ 391,795 $ 1,168,711 $ 2,414,569
====================================================================
THREE MONTHS ENDED JUNE 30, 2001
Net interest income .............................. $ 4,864 $ 4,101 $ 2,144 $ 954 $ 12,064
Provision for loan losses ........................ 221 2,961 127 -- 3,310
Other operating income ........................... 1,892 231 1,617 275 4,015
General and administrative expenses .............. 5,408 767 1,258 252 7,685
Income taxes ..................................... 438 1,055 806 327 2,625
--------------------------------------------------------------------
Segment profit ................................... $ 689 $ (451) $ 1,570 $ 651 $ 2,458
====================================================================
Segment average assets ........................... $ 322,620 $ 604,658 $ 372,429 $ 876,145 $ 2,175,852
====================================================================
THREE MONTHS ENDED JUNE 30, 2000
Net interest income .............................. $ 6,261 $ 3,540 $ 1,784 $ 1,319 $ 12,904
Provision for loan losses ........................ 197 237 72 -- 506
Other operating income ........................... 1,845 369 429 -- 2,643
General and administrative expenses .............. 5,228 599 867 188 6,882
Income taxes ..................................... 1,026 1,178 491 438 3,133
--------------------------------------------------------------------
Segment profit ................................... $ 1,654 $ 1,895 $ 783 $ 694 $ 5,026
====================================================================
Segment average assets ........................... $ 311,821 $ 556,872 $ 411,021 $ 1,134,869 $ 2,414,583
====================================================================
17
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Nine months ended June 30, Three months ended June 30,
2001 2000 2001 2000
-----------------------------------------------------------
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments ............................................... $ 47,076 $ 46,851 $ 16,078 $ 15,546
Unallocated transfer pricing credit (primarily on capital) ....... 5,492 3,978 2,368 1,291
Income from affordable housing subsidiary ........................ 2,259 2,219 753 721
Holding company interest expense ................................. (1,855) (1,295) (504) (549)
Elimination of intercompany interest income ...................... (1,132) (824) (581) (266)
Other ............................................................ 2,647 1,060 1,474 520
-----------------------------------------------------------
Consolidated total revenue ....................................... $ 54,487 $ 51,989 $ 19,588 $ 17,263
===========================================================
PROFIT
Total for segments ............................................... $ 13,591 $ 14,957 $ 2,458 $ 5,026
Unallocated transfer pricing credit (primarily on capital) ....... 3,295 2,387 1,421 775
Unallocated administrative and centralized support costs (a) ..... (4,066) (4,447) (1,364) (1,419)
Holding company net loss ......................................... (1,543) (992) (432) (370)
Elimination of intercompany interest income ...................... (679) (494) (349) (159)
Affordable housing tax credits ................................... 1,956 1,957 652 663
Additional ESOP expense not allocated to segments ................ -- (6,317) -- (603)
Other ............................................................ (38) 95 1,086 69
-----------------------------------------------------------
Consolidated net income .......................................... $ 12,516 $ 7,146 $ 3,472 $ 3,981
===========================================================
AVERAGE ASSETS
Total for segments ............................................... $ 2,302,512 $ 2,414,569 $ 2,175,852 $ 2,414,583
Elimination of intercompany loans ................................ (13,338) (13,388) (13,362) (13,388)
Other assets not allocated ....................................... 113,618 105,844 132,254 89,696
-----------------------------------------------------------
Consolidated average assets ...................................... $ 2,402,792 $ 2,507,025 $ 2,294,744 $ 2,490,891
===========================================================
--------------------------
(a) After-tax effect of $6.8 million and $7.4 million of general and
administrative expenses for the nine month periods ended June 30, 2001 and
2000, respectively. After-tax effect of $2.3 million and $2.3 million of
general and administrative expenses for the three month periods ended June
30, 2001 and 2000, respectively.
18
19
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis Of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operation and business of St. Francis Capital
Corporation (the "Company"). The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors could affect the
Company'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 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 the Company's loan and investment portfolios, (vi) demand for
loan products, (vii) deposit flows, (viii) competition, (ix) demand for
financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Company's total assets decreased $249 million to $2.24 billion at June 30,
2001 from $2.49 billion at September 30, 2000. The primary reason for the
decrease is the continuing restructuring of the balance sheet as the Company
continues to reduce the size of its mortgage-backed securities and investment
securities portfolios. Due to a combination of year-to-date earnings and
improvement in the Company's unrealized market value on its' available for sale
securities portfolio, total capital increased to $154.1 million at June 30, 2001
compared with $130.9 million at September 30, 2000. The Company's ratio of
shareholders' equity to total assets was 6.86% at June 30, 2001, compared to
5.25% at September 30, 2000. The Company's fully dilutive book value per share
was $15.72 at June 30, 2001, compared to $13.68 at September 30, 2000.
The restructuring of the balance sheet continues to be one of the strategic
initiatives of the Company. As has been the case over the past eight quarters,
the Company continues to reduce the size of its mortgage-backed securities and
investment securities portfolios as repayments, scheduled maturities and sales
occur. Funds received from these repayments, maturities and sales have been and
are expected to be used to grow and diversify the Company's loan portfolio, to
reduce the Company's wholesale debt and as an additional source of liquidity.
This restructuring is part of a long-range plan to make the Company's balance
sheet composition more representative of "community banks" with a greater
percentage of assets in the loan portfolio as opposed to investments. Management
anticipates that this restructuring should improve the Company's margins due to
the generally higher interest rates on loans.
Loans receivable, including mortgage loans held for sale, decreased $36.8
million to $1.27 billion at June 30, 2001 from $1.31 billion at September 30,
2000. During the nine month period ended June 30, 2001, one- to four-family
mortgage loans decreased $62.2 million and multi-family mortgage loans decreased
$22.1 million, offset by an increase of $48.7 million in commercial real estate
loans and $23.6 million in home equity loans. The Company's one- to four-family
mortgage loan portfolio has a significant level of adjustable rate loans and
during periods of declining interest rates, the customers convert adjustable
rate loans to fixed rate loans. However, fixed rate loans are generally sold in
the secondary market and are not maintained on the Company's balance sheet.
The Company originated approximately $512.7 million in loans for the nine month
period ended June 30, 2001, as compared to $425.8 million for the same period in
the prior year. Of the $512.7 million in loans originated, $41.2 million were
commercial loans, $7.8 million were multi-family loans, $81.5 million were
commercial real estate loans, $222.6 million were first mortgage loans, $116.7
million were home equity loans, and $42.9 million were consumer and interim
financing loans. For the nine month period ended June 30, 2001, the Company
purchased $137.5 million of one- to four-family loans, as compared to $65.6
million for the same period in the prior year. The increase in loans purchased
during the current year is primarily due to the Company's mortgage banking
operation in Illinois. For the nine month period ended June 30, 2001, the
Company sold $301.2 million of one- to four-family loans, as compared to $74.8
million for the same period in the prior year. During periods of declining
interest rates, the Company originates more fixed rate loans, which are
generally sold into the secondary market.
Mortgage-backed and related securities, including securities available for sale,
decreased $55.2 million to $749.8 million at June 30, 2001 from $805.0 million
at September 30, 2000. Debt and equity securities decreased $168.1 million to
$46.3 million at June 30, 2001 from $214.4 million at September 30, 2000. These
decreases were due to scheduled maturities, accelerated repayments and sales
during the current year. The decrease in mortgage backed securities was
partially offset by purchases of $72.5 million during the three month period
ended June 30, 2001. As noted above, in connection with the balance sheet
restructuring program, in fiscal
19
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
2000, the Company began reducing the size of its mortgage-backed securities and
investment securities portfolios which management anticipates will continue to
be an ongoing strategic initiative of the Company in fiscal 2001. As part of
this effort, the Company has reduced the size of the mortgage-backed securities
and investment securities portfolios and used the funds generated from the
repayment of principal to grow and diversify the Company's loan portfolio, to
reduce the size of the Company's wholesale debt and as an additional source of
liquidity.
Deposits decreased $2.7 million to $1.469 billion at June 30, 2001 from $1.472
billion at September 30, 2000. The decrease in deposits was due primarily to
decreases of $88.1 million in brokered certificates of deposit partially offset
by increases of $80.6 million in money market demand account deposits as well as
slight increases in other types of deposit products. At June 30, 2001, the
Company had approximately $258.7 million in brokered certificates of deposit
compared with $341.3 million at September 30, 2000. The brokered deposits
generally consist of terms from three months to ten years and include
certificates that are callable at the option of the Company. As part of a
continuing strategy, the Company continues to offer deposit products that
compete more effectively with money market funds and other non-financial deposit
products. Such accounts have generally changed the Company's traditional mix of
deposit accounts to one that is more adjustable to current interest rates such
as the money market demand account. This has resulted in passbook and
certificate of deposit accounts representing a lower percentage of the Company's
total deposit portfolio. The level of deposit flows during any given period is
heavily influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing instruments,
such as money market mutual funds. The Company believes that the likelihood for
retention of brokered certificates of deposit is more a function of the rate
paid on such accounts, as compared to retail deposits which may be established
due to branch location or other undefined reasons.
Advances and other borrowings decreased by $269.7 million to $595.0 million at
June 30, 2001 from $864.7 million at September 30, 2000. Short term borrowings
decreased $259.5 million to $499.1 million at June 30, 2001, compared to $758.6
million at September 30, 2000. At June 30, 2001, $420.0 million of the short
term borrowings were callable FHLB advances with maturities from four to ten
years and are callable by the FHLB during the next fiscal year and quarterly
thereafter. Long term borrowings decreased $10.2 million to $95.9 million at
June 30, 2001, compared to $106.1 million at September 30, 2000. As noted above,
in connection with the balance sheet restructuring program, the Company has used
funds generated from the reduction in the size of the mortgage-backed securities
and investments securities portfolios to reduce the Company's wholesale debt. At
June 30, 2001, the Company had an additional borrowing capacity of $227.6
million available from the FHLB.
At June 30, 2001, the Company had $145.0 million in interest rate swaps
outstanding compared with $400.0 million at September 30, 2000. The swaps are
designed to offset the changing interest payments of some of the Company's
brokered certificates. Fixed receive-floating pay swaps totaled $145.0 million
at June 30, 2001 and were entered into to hedge interest rates on fixed rate
certificates of deposits. Fixed receive-floating pay swaps will provide for a
lower interest expense (or interest income) in a falling rate environment while
adding to interest expense in a rising rate environment. During the nine month
period ended June 30, 2001, the Company recorded a net reduction of interest
expense of $1.0 million as a result of the Company's interest rate swap
agreements compared with a net reduction of $1.9 million for the nine month
period ended June 30, 2000.
RESULTS OF OPERATIONS
NET INCOME. Net income for the nine month period ended June 30, 2001 increased
to $12.5 million compared with $7.1 million for the nine month period ended June
30, 2000. Net income for the three month period ended June 30, 2001 decreased to
$3.5 million compared with $4.0 million for the three month period ended June
30, 2000. The results for the current years' nine and three month periods
included an after-tax effect of $1.5 million on a specific provision for loan
losses related to a commercial credit. (See "Provision for Loan Losses" and
"Asset Quality"). The results for the prior years' nine and three month periods
included an after-tax effect of $6.3 million and $603,000, respectively, due to
the voluntary acceleration of loan principal repayment to the Company's Employee
Stock Ownership Plan ("ESOP"). The ESOP loan was repaid in full in the prior
fiscal year, and the ongoing expense was eliminated. The nine month period ended
June 30, 2001 included a reduction in net income of $84,000 for the cumulative
effect of a change in accounting principle resulting from the adoption of
Financial Accounting Statement Number 133, "Accounting for Derivative
Instruments and Hedging Activities." Net income for the nine and three month
periods ended June 30, 2001 increased primarily due to the ESOP expense in the
prior period and due to increases in other operating income offset by a decrease
in net interest income.
20
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table shows the return on average assets and return on average
equity ratios for each period:
Nine months ended Three months ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Return on average assets.................. 0.70% 0.38% 0.61% 0.64%
Return on average equity.................. 11.46% 7.45% 9.03% 12.80%
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $2.4 million or 5.8% and increased $283,000 or 2.1% for the nine and
three month periods ended June 30, 2001, respectively, compared to the same
periods in the prior year. The decrease in net interest income for the nine
month period ended June 30, 2001 was due to a decrease in the net interest
margin and to a decrease in average earning assets. The slight increase in net
interest income for the three month period ended June 30, 2001 was due to an
increase in the net interest margin, partially offset by a decrease in average
earning assets. The net interest margin declined to 2.27% for the nine month
period ended June 30, 2001 compared with 2.30% in the prior year. The net
interest margin increased to 2.52% for the three month period ended June 30,
2001 compared with 2.24% in the same period in the prior year. In addition,
average earning assets decreased $106.4 million and $222.4 million,
respectively, for the nine and three month periods ended June 30, 2001. The
decrease in average earning assets is largely the result of the Company's
restructuring effort to reduce the amount of mortgage-backed and investment
securities. The change in market interest rates over the last two fiscal years
resulted in the Company's net interest margin decreasing to its lowest point
during the three month period ended December 31, 2000. However, since that time,
the Company's net interest margin has improved over successive quarters as
market interest rates have declined.
The recent decline in market interest rates is expected to continue to
positively impact the Company's net interest margin over the course of the
fiscal year. While decreases in market rates have a delayed effect on the
Company's net interest margin (as it takes time for assets and liabilities to
reprice), management currently anticipates that the Company's net interest
income will improve over the remainder of the fiscal year, subject to increases
or decreases in total net earning assets.
Total interest income decreased $4.9 million or 3.8% to $125.2 million for the
nine month period ended June 30, 2001 compared to $130.1 million at June 30,
2000, and decreased $6.1 million or 13.9% to $38.0 million for the three month
period ended June 30, 2001, compared to $44.1 million for the three month period
ended June 30, 2000. The change in interest income was primarily the result of
increases in interest on loans partially offset by decreases in interest on
mortgage-backed and related securities and debt and equity securities. The
increase in interest income on loans was the result of an increase in the
average balance of loans to $1.32 billion from $1.23 billion for the nine month
periods ended June 30, 2001 and 2000, respectively, partially offset by a
decrease in the average yield on loans to 8.01% from 8.06% for the same periods.
The slight decrease in interest income on loans for the three month period ended
June 30, 2001 compared with the three month period ended June 30, 2000 was the
result of a decrease in the average yield on loans to 7.78% from 8.19%,
respectively, partially offset by an increase in the average balance of loans to
$1.30 billion from $1.27 billion for the same periods.
The decrease in interest income on mortgage-backed and related securities was
due to a decrease in the average balance of such securities to $790.4 million
and $769.2 million for the nine and three month periods ended June 30, 2001,
respectively, as compared to $916.6 million and $882.0 million for the same
periods in the prior year. The average yield on mortgage-backed and related
securities decreased to 6.30% and 5.76% for the nine and three month periods
ended June 30, 2001, respectively, as compared to 6.42% and 6.58% for the same
periods in the prior year. The decrease in interest income on debt and equity
securities was the result of a decrease in the average balance of such
securities to $151.2 million from $222.9 million for the nine month periods
ended June 30, 2001 and 2000, respectively, partially offset by an increase in
the average yield on such securities to 6.07% from 5.89% for the same periods.
The decrease in interest income on debt and equity securities for the three
month period ended June 30, 2001 compared with the three month period ended June
30, 2000 was due to a decrease in the average balance of such securities to
$75.1 million from $220.9 million, in conjunction with a decrease in the average
yield on such securities to 5.84% from 5.93% for the same periods. See
"Financial Condition" for a further discussion of the Company's balance sheet
restructuring activities.
Total interest expense decreased $2.5 million or 2.8% to $86.1 million for the
nine month period ended June 30, 2001, compared to $88.6 million for the nine
month period ended June 30, 2000. For the three month period ended June 30,
2001, total interest expense decreased $6.4 million or 20.9% to $24.3 million
compared to $30.7 million for the three month period ended June 30, 2000. The
change in interest expense for the nine month period ended June 30, 2001
compared with the nine month period ended
21
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
June 30, 2000 was the result of decreases in the average balances partially
offset by increases in the cost of deposits and advances and other borrowings.
The average balances of deposits for the nine month period ended June 30, 2001
as compared to the nine month period ended June 30, 2000 decreased to $1.41
billion from $1.44 billion, partially offset by an increase in the cost of
deposits to 5.03% from 4.93% for the same periods. The average balances of
deposits for the three month period ended June 30, 2001 as compared to the three
month period ended June 30, 2000 decreased to $1.41 billion from $1.42 billion,
in conjunction with a decrease in the cost of deposits to 4.43% from 5.15% for
the same periods. See "Financial Condition" for a further discussion of the
Company's deposit base. The average balances of advances and other borrowings
for the nine month period ended June 30, 2001, as compared to the nine month
period ended June 30, 2000 decreased to $745.3 million from $843.5 million,
partially offset by an increase in the cost of advances and other borrowings to
5.92% from 5.59% for the same periods. The average balances of advances and
other borrowings for the three month period ended June 30, 2001 as compared to
the three month period ended June 30, 2000 decreased to $627.2 million from
$852.8 million, in conjunction with a decrease in the cost of advances and other
borrowings to 5.56% from 5.87% for the same periods. The borrowings are
primarily adjustable-rate FHLB advances, reverse repurchase agreements and
Federal Funds purchased which have repriced to reflect the changes in rate
levels associated with the respective borrowing rate indexes from the same
period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the nine and three month periods
ended June 30, 2001 and 2000, respectively. Tax-exempt investments are not
material and the tax-equivalent method of presentation is not included in the
table.
22
23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
NINE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits ................ $ 3,841 $ 143 4.98% $ 1,250 $ 48 5.13%
Trading account securities ............................... 131 8 8.16 641 42 8.75
Debt and equity securities ............................... 151,249 6,866 6.07 222,858 9,820 5.89
Mortgage-backed and related securities ................... 790,434 37,274 6.30 916,553 44,074 6.42
Loans:
First mortgage ......................................... 848,111 49,727 7.84 794,877 46,306 7.78
Home equity ............................................ 201,358 12,952 8.60 168,660 11,110 8.80
Consumer ............................................... 119,687 7,778 8.69 143,192 9,000 8.40
Commercial and agricultural ............................ 153,537 8,777 7.64 127,031 8,039 8.45
----------- ----------- ---------- -----------
Total loans ........................................ 1,322,693 79,234 8.01 1,233,760 74,455 8.06
Federal Home Loan Bank stock ............................. 31,577 1,690 7.16 31,287 1,701 7.26
----------- ----------- ---------- -----------
Total earning assets ............................... 2,299,925 125,215 7.28 2,406,349 130,140 7.22
----------- -----------
Valuation allowances ..................................... (25,085) (41,620)
Cash and due from banks .................................. 28,144 33,159
Other assets ............................................. 99,808 109,137
----------- ----------
Total assets ....................................... $ 2,402,792 $2,507,025
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ........................................... $ 78,996 358 0.61 $ 76,844 386 0.67
Money market demand accounts ........................... 392,280 13,494 4.60 362,158 12,475 4.60
Passbook ............................................... 87,838 1,205 1.83 105,623 1,732 2.19
Certificates of deposit ................................ 852,209 38,053 5.97 898,916 38,709 5.75
----------- ----------- ---------- -----------
Total interest-bearing deposits ........................... 1,411,323 53,110 5.03 1,443,541 53,302 4.93
Advances and other borrowings ............................. 745,342 33,010 5.92 843,489 35,322 5.59
Advances from borrowers for taxes and insurance ........... 6,169 11 0.24 5,550 12 0.29
----------- ----------- ---------- -----------
Total interest-bearing liabilities ................. 2,162,834 86,131 5.32 2,292,580 88,636 5.16
Non interest-bearing deposits ............................. 75,843 73,504
Other liabilities ......................................... 18,130 12,748
Shareholders' equity ...................................... 145,985 128,193
----------- ----------
Total liabilities and shareholders' equity ................ $ 2,402,792 $2,507,025
=========== ==========
Net interest income ....................................... $ 39,084 $ 41,504
=========== ===========
Net yield on interest-earning assets ...................... 2.27 2.30
Interest rate spread ...................................... 1.95 2.06
Ratio of earning assets to interest-bearing liabilities ... 106.34 104.96
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits ................ $ 6,537 $ 71 4.36% $ 1,342 $ 19 5.69%
Trading account securities ............................... 1 -- -- 541 10 7.43
Debt and equity securities ............................... 75,107 1,093 5.84 220,872 3,257 5.93
Mortgage-backed and related securities ................... 769,210 11,055 5.76 881,993 14,428 6.58
Loans:
First mortgage ......................................... 825,179 15,930 7.74 826,153 16,140 7.86
Home equity ............................................ 208,266 4,091 7.88 174,698 3,981 9.17
Consumer ............................................... 113,985 2,475 8.71 137,136 2,894 8.49
Commercial and agricultural ............................ 151,801 2,721 7.19 131,999 2,834 8.64
----------- ----------- ---------- -----------
Total loans ........................................ 1,299,231 25,217 7.78 1,269,986 25,849 8.19
Federal Home Loan Bank stock ............................. 32,153 521 6.50 29,855 539 7.26
----------- ----------- ---------- -----------
Total earning assets ............................... 2,182,239 37,957 6.98 2,404,589 44,102 7.38
----------- -----------
Valuation allowances ..................................... (17,309) (49,808)
Cash and due from banks .................................. 28,988 28,413
Other assets ............................................. 100,826 107,697
----------- ----------
Total assets ....................................... $ 2,294,744 $2,490,891
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ........................................... $ 80,574 120 0.60 $ 77,744 127 0.66
Money market demand accounts ........................... 420,512 4,083 3.89 363,178 4,423 4.90
Passbook ............................................... 88,678 363 1.64 100,211 543 2.18
Certificates of deposit ................................ 819,651 11,011 5.39 882,196 13,143 5.99
----------- ----------- ---------- -----------
Total interest-bearing deposits ........................... 1,409,415 15,577 4.43 1,423,329 18,236 5.15
Advances and other borrowings ............................. 627,182 8,687 5.56 852,813 12,456 5.87
Advances from borrowers for taxes and insurance ........... 6,213 4 0.26 5,968 4 0.27
----------- ----------- ---------- -----------
Total interest-bearing liabilities ................. 2,042,810 24,268 4.76 2,282,110 30,696 5.41
Non interest-bearing deposits ............................. 79,541 73,374
Other liabilities ......................................... 18,186 10,302
Shareholders' equity ...................................... 154,207 125,105
----------- ----------
Total liabilities and shareholders' equity ................ $ 2,294,744 $2,490,891
=========== ==========
Net interest income ....................................... $ 13,689 $ 13,406
=========== ===========
Net yield on interest-earning assets ...................... 2.52 2.24
Interest rate spread ...................................... 2.21 1.97
Ratio of earning assets to interest-bearing liabilities ... 106.83 105.37
23
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
Nine months ended Three months ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in thousands)
Beginning balance ..................................... $ 10,404 $ 9,356 $ 11,379 $ 10,102
Provision for loan losses ............................. 4,619 1,506 3,310 506
Recoveries ............................................ 47 90 25 13
Charge-offs ........................................... (4,024) (1,373) (3,668) (1,042)
-------- -------- -------- --------
Ending balance ........................................ $ 11,046 $ 9,579 $ 11,046 $ 9,579
======== ======== ======== ========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period .................................... 0.83% 0.71% 0.83% 0.71%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ................................ 110.77% 368.99% 110.77% 368.99%
Ratio of net charge-offs to average
gross loans (annualized) ......................... 0.40% 0.14% 1.13% 0.33%
Management believes that the allowance for loan losses is adequate to provide
for probable losses as of June 30, 2001, based upon its current evaluation of
loan delinquencies, non-performing loans, charge-off trends, loan portfolio
composition, economic conditions and other factors. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers, among other matters, the estimated net realizable
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
accurate provision for loan losses. However, no assurance can be given that the
Company will not, in future periods, sustain losses that are sizable in relation
to amounts reserved, or that subsequent evaluations of the loan portfolio, in
light of the factors then prevailing, including economic conditions and the
Company's ongoing examination process and that of regulators, will not require
significant increases in the allowance for loan losses.
For the nine and three month periods ended June 30, 2001, the provision for loan
losses was $4.6 million and $3.3 million, respectively, compared to $1.5 million
and $506,000 for the same periods in the prior year. During the three month
period ended June 30, 2001, the Company recorded a specific loan loss provision
of $2.5 million related to a commercial credit that has been in non-performing
status since September 2000. After consideration of specific reserves already
established for the loan, the Company felt the provision was appropriate given
the current known status of the credit. At June 30, 2001, the commercial loan
credit had a balance of $5.4 million and had associated impairment reserves of
approximately $543,000. During the three month period ended June 30, 2001, the
balance of the commercial loan credit was reduced by a $3.5 million charge-off
and by the receipt of $1.0 million in payments. (For further information
regarding this particular commercial credit, see "Asset Quality"). The Company's
loan portfolio is increasingly more diversified than in previous years. The
Company has and continues to expect to increase its commercial, consumer and
commercial real estate loan portfolios, which are generally presumed to have
more risk than single-family mortgage loans. Charge-offs for the nine and three
month periods ended June 30, 2001 were $4.0 and $3.7, respectively, compared to
$1.4 million and $1.0 million for the nine and three month periods ended June
30, 2000. The increase in charge-offs in the current fiscal year is due to a
$3.5 million charge-off on the aforementioned commercial credit. At June 30,
2001, the decrease in the ratio of the allowance for loan losses to total
non-performing loans is due to the increase in non-performing loans. (See "Asset
Quality").
OTHER OPERATING INCOME. Other operating income increased by $4.9 million to
$15.4 million and $2.0 million to $5.9 million for the nine and three month
periods ended June 30, 2001, respectively, compared to the same periods in the
prior year. The following table shows the percentage of other operating income
to average assets for each period:
24
25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Nine months ended Three months ended
June 30, June 30,
--------------------------- --------------------------
2001 2000 2001 2000
--------- --------- -------- --------
(In thousands)
Other operating income.................... $ 15,403 $ 10,485 $ 5,899 $ 3,857
Percent of average assets (annualized).... 0.86% 0.56% 1.03% 0.62%
The increase for the nine and three month periods ended June 30, 2001 was due
primarily to increases in gains on the sale of loans, securities gains and
increases in other fees. Gains on the sale of mortgage loans increased to $3.9
million and $1.3 million for the nine and three month periods ended June 30,
2001, respectively, compared to gains of $721,000 and $363,000 for the same
periods in the prior year. The Company's volume of mortgage loan sales were
$301.2 million and $147.1 million for the nine and three month periods ended
June 30, 2001, respectively, compared to $74.8 million and $45.6 million for the
same periods in the prior year. The Company sells a significant amount of its
residential mortgage loans to secondary marketing agencies. Depending on factors
such as interest rates, levels of borrower refinancing and competitive factors
in the Company's primary market area, the amount of mortgage loans ultimately
sold can vary significantly. See "Financial Condition" for a further discussion
of the sale of fixed rate loans.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $6.3 million or 16.0% to $32.9 million and increased $276,000 or
2.5% to $11.4 million for the nine and three month periods ended June 30, 2001,
respectively, compared to the same periods in the prior year. The following
table shows the percentage of general and administrative expenses to average
assets for each period:
Nine months ended Three months ended
June 30, June 30,
--------------------------- --------------------------
2001 2000 2001 2000
--------- --------- -------- --------
(Dollars in thousands)
General and administrative expenses....... $ 32,858 $ 39,116 $ 11,441 $ 11,165
Percent of average assets (annualized).... 1.83% 2.08% 2.00% 1.80%
The nine and three month periods ended June 30, 2000 include an additional ESOP
expense of $7.1 million and $705,000, respectively, due to accelerated payments
made to retire the Company's ESOP debt. Excluding the effect of the additional
ESOP expense, general and administrative expenses increased $1.0 million and
$834,000 for the nine and three month periods ended June 30, 2001, respectively,
compared to the same periods in the prior year. The increase is primarily due to
additional levels of compensation, including increased commissions and incentive
pay related to the Company's increased loan origination activity, normal merit
increases at the start of the Company's fiscal year and to the full operation of
the Company's mortgage banking operation in Illinois.
INCOME TAX EXPENSE. Income tax expense increased to $4.4 million and decreased
to $1.4 million for the nine and three month periods ended June 30, 2001,
compared to $4.2 million and $1.6 million for the same periods in the prior
year. The effective tax rate for the nine and three month periods ended June 30,
2001 was 25.93% and 28.22%, respectively, compared with 37.13% and 28.81% for
the nine and three month periods ended June 30, 2000. The decrease in the
effective tax rate is due primarily to the fact that the majority of the ESOP
expense incurred in the prior year was non-deductible for tax purposes.
ASSET QUALITY
Total non-performing assets were $10.2 million, or 0.45% of total assets at June
30, 2001, compared with $13.2 million, or 0.53% of total assets at September 30,
2000. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure. The Company had no troubled debt restructurings at either date.
25
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets are summarized as follows:
June 30, September 30,
2001 2000
--------- -------------
(Dollars in thousands)
Non-performing loans.............................. $ 9,972 $ 12,977
Foreclosed properties............................. 239 241
--------- ---------
Non-performing assets............................. $ 10,211 $ 13,218
========= =========
Non-performing loans to gross loans............... 0.75% 0.95%
Non-performing assets to total assets............. 0.45% 0.53%
Except as disclosed above, there are no material loans about which management is
aware that there exists serious doubts as to the ability of the borrower to
comply with the loan terms. Non-performing assets include a single $5.4 million
commercial loan credit to a company in the food industry that was added to
non-accrual status during the quarter ended September 30, 2000. The Company
participates in that credit with other financial institutions. During the three
month period ended June 30, 2001, the balance of the commercial loan credit was
reduced by a $3.5 million charge-off and by the receipt of $1.0 million in
payments. Management of the Company now considers collection of the entire
original loan balance unlikely. Interest payments received are recorded as
principal reductions due to the non-accrual status of the loan. During December
2000, the participating bank group entered into a forbearance agreement with the
borrower, which was extended in February 2001 and May 2001. The second extension
period expired on July 31, 2001 and another extension had not been executed as
of the date hereof. Management has taken the current known status about this
credit into account in establishing its allowance for loan losses and in the
level of provision taken during the nine and three month periods ended June 30,
2001.
Impaired loans totaled $7.1 million at June 30, 2001 compared to $12.1 million
at September 30, 2000. These loans had associated impairment reserves of $1.4
million and $1.6 million at June 30, 2001 and September 30, 2000, respectively.
For the nine month period ended June 30, 2001, the average balance of impaired
loans was $11.2 million compared to $6.4 million for the year ended September
30, 2000. Interest income on impaired loans for the nine month period ended June
30, 2001 and 2000 was $116,000 and zero, respectively.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter interest
rate characteristics. Although management believes that its asset/liability
management strategies have reduced the potential effects of changes in interest
rates on its operations, increases in interest rates may adversely affect the
Company's results of operations because interest-bearing liabilities will
reprice more quickly than interest-earning assets.
At June 30, 2001, the Company's estimated cumulative one-year gap between assets
and liabilities was a negative 8.92% of total assets. A negative gap occurs when
a greater dollar amount of interest-bearing liabilities are repricing or
maturing than interest earning assets. The Company's three-year cumulative gap
as of June 30, 2001 was a negative 11.91% of total assets. With a negative gap
position, during periods of rising interest rates it is expected that the cost
of the Company's interest-bearing liabilities will rise more quickly than the
yield on its interest-earning assets, which will have a negative effect on its
net interest income. Although the opposite effect on net interest income would
occur in periods of falling interest rates, the Company could experience
substantial prepayments of its fixed-rate mortgage loans and mortgage-backed and
related securities in periods of falling interest rates, which would result in
the reinvestment of such proceeds at market rates which are lower than current
rates.
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
actual withdrawals and repayments of assets and liabilities may vary
substantially. Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and liabilities
may have similar maturities to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on other types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag
26
27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans and mortgage-backed and related securities, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of an actual change in interest rates,
actual prepayment and early withdrawal levels could deviate significantly from
those assumed in calculating the data in the table.
27
28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of June 30, 2001.
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
-------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Residential ................................ $ 31,406 $ 73,772 $ 122,229 $ 60,248 $ 40,560 $ 328,215
Commercial ................................. 120,286 132,641 212,792 76,465 47,870 590,054
Consumer ................................... 130,324 20,921 40,298 102,438 29,257 323,238
Mortgage-backed and related securities .......... 5,728 12,863 32,969 22,962 18,311 92,833
Assets available for sale:
Mortgage loans ............................. 27,029 -- -- -- -- 27,029
Fixed rate mortgage related ................ 30,211 67,889 129,470 66,855 71,065 365,490
Variable rate mortgage related ............. 291,468 -- -- -- -- 291,468
Investment securities ...................... 339 3,003 42,936 -- -- 46,278
Trading account securities ...................... -- -- -- -- -- --
Other assets .................................... 37,355 -- -- -- -- 37,355
Impact of interest rate swaps ................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total ...................................... $ 674,146 $ 311,089 $ 580,694 $ 328,968 $ 207,063 $2,101,960
========== ========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts ............................... $ 6,875 $ 20,624 $ 30,769 $ 13,812 $ 11,251 $ 83,331
Passbook savings accounts .................. 3,335 10,006 18,936 12,810 43,470 88,557
Money market deposit accounts .............. 112,211 336,633 2,838 1,022 575 453,279
Certificates of deposit .................... 136,449 328,900 141,973 23,938 126,578 757,838
Borrowings (4) .................................. 80,690 4,680 453,337 56,280 -- 594,987
Impact of interest rate swaps ................... 145,000 -- -- (15,000) (130,000) --
---------- ---------- ---------- ---------- ---------- ----------
Total ...................................... $ 484,560 $ 700,843 $ 647,853 $ 92,862 $ 51,874 $1,977,992
========== ========== ========== ========== ========== ==========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities......... $ 189,586 $ (389,754) $ (67,159) $ 236,106 $ 155,189 $ 123,968
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities.............................. $ 189,586 $ (200,168) $ (267,327) $ (31,221) $ 123,968
========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets........................................... 8.45% (8.92%) (11.91%) (1.39%) 5.52%
========== ========== ========== ========== ==========
--------------------------------------------------------------------------------
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing the
Company's historical prepayment statistics, modified for forecasted
statistics using the Public Securities Association model of prepayments.
For fixed rate mortgage loans and mortgage-backed and related securities,
annual prepayment rates ranging from 8% to 30%, based on the loan coupon
rate, were used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
insurance premiums, deferred loan fees, purchased loan discounts and
allowances for loan losses, which aggregated $68.2 million at June 30,
2001.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
of 33%, 10% and 98%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher than
the Company's historical rates, but are considered by management to be more
indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $335.7 million or 15.0% of
total assets.
(4) Fixed rate puttable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due.
28
29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $47.1 million and
$34.7 million as of June 30, 2001 and September 30, 2000, respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At June 30, 2001, the Company had
additional borrowing capacity of $227.6 million available from the FHLB.
The Company is in the midst of a share repurchase program whereby it may
purchase up to 485,000, or approximately five percent, of its common stock in
the open market. As of June 30, 2001, the Company had purchased 378,200 shares
under the authorization at an average price of $16.02 per share. The Company may
purchase an additional 106,800 shares under the current authorization. The
Company's share repurchase program is funded through dividends received from the
Bank and a line of credit with a third party lending institution.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow Office of Thrift Supervision ("OTS") capital
regulations which require savings institutions to meet two capital standards:
(i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets
and (ii) "risk-based capital" of at least 8% of risk-weighted assets.
The following table summarizes the Bank's capital ratios at the dates indicated:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------- --------- ----------- ----------- --------- ----------- ---------
(Dollars in thousands)
As of June 30, 2001:
Tangible capital.............. $ 176,288 7.89% >$ 89,365 >4.0% >$111,706 > 5.0%
- - - -
Core capital ................. 176,288 7.89% > 89,365 >4.0% > 111,706 > 5.0%
- - - -
Tier 1 risk-based capital..... 176,288 11.57% > 60,922 >4.0% > 91,383 > 6.0%
- - - -
Risk-based capital............ 186,706 12.26% > 121,844 >8.0% > 152,305 > 10.0%
- - - -
As of September 30, 2000:
Tangible capital.............. $ 169,261 6.78% >$ 99,893 >4.0% >$124,866 > 5.0%
- - - -
Core capital ................. 169,261 6.78% > 99,893 >4.0% > 124,866 > 5.0%
- - - -
Tier 1 risk-based capital..... 169,261 10.92% > 61,995 >4.0% > 92,993 > 6.0%
- - - -
Risk-based capital............ 179,330 11.57% > 123,991 >8.0% > 154,989 > 10.0%
- - - -
Management believes, as of June 30, 2001, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
29
30
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
June 30, 2001.
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years To Four Years
------------------- ------------------ ----------------- -------------------
Interest earning assets (Dollars in millions)
Loans:
Residential ............................ $ 1.3 9.40% $ 1.2 8.07% $ 4.1 7.58% $ 0.7 7.83%
Commercial ............................. 98.0 6.28% 23.2 8.28% 55.4 7.98% 34.3 7.92%
Consumer ............................... 24.2 6.93% 37.5 7.23% 108.6 7.37% 95.6 7.51%
Mortgage-backed
securities:
Fixed rate ............................. 137.5 6.35% 91.7 6.35% 91.7 6.35% 50.4 6.35%
Adjustable rate ........................ 52.5 4.91% 40.8 4.91% 37.9 4.91% 34.9 4.91%
Debt and equity
securities ............................... 3.3 6.00% 21.5 6.29% 21.5 6.29% -- --
Other ...................................... 37.4 6.50% -- -- -- -- -- --
--------- -------- -------- --------
Total interest
earning assets ........................... $ 354.2 6.18% $ 215.9 6.44% $ 319.2 6.82% $ 215.9 6.88%
========= ======== ======== ========
Interest bearing liabilities
Deposits:
NOW accounts ........................... $ 27.5 0.50% $ 15.4 0.50% $ 15.4 0.50% $ 6.9 0.50%
Passbooks .............................. 13.3 0.75% 9.5 0.75% 9.5 0.75% 6.4 0.75%
Money market ........................... 447.9 3.76% 1.4 3.76% 1.4 3.76% 1.0 3.76%
Certificates ........................... 465.3 5.30% 130.1 5.81% 11.9 5.26% 5.4 5.87%
Borrowings
Fixed rate ............................. 42.1 3.86% 160.0 4.97% 280.0 5.85% 75.0 5.67%
Adjustable rate ........................ 37.9 5.48% -- -- -- -- -- --
Total interest --------- -------- -------- --------
bearing liabilities ...................... $ 1034.0 4.39% $ 316.4 4.97% $ 318.2 5.41% $ 94.7 4.95%
========= ======== ======== ========
More than Fair
Four Years Over Market
To Five Years Five Years Total Value
------------------- ------------------- ------------------- --------
Interest earning assets (Dollars in millions)
Loans:
Residential ........................ $ 18.9 7.26% $ 329.0 7.56% $ 355.2 7.55% $ 357.9
Commercial ......................... 69.1 8.28% 310.1 7.83% 590.1 7.66% 593.7
Consumer ........................... 26.0 8.79% 31.3 9.61% 323.2 7.69% 327.3
Mortgage-backed
securities:
Fixed rate ......................... 45.8 6.35% 41.2 6.35% 458.3 6.35% 458.8
Adjustable rate .................... 32.1 4.91% 93.3 4.91% 291.5 4.91% 291.5
Debt and equity
securities ........................... -- -- -- -- 46.3 6.27% 46.3
Other .................................. -- -- -- -- 37.4 6.50% 37.4
Total interest ......................... -------- -------- -------- --------
earning assets ....................... $ 191.9 7.22% $ 804.9 7.37% $2,102.0 6.93% $2,112.9
======== ======== ======== ========
Interest bearing liabilities
Deposits:
NOW accounts ....................... $ 6.9 0.50% $ 11.2 0.50% $ 83.3 0.50% $ 75.0
Passbooks .......................... 6.4 0.75% 43.5 0.75% 88.6 0.75% 66.4
Money market ....................... 1.0 3.76% 0.6 3.76% 453.3 3.76% 453.3
Certificates ....................... 18.5 5.93% 126.6 6.48% 757.8 5.60% 761.7
Borrowings
Fixed rate ......................... -- -- -- -- 557.1 5.42% 575.7
Adjustable rate .................... -- -- -- -- 37.9 5.48% 37.9
Total interest ......................... -------- -------- -------- --------
bearing liabilities .................. $ 32.8 3.71% $ 181.9 4.73% $1,978.0 4.70% $1,970.0
======== ======== ======== ========
30
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein pursuant to Item 305 of Regulation
S-K is contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
is incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 20, 2001, the Company announced the declaration of a
dividend of $0.10 per share on the Company's common stock for the
quarter ended June 30, 2001. The dividend is payable on August 20,
2001 to shareholders of record as of August 10, 2001. This will be
the 24th consecutive cash dividend payment since the Company
became publicly-held in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share
(See Footnote 7 in "Notes to Unaudited Consolidated
Financial Statements")
(b) No reports on Form 8-K were filed during the quarter for which
this report was filed.
31
32
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.
ST. FRANCIS CAPITAL CORPORATION
Dated: August 14, 2001 By: /s/ Jon D. Sorenson
--------------- -------------------------------------
Jon D. Sorenson
Chief Financial Officer
32