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 December 31, 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 9,183,446 at January 31, 2002.
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............... 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 30
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 30
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 30
ITEM 3. Defaults Upon Senior Securities..................................................................... 30
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 30
ITEM 5. Other Information................................................................................... 30
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 30
SIGNATURES.................................................................................................... 31
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
-----------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
2001 2001
----------------- ------------------
(In thousands, except share data)
ASSETS
Cash and due from banks..................................................... $ 39,785 $ 37,989
Federal funds sold and overnight deposits................................... 1,114 111
----------------- ------------------
Cash and cash equivalents................................................... 40,899 38,100
----------------- ------------------
Assets available for sale, at fair value:
Debt and equity securities.............................................. 23,909 41,661
Mortgage-backed and related securities.................................. 590,702 616,969
Mortgage loans held for sale, at lower of cost or market.................... 57,594 18,974
Securities held to maturity, at amortized cost:
Mortgage-backed and related securities (fair values of $86,912
and $96,237, respectively).............................................. 85,800 95,384
Loans receivable, net....................................................... 1,235,980 1,237,900
Federal Home Loan Bank stock, at cost....................................... 63,266 62,691
Accrued interest receivable................................................. 10,035 11,115
Foreclosed properties....................................................... 431 401
Real estate held for investment............................................. 28,896 26,255
Premises and equipment, net................................................. 29,555 29,128
Other assets................................................................ 32,590 27,688
----------------- ------------------
Total assets................................................................ $ 2,199,657 $ 2,206,266
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................................... $ 1,430,440 $ 1,449,320
Short term borrowings....................................................... 519,664 497,152
Long term borrowings........................................................ 66,412 74,281
Advances from borrowers for taxes and insurance............................. 1,290 10,350
Accrued interest payable and other liabilities.............................. 17,869 14,688
----------------- ------------------
Total liabilities........................................................... 2,035,675 2,045,791
----------------- ------------------
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, 9,183,446 and 9,208,244 shares, respectively............... 146 146
Additional paid-in-capital.................................................. 88,845 88,826
Accumulated other comprehensive income...................................... 568 1,137
Treasury stock at cost (5,395,794 and 5,370,996 shares, respectively)....... (74,837) (74,264)
Retained earnings, substantially restricted................................. 149,260 144,630
----------------- ------------------
Total shareholders' equity.................................................. 163,982 160,475
----------------- ------------------
Total liabilities and shareholders' equity.................................. $ 2,199,657 $ 2,206,266
================= ==================
See accompanying Notes to Unaudited Consolidated Financial Statements
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
-----------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans.................................................................... $ 23,034 $ 27,277
Mortgage-backed and related securities................................... 8,537 13,681
Debt and equity securities............................................... 199 3,342
Federal funds sold and overnight deposits................................ 24 38
Federal Home Loan Bank stock............................................. 917 623
------------------ -----------------
Total interest and dividend income............................................ 32,711 44,961
------------------ -----------------
INTEREST EXPENSE:
Deposits................................................................. 10,994 19,168
Advances and other borrowings............................................ 7,677 13,335
------------------ -----------------
Total interest expense........................................................ 18,671 32,503
------------------ -----------------
Net interest income before provision for loan losses.......................... 14,040 12,458
Provision for loan losses..................................................... 911 603
------------------ -----------------
Net interest income........................................................... 13,129 11,855
------------------ -----------------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees..................................... 1,244 682
Depository fees and service charges...................................... 1,540 1,347
Securities gains......................................................... 57 277
Gain on sales of loans................................................... 3,203 613
Insurance annuity and brokerage commissions.............................. 377 288
Loss on foreclosed properties............................................ (1) (11)
Income from real estate held for investment.............................. 778 753
Other income............................................................. 192 209
------------------ -----------------
Total other operating income, net............................................. 7,390 4,158
------------------ -----------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits................................. 6,970 4,941
Occupancy expenses, including depreciation............................... 1,170 1,088
Furniture and equipment, including depreciation ......................... 990 1,070
Real estate held for investment expenses................................. 773 759
Other general and administrative expenses................................ 2,040 2,402
------------------ -----------------
Total general and administrative expenses..................................... 11,943 10,260
------------------ -----------------
Income before income tax expense and cumulative effect of change in
accounting principle..................................................... 8,576 5,753
Income tax expense............................................................ 2,582 1,384
------------------ -----------------
Income before cumulative effect of change in accounting principle............. $ 5,994 $ 4,369
Cumulative effect of a change in accounting for derivative instruments and
hedging activities (net of income taxes of $55)......................... - (84)
------------------ -----------------
Net income.................................................................... $ 5,994 $ 4,285
================== =================
Basic earnings per share:
Before cumulative effect of change in accounting principle................ $ 0.65 $ 0.46
Cumulative effect of change in accounting principle....................... - (0.01)
------------------ -----------------
$ 0.65 $ 0.45
================== =================
Diluted earnings per share:
Before cumulative effect of change in accounting principle................ $ 0.62 $ 0.46
Cumulative effect of change in accounting principle....................... - (0.01)
------------------ -----------------
$ 0.62 $ 0.45
================== =================
See accompanying Notes to Unaudited Consolidated Financial Statements
4
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
(Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Shares of Other
Common Additional Comprehensive
Stock Common Paid-In Retained Income/ Treasury
Outstanding Stock Capital Earnings (Loss) Stock Total
------------------------------------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding and per share data)
Three months ended December 31, 2000
Balance at September 30, 2000........... 9,437,197 $ 146 $ 88,799 $ 130,399 $(18,923) $(69,498) $ 130,923
Net income.............................. - - - 4,285 - - 4,285
Change in unrealized loss on securities
available for sale................. - - - - 16,668 - 16,668
Reclassification adjustment for gains
realized in net income............ - - - - (277) - (277)
Income taxes............................ - - - - (5,841) - (5,841)
------------
Comprehensive income.................... 14,835
Cash dividend - $0.10 per share......... - - - (941) - - (941)
Purchase of treasury stock.............. (35,076) - - - - (487) (487)
------------- ---------- ----------- ----------- ------------ ----------- ------------
Balance at December 31, 2000............ 9,402,121 $ 146 $ 88,799 $ 133,743 $ (8,373) $(69,985) $ 144,330
============= ========== =========== =========== ============= =========== ============
Three months ended December 31, 2001
Balance at September 30, 2001........... 9,208,244 $ 146 $ 88,826 $ 144,630 $ 1,137 $(74,264) $ 160,475
Net income.............................. - - - 5,994 - - 5,994
Change in unrealized gain on securities
available for sale................. - - - - (985) - (985)
Reclassification adjustment for gains
realized in net income............ - - - - (57) - (57)
Income taxes............................ - - - - 473 - 473
------------
Comprehensive income.................... 5,425
Cash dividend - $0.15 per share......... - - - (1,376) - - (1,376)
Purchase of treasury stock.............. (32,500) - - - - (679) (679)
Exercise of stock options, net.......... 7,702 19 12 106 137
------------- ---------- ----------- ----------- ------------- ----------- ------------
Balance at December 31, 2001............ 9,183,446 $ 146 $ 88,799 $ 149,260 $ 568 $ (74,837) $ 163,982
============= ========== =========== =========== ============= =========== ============
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
-------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------------------
2001 2000
------------------ ----------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 5,994 $ 4,285
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.................................................... 911 603
Depreciation, accretion and amortization..................................... 2,058 1,718
Deferred income taxes........................................................ 341 (3,286)
Securities gains............................................................. (57) (277)
Originations of loans held for sale.......................................... (259,987) (44,484)
Proceeds from sales of loans held for sale................................... 224,570 47,064
Gain on sale of loans........................................................ (3,203) (613)
Stock dividends received on Federal Home Loan Bank stock..................... (575) (583)
Other, net................................................................... (1,737) 1,785
------------------ ------------------
Net cash provided by (used in) operating activities................................ (31,685) 6,212
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed and related securities held to maturity............. (5,431) -
Principal repayments on mortgage-backed and related securities
held to maturity............................................................. 15,015 1,979
Purchases of mortgage-backed and related securities available for sale........... (55,851) -
Proceeds from sales of mortgage-backed securities available for sale............. 3,666 6,282
Principal repayments on mortgage-backed securities available for sale............ 77,423 21,164
Purchases of debt and equity securities available for sale....................... (7,264) -
Proceeds from sales of debt and equity securities available for sale............. - 1,766
Proceeds from maturities of debt and equity securities available for sale........ 25,003 1,975
Purchase of loans................................................................ (82,441) (26,076)
Decrease (increase) in loans, net of loans held for sale......................... 84,361 (2,637)
Increase in real estate held for investment...................................... (2,977) (168)
Purchases of premises and equipment, net......................................... (1,299) (49)
------------------ ------------------
Net cash provided by investing activities.......................................... 50,205 4,236
------------------ ------------------
See accompanying Notes to Unaudited Consolidated Financial Statements
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
-------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------------------
2001 2000
------------------ ----------------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits......................................... (19,386) 7,306
Proceeds from advances and other borrowings................................. 60,518 248,261
Repayments on advances and other borrowings................................. (51,332) (269,335)
Increase in securities sold under agreements to repurchase.................. 5,457 21,895
Decrease in advances from borrowers for taxes and insurance................. (9,060) (9,826)
Dividends paid.............................................................. (1,376) (941)
Stock option transactions................................................... 137 -
Purchase of treasury stock.................................................. (679) (487)
------------------ ------------------
Net cash used in financing activities........................................... (15,721) (3,127)
------------------ ------------------
Increase in cash and cash equivalents........................................... 2,799 7,321
Cash and cash equivalents:
Beginning of period....................................................... 38,100 34,747
------------------ ------------------
End of period............................................................. $ 40,899 $ 42,068
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................................. $ 19,028 $ 29,821
Income taxes.............................................................. 3,357 3,001
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Transfer from loans to foreclosed properties.............................. $ 187 $ -
Transfer of mortgage loans to mortgage loans held for sale................ 33,747 9,269
See accompanying Notes to Unaudited Consolidated Financial Statements
7
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 three month period ended December
31, 2001 are not necessarily indicative of the results which may be
expected for the entire year ending September 30, 2002. 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, 2001.
Certain previously reported balances have been reclassified to conform
with current year 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)
December 31, September 30,
2001 2001
----------------- ------------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans..................................... $ 21,465 $ 19,375
Variable-rate loans.................................. 51,699 29,157
Mortgage loans sold with recourse........................ 13,312 15,090
Guarantees under IRB issues.............................. 38,019 38,080
Interest rate swap agreements (notional amount).......... 60,000 80,000
Unused and open-ended lines of credit:
Consumer.............................................. 242,635 232,046
Commercial............................................. 72,392 24,423
Commitments to fund equity investments.................... 987 3,811
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 December 31, 2001 have interest rates ranging
from 5.875% to 9.875%. 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
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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
and commercial business assets.
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 December 31, 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.
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 December 31,
2001, the Company had $60 million in fixed receive-floating pay
agreements with maturity dates ranging from 2008 to 2009 and call dates
ranging from January 2002 to June 2002. The agreements have fixed
interest rates ranging from 5.85% to 6.30% and variable interest rates
ranging from 1.72% to 2.33%.
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, 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 commitments to fund equity investments represent amounts St.
Francis Equity Properties, Inc. ("SFEP") 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
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
December 31, 2001 were as follows:
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------ ------------- -------------
(In thousands)
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and obligations
of U.S. Government Agencies............... $ 11,007 $ 80 $ - $ 11,087
Marketable equity securities................ 12,822 - - 12,822
------------ ------------ ------------- -------------
TOTAL DEBT AND EQUITY SECURITIES............. $ 23,829 $ 80 $ - $ 23,909
============ ============ ============= =============
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
Private issue............................. $ 15,487 $ - $ (605) $ 14,882
REMICs:
FHLMC..................................... 64,094 328 (1,369) 63,053
FNMA...................................... 10,008 97 - 10,105
Private issue............................. 500,263 3,452 (1,089) 502,626
CMO residual................................ 36 - - 36
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................. $ 589,888 $ 3,877 $ (3,063) $590,702
============ ============ ============= =============
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------ ------------- -------------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
GNMA...................................... $ 9,206 $ 70 $ - $ 9,276
REMICs:
Private issue............................. 76,594 1,042 - 77,636
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................ $ 85,800 $ 1,112 $ - $ 86,912
============ ============ ============= =============
During the three month periods ended December 31, 2001 and 2000, gross
proceeds from the sale of securities available for sale totaled
approximately $3.7 million and $8.0 million, respectively. The gross
realized gains on such sales totaled approximately $57,000 and $122,000
for the three month periods ended December 31, 2001 and 2000,
respectively. There were no gross realized losses on such sales for the
three month periods ended December 31, 2001 and 2000.
At December 31, 2001, $451.2 million of mortgage-related securities
were pledged as collateral for Federal Home Loan Bank ("FHLB")
advances.
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(5) Loans
Loans receivable are summarized as follows:
December 31, September 30,
2001 2001
-----------------------------------------------------------------------------------------------------------
(In thousands)
First mortgage -- one- to four-family.............................. $ 291,363 $ 298,617
First mortgage -- residential construction.......................... 73,828 68,936
First mortgage - multi-family...................................... 140,949 126,338
Commercial real estate............................................. 378,217 362,329
Home equity........................................................ 226,149 221,559
Commercial......................................................... 152,480 140,826
Consumer secured by real estate..................................... 67,940 71,325
Interim financing and consumer loans............................... 20,193 18,027
Indirect auto....................................................... 12,301 15,632
Education.......................................................... 3,348 3,253
--------------- ----------------
Total gross loans................................................ 1,366,768 1,326,842
--------------- ----------------
Less:
Loans in process.................................................. 59,604 57,153
Unearned insurance premiums...................................... 128 136
Deferred loan and guarantee fees................................. 567 445
Purchased loan discount.......................................... 513 548
Allowance for loan losses........................................ 12,382 11,686
--------------- ----------------
Total deductions................................................. 73,194 69,968
--------------- ----------------
Total loans receivable............................................. 1,293,574 1,256,874
Less: First mortgage loans held for sale.......................... 57,594 18,974
--------------- ----------------
Loans receivable, net.............................................. $1,235,980 $1,237,900
=============== ================
11
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:
Three months ended
December 31,
----------------------------------
2001 2000
--------------- ----------------
(In thousands)
Beginning Balance.................................................... $ 11,686 $ 10,404
Charge-offs:
Real estate -- mortgage............................................ (23) (27)
Commercial loans................................................... - (93)
Home equity loans.................................................. - (35)
Consumer.......................................................... (214) (50)
--------------- ----------------
Total charge-offs.................................................... (237) (205)
--------------- ----------------
Recoveries:
Real estate -- mortgage............................................ 18 -
Commercial loans................................................... - 2
Home equity loans.................................................. - -
Consumer.......................................................... 4 8
--------------- ----------------
Total recoveries..................................................... 22 10
---------------- ----------------
Net charge-offs...................................................... (215) (195)
--------------- ----------------
Provision............................................................ 911 603
--------------- ----------------
Ending balance....................................................... $ 12,382 $ 10,812
=============== ================
(7) Earnings Per Share
Basic earnings per share of common stock for the three month periods
ended December 31, 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 three month periods ended December 31, 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 December 31, 2001 and
September 30, 2001, have been determined by dividing total
shareholders' equity by the number of shares of common stock
outstanding at period end 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.
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
Three months ended
December 31,
-----------------------------------------
2001 2000
------------------- -------------------
Income before cumulative effect of change in
accounting principle......................................... $ 5,994,000 $ 4,369,000
Cumulative effect of change in accounting principle.............. - (84,000)
------------------- -------------------
Net income for the period........................................ $ 5,994,000 $ 4,285,000
=================== ===================
Common shares issued............................................. 14,579,240 14,579,240
Weighted average treasury shares................................. 5,399,966 5,165,991
Weighted average common shares
outstanding during the period................................ 9,179,274 9,413,249
Effect of dilutive stock options outstanding..................... 441,823 79,366
------------------- -------------------
Diluted weighted average common shares
outstanding during the period................................ 9,621,097 9,492,615
=================== ===================
Basic earnings per share:
Before cumulative effect of change in accounting principle... $ 0.65 $ 0.46
Cumulative effect of change in accounting principle.......... - (0.01)
------------------- -------------------
$ 0.65 $ 0.45
=================== ===================
Diluted earnings per share:
Before cumulative effect of change in accounting principle... $ 0.62 $ 0.46
Cumulative effect of change in accounting principle.......... - (0.01)
------------------- -------------------
$ 0.62 $ 0.45
=================== ===================
The computation of book value per common share is as follows:
December 31, September 30,
2001 2001
------------------- -------------------
Common shares outstanding at the end of the period............. 9,183,446 9,208,244
Incremental shares relating to dilutive stock
options outstanding at the end of the period................. 513,497 424,891
------------------- -------------------
9,696,943 9,633,135
=================== ===================
Total shareholders' equity at the end of the period............ $ 163,982,000 $ 160,475,000
Book value per common share.................................... $ 16.91 $ 16.66
13
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 December 31, 2001, 60,650 shares were reserved for future grants.
Further information concerning the options is as follows:
Three months ended December 31,
--------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
--------------------------------------------------------------------
Outstanding at beginning of period........ 1,614,898 $15.74 1,700,148 $15.78
Granted................................... - - - -
Canceled.................................. - - (2,400) 21.31
Exercised................................. (7,702) 15.43 - -
-------------- ---------------- ------------- -----------------
Outstanding at end of period.............. 1,607,196 $15.74 1,697,748 $15.77
============== ================ ============= =================
Options exercisable....................... 1,041,701 $5.00 -- 22.00 819,625 $5.00 -- 22.00
============== ================ ============= =================
(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:
------------------------------
Three months ended
December 31,
------------------------------
2001 2000
------------------------------
(In thousands)
Federal income tax expense at statutory rate of 35%.................. $ 3,001 $ 1,965
State income taxes, net of Federal income tax benefit................ 262 2
Tax exempt interest.................................................. (17) (26)
Acquisition intangible amortization.................................. - 57
Affordable housing credits........................................... (652) (652)
Other, net........................................................... (12) 38
------------- -------------
$ 2,582 $ 1,384
============= =============
14
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 a significant 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. If the
ineffectiveness of a hedge exceeds certain levels, 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 are
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.
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 ended December 31, 2000
is included in securities gains (losses) in the income statement.
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 October 1, 2000. The cumulative effect,
net of taxes, was a decrease in net income of $84,000.
At December 31, 2001, the Company had $60.0 million in interest rate
swaps outstanding compared with $80.0 million at September 30, 2001.
The swaps are designed to offset the changing interest payments of
certain of the Company's brokered certificates. Fixed receive-floating
pay swaps totaled $60.0 million at December 31, 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 three
month period ended December 31, 2001, the Company recorded a net
reduction of interest expense of $561,000 as a result of the Company's
interest rate swap agreements compared with a net reduction of $200,000
for the three month period ended December 31, 2000.
15
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, 2001. 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 did not 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 discontinued the amortization
of goodwill with a net carrying value of $13.4 million at October 1,
2001 and annual amortization of approximately $1.2 million that
resulted from business combinations prior to the adoption of SFAS No.
141. The Company will evaluate goodwill for impairment at least
annually.
(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
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)
THREE MONTHS ENDED DECEMBER 31, 2001
Net interest income (expense)........ $ (29) $ 5,496 $ 2,358 $ (281) $ 7,545
Provision for loan losses............ 378 492 41 - 911
Other operating income............... 2,184 326 3,338 57 5,906
General and administrative expenses.. 5,516 865 1,360 211 7,951
Income tax expense (benefit)......... (936) 1,118 1,079 (109) 1,152
-------------- -------------- --------------- -------------- ---------------
Segment profit (loss)................ $ (2,802) $ 3,347 $ 3,217 $ (326) $ 3,436
============== ============== =============== ============== ===============
Segment average assets............... $ 330,906 $ 632,960 $ 309,960 $ 781,403 $ 2,055,229
============== ============== =============== ============== ===============
THREE MONTHS ENDED DECEMBER 31, 2000
Net interest income.................. $ 6,473 $ 3,370 $ 1,674 $ 528 $ 12,045
Provision for loan losses............ 221 261 120 - 603
Other operating income............... 1,819 275 689 141 2,925
General and administrative expenses.. 5,227 649 839 230 6,945
Income tax expense................... 632 608 313 98 1,650
-------------- -------------- --------------- -------------- ---------------
Segment profit....................... $ 2,212 $ 2,127 $ 1,092 $ 342 $ 5,773
============== ============== =============== ============== ===============
Segment average assets............... $ 319,172 $ 583,451 $ 434,085 $ 1,070,910 $ 2,407,618
============== ============== =============== ============== ===============
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Three months ended December 31,
2001 2000
----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments............................................................... $ 13,450 $ 14,970
Unallocated transfer pricing credit (primarily on capital)....................... 7,013 1,340
Income from affordable housing subsidiary........................................ 778 753
Holding company interest expense................................................. (320) (725)
Elimination of intercompany interest income...................................... (276) (278)
Other............................................................................ 785 556
--------------- ----------------
Consolidated total revenue....................................................... $ 21,430 $ 16,616
=============== ================
PROFIT
Total for segments............................................................... $ 3,436 $ 5,773
Unallocated transfer pricing credit (primarily on capital)....................... 4,208 804
Unallocated administrative and centralized support costs (a)..................... (1,501) (1,275)
Holding company net loss........................................................ (293) (543)
Elimination of intercompany interest income...................................... (166) (167)
Affordable housing tax credits................................................... 652 652
Other............................................................................ (342) (959)
--------------- ----------------
Consolidated net income.......................................................... $ 5,994 $ 4,285
=============== ================
AVERAGE ASSETS
Total for segments............................................................... $ 2,055,229 $ 2,407,618
Elimination of intercompany loans................................................ (13,371) (13,338)
Other assets not allocated....................................................... 144,031 96,053
--------------- ----------------
Consolidated average assets...................................................... $ 2,185,889 $ 2,490,333
=============== ================
----------------------
(a) After-tax effect of $2.5 million and $2.1 million of general and
administrative expenses for the three month periods ended December
31, 2001 and 2000, respectively.
17
ST. FRANCIS CAPITAL CORPORATION AND 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 at December 31, 2001 were $2.20 billion, a decrease
of $6.6 million from $2.21 billion at September 30, 2001. Decreases in
mortgage-backed and related securities and investment securities were offset by
an increase in loans held for sale. 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 and related securities and investment securities
portfolios. Total capital increased to $164.0 million at December 31, 2001
compared with $160.5 million at September 30, 2001. The Company's ratio of
shareholders' equity to total assets was 7.45% at December 31, 2001, compared to
7.27% at September 30, 2001. The Company's fully dilutive book value per share
was $16.91 at December 31, 2001, compared to $16.66 at September 30, 2001.
The restructuring of the balance sheet continues to be one of the strategic
initiatives of the Company. Since fiscal 2000, 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 our
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, and depending on the growth in the loan portfolio, this
will continue to be an ongoing initiative of the Company in fiscal 2002.
Loans receivable, including mortgage loans held for sale, increased $36.7
million to $1.29 billion at December 31, 2001 from $1.26 billion at September
30, 2001. During the three month period ended December 31, 2001, multi-family
mortgage loans increased $14.6 million, commercial real estate loans increased
$15.9 million, and commercial loans increased $11.7 million, partially offset by
a decrease of $4.5 million in consumer and interim financing loans and a
decrease of $2.4 million in one- to four-family loans. The Company's one- to
four-family mortgage loan portfolio has a significant level of adjustable rate
loans and during periods of declining or generally low interest rates, the
customers generally 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.
For the three month period ended December 31, 2001, the Company originated
approximately $326.8 million in loans, as compared to $143.3 million for the
same period in the prior year. Of the $326.8 million in loans originated, $28.3
million were commercial loans, $17.5 million were multi-family loans, $26.0
million were commercial real estate loans, $188.5 million were first mortgage
loans, $44.7 were home equity loans and $21.8 million were consumer and interim
financing loans. For the three month period ended December 31, 2001, the Company
purchased $82.4 million one- to four-family loans, as compared to $26.1 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 three month period ended December 31, 2001, the Company sold
$221.4 million one- to four-family loans, as compared to $46.5 million for the
same period in the prior year. During periods of declining or generally low
interest rates, the Company originates more fixed rate loans, which are
generally sold in the secondary market.
Mortgage-backed and related securities, including securities available for sale,
decreased $35.9 million to $676.5 million at December 31, 2001 from $712.4
million at September 30, 2001. The decreases were due to accelerated repayments,
scheduled maturities and sales during the current quarter. The decrease in
mortgage-backed securities was partially offset by purchases of
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
$61.3 million during the three month period ended December 31, 2001. As noted
above, in connection with the balance sheet restructuring program, in fiscal
2000, the Company began reducing the size of its mortgage-backed securities
portfolios which management anticipates will continue to be an ongoing strategic
initiative of the Company in fiscal 2002. 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 amount of the
Company's wholesale debt and as an additional source of liquidity. The Company
intends to reduce the size of its mortgage-backed securities and investment
securities portfolios to accommodate growth in the loan portfolio.
Deposits decreased $18.9 million to $1.43 billion at December 31, 2001 from
$1.45 billion at September 30, 2001. The decrease in deposits was due primarily
to decreases of $12.3 million in certificates of deposit and $6.5 million in
money market demand account deposits offset by increases of $2.5 million in
checking accounts. At December 31, 2001, the Company had approximately $189.5
million in brokered certificates of deposit compared with $224.4 million at
September 30, 2001. 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 increased by $14.6 million to $586.1 million at
December 31, 2001 from $571.4 million at September 30, 2001. Short term
borrowings increased $22.5 million to $519.7 million at December 31, 2001,
compared to $497.2 million at September 30, 2001. At December 31, 2001, $420.0
million of the short term borrowings were callable FHLB advances with maturities
from three to ten years and are callable by the FHLB during the next fiscal year
and quarterly thereafter. Long-term borrowings decreased $7.9 million to $66.4
million at December 31, 2001, compared to $74.3 million at September 30, 2001.
At December 31, 2001, the Company had an additional borrowing capacity of $257.1
million available from the FHLB.
RESULTS OF OPERATIONS
NET INCOME. Net income for the three month period ended December 31, 2001 was
$6.0 million compared with $4.4 million for the three month period ended
December 31, 2000. The prior year period 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 three month
period ended December 31, 2001 increased primarily due to an increase in net
interest income and other operating income.
The following table shows the return on average assets and return on average
equity ratios for each period:
Three months ended
December 31,
---------------------------------------
2001 2000
------------------ -----------------
Return on average assets........................................... 1.09% 0.68%
Return on average equity........................................... 14.43% 12.59%
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $1.5 million or 12.7% to $14.0 million for the three month period
ended December 31, 2001 compared to $12.5 million for the same period in the
prior year. The increase in net interest income for the three month period ended
December 31, 2001 was primarily due to an increase in the net interest margin to
2.70% from 2.06% in the prior year, partially offset by a decrease of $334.3
million in average earning assets. The increase in net interest margin is
largely attributable to the reduction in market interest rates and to the
restructuring of the balance sheet. Generally during times when market interest
rates decline, the Company experiences an improvement in its' funding costs at a
faster pace than
19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
the decrease in its' asset yields. In addition, the Company continued its' long
term balance sheet restructuring, replacing lower-yielding security assets with
higher yielding loan assets.
Total interest income decreased $12.3 million or 27.3% to $32.7 million for the
three month period ended December 31, 2001 compared to $45.0 million at December
31, 2000. The decrease in interest income was primarily the result of decreases
in interest on loans, mortgage-backed and related securities and debt and equity
securities. The decrease in interest income on loans was the result of a
decrease in the average balance of loans to $1.27 billion from $1.33 billion for
the three month periods ended December 31, 2001 and 2000, respectively, and a
decrease in the average yield on loans to 7.18% from 8.15% 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 $709.8 million
from $820.0 million for the three month period ended December 31, 2001 and 2000,
respectively, and a decrease in the average yield on such securities to 4.77%
from 6.62% for the same periods.
Total interest expense decreased $13.8 million or 42.6% to $18.7 million for the
three month period ended December 31, 2001, compared to $32.5 million for the
three month period ended December 31, 2000. The decrease in interest expense was
the result of decreases in the cost of deposits and advances and other
borrowings, as well as decreases in the average balances. The average cost of
deposits decreased to 3.19% from 5.46% for the three month periods ended
December 31, 2001 and 2000, respectively. The average balances of deposits
decreased to $1.37 billion for the three month period ended December 31, 2001,
as compared to $1.39 billion for the same period in the prior year. See
"Financial Condition" for a further discussion of the Company's deposit base.
The average balance of advances and other borrowings decreased to $553.5 million
for the three month period ended December 31, 2001, as compared to $858.9
million for the same period in the prior year. The average cost of advances and
other borrowings decreased to 5.50% for the three month period ended December
31, 2001 from 6.16% for the same period in the prior year. 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 three month period ended December
31, 2001 and 2000, respectively. Tax-exempt investments are not material and the
tax-equivalent method of presentation is not included in the schedule.
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------- -----------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits... $ 4,604 $ 24 2.07 % $ 2,385 $ 38 6.32 %
Debt and equity securities.................. 13,051 199 6.05 217,257 3,342 6.10
Mortgage-backed and related securities...... 709,756 8,537 4.77 819,963 13,681 6.62
Loans:
First mortgage............................ 800,658 14,942 7.40 855,902 16,959 7.86
Home equity............................... 225,364 3,626 6.38 194,162 4,489 9.17
Consumer ................................. 105,346 2,241 8.44 124,439 2,706 8.63
Commercial and agricultural............... 141,321 2,225 6.25 152,528 3,123 8.12
------------------------ ------------------------
Total loans........................... 1,272,689 23,034 7.18 1,327,031 27,277 8.15
Federal Home Loan Bank stock................ 63,254 917 5.75 30,981 623 7.98
------------------------ ------------------------
Total earning assets.................. 2,063,354 32,711 6.29 2,397,617 44,961 7.44
----------- -----------
Valuation allowances........................ (8,951) (37,096)
Cash and due from banks..................... 31,339 27,584
Other assets................................ 100,147 102,228
------------- -------------
Total assets.......................... $ 2,185,889 $ 2,490,333
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 86,498 81 0.37 $ 78,403 120 0.61
Money market demand accounts.............. 461,352 2,179 1.87 374,677 4,944 5.24
Passbook.................................. 89,138 228 1.01 89,689 442 1.96
Certificates of deposit................... 730,598 8,506 4.62 849,044 13,662 6.38
------------------------ ------------------------
Total interest-bearing deposits.............. 1,367,586 10,994 3.19 1,391,813 19,168 5.46
Advances and other borrowings................ 553,464 7,672 5.50 858,915 13,329 6.16
Advances from borrowers for taxes and
insurance.................................. 9,014 5 0.22 9,305 6 0.26
----------------------- ------------------------
Total interest-bearing liabilities 1,930,064 18,671 3.84 2,260,033 32,503 5.71
----------- -----------
Non interest-bearing deposits................ 74,476 78,156
Other liabilities............................ 16,540 17,121
Shareholders' equity......................... 164,809 135,023
------------- -------------
Total liabilities and shareholders' equity... $ 2,185,889 $ 2,490,333
============= =============
Net interest income.......................... $ 14,040 $ 12,458
=========== ===========
Net yield on interest-earning assets......... 2.70% 2.06 %
Interest rate spread......................... 2.45 1.73
Ratio of earning assets to interest-bearing
liabilities................................ 106.91 106.09
21
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:
Three months ended
December 31,
2001 2000
------------------ -------------------
(Dollars in thousands)
Beginning balance...................................... $ 11,686 $ 10,404
Provision for loan losses.............................. 911 603
Charge-offs............................................ (237) (205)
Recoveries............................................. 22 10
------------------ -------------------
Ending balance......................................... $ 12,382 $ 10,812
================== ===================
Ratio of allowance for loan losses to gross loans
receivable at the end of the period................ 0.91% 0.78%
Ratio of allowance for loan losses to total non-
performing loans at the end of the period.......... 119.62% 75.18%
Ratio of net charge-offs to average gross loans
(annualized)...................................... 0.07% 0.06%
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through a
provision for loan losses. The allowance is based upon past loan loss experience
and other factors, which in management's judgement, deserve current recognition
in estimating loan losses. The evaluation includes a review of all loans on
which full collectibility may not be reasonably assured. Such other factors
considered by management include the size and character of the loan portfolio,
concentrations of loans to specific borrowers or industries, existing economic
conditions and historical losses on each portfolio category. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties which collateralize loans.
With respect to loans that are deemed impaired, the calculation of allowance for
loan losses is based upon the discounted present value of expected cash flows
received from the debtor or other measures of market prices or collateral
values.
In general, the level of the allowance for loan losses and changes during each
fiscal year is a function of several factors, including but not limited to
changes in the loan portfolio, net charge-offs and non-performing loans. At
December 31, 2001, gross loans receivable were $1.37 billion compared to $1.39
billion at December 31, 2000. Net charge-offs for the three month period ended
December 31, 2001 were $215,000 compared to $195,000 for the three month period
ended December 31, 2000. Non-performing loans decreased to $9.9 million or 0.73%
of gross loans at December 31, 2001 compared to $10.3 million or 0.77% of gross
loans at September 30, 2001. For the three month period ended December 31, 2001,
the provision for loan losses was $911,000 compared to $603,000 for the same
period in the prior year.
Management believes that the allowance for loan losses at December 31, 2001 is
adequate to absorb probable losses inherent in the portfolio. Management
believes it uses the best information available to make such determinations. If
circumstances differ substantially from the assumptions used in making
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States of America,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting the borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary should the quality of any loans deteriorate as a result of
factors discussed herein.
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
OTHER OPERATING INCOME. Other operating income increased by $3.2 million to $7.4
million for the three month period ended December 31, 2001, compared to the same
period in the prior year. The following table shows the percentage of other
operating income to average assets for each period:
Three months ended
December 31,
2001 2000
----------------- ----------------
(Dollars in thousands)
Other operating income................................... $ 7,390 $ 4,158
Percent of average assets (annualized)................... 1.34% 0.66%
The increase for the three month period ended December 31, 2001 was due
primarily to increases in gains on the sale of loans and increases in
loan-related fees. Gains on the sale of mortgage loans increased to $3.2 million
for the three month period ended December 31, 2001 compared to gains of $613,000
for the same period in the prior year. The Company's volume of mortgage loan
sales were $221.4 million for the three month period ended December 31, 2001,
compared to $46.4 million for the same period in the prior year. The level of
loan sale activity is highly dependent on the interest rate environment and on
the types of mortgage loans originated. In the recent low interest rate
environment, customers are more likely to select or refinance into fixed-rate
mortgages, which the Company then generally sells in the secondary market. The
increase in other loan-related fees included higher levels of a variety of fees
including prepayment penalties, loan modification fees and other loan
origination fees, which were also attributable to increased loan activity in the
recent low interest rate environment.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.7 million or 16.4% to $11.9 million for the three month period
ended December 31, 2001, compared to the same period in the prior year. The
following table shows the percentage of general and administrative expenses to
average assets for each period:
Three months ended
December 31,
2001 2000
----------------- ------------------
(Dollars in thousands)
General and administrative expenses...................... $ 11,943 $ 10,260
Percent of average assets (annualized)................... 2.17% 1.63%
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, higher benefit costs and normal merit pay increases at the
start of the Company's fiscal year. Including commissions and salaries, mortgage
loan related compensation increased by approximately $800,000 during the quarter
compared to the prior year. Increases in benefit costs in the current period are
the result of lower benefit costs during the three months ended December 31,
2000. The Company paid off its ESOP loan in June 2000 and reduced the retirement
benefit costs for the remainder of calendar year 2000. Normal retirement benefit
costs resumed on January 1, 2001. Pension and ESOP expenses were $474,000 during
the three month period ended December 31, 2001 compared with zero for the three
month period ended December 31, 2000. The prior year also included $308,000
related to goodwill amortization. This expense was eliminated with the Company's
adoption of Financial Accounting Standards No. 142 effective on October 1, 2001.
INCOME TAX EXPENSE. Income tax expense increased to $2.6 million for the three
month period ended December 31, 2001, compared to $1.4 million for the same
period in the prior year. The effective tax rate for the three month period
ended December 31, 2001 was 30.11% compared with 24.06% for the three month
period ended December 31, 2000. The increase in the effective tax rate is
primarily due to the increased amount of income and an increase in state taxes
of $260,000 during the three month period ended December 31, 2001. The income
tax credits received on the Company's affordable housing investments were
$652,000 for each of the three month periods ended December 31, 2000 and 2001.
23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
ASSET QUALITY
Total non-performing assets were $10.4 million, or 0.47% of total assets at
December 31, 2001, compared with $10.7 million, or 0.48% of total assets at
September 30, 2001. 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.
Non-performing assets are summarized as follows:
December 31, September 30,
2001 2001
----------------- -----------------
(Dollars in thousands)
Non-performing loans.............................. $ 9,920 $ 10,262
Foreclosed properties............................. 431 401
----------------- -----------------
Non-performing assets............................. $ 10,351 $ 10,663
================= =================
Non-performing loans to gross loans............... 0.73% 0.77%
Non-performing assets to total assets............. 0.47% 0.48%
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. The Company's largest non-performing credit at
December 31, 2001 is a $3.1 million commercial credit, which had been reduced by
$2.0 million in payments received during the quarter. The loan was restructured
during the quarter with the Company receiving a new secured term loan (as a
participant bank), the aforementioned cash payments and unregistered shares of
the borrower's common stock. No additional charge-off or provision was required
during the quarter in connection with the loan restructuring.
Impaired loans totaled $8.7 million at December 31, 2001 compared to $7.8
million at September 30, 2001. These loans had associated impairment reserves of
$1.5 million and $1.3 million at December 31, 2001 and September 30, 2001,
respectively. For the three month period ended December 31, 2001, the average
balance of impaired loans was $9.0 million compared to $11.0 million for the
year ended September 30, 2001. Interest income on impaired loans for the three
month periods ended December 31, 2001 and 2000 was $25,000 and $30,000,
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 attempts to control this risk through pricing of assets and
liabilities and maintaining specific levels of maturities. Generally, the
Company is subject to decreases in the net interest margin in rising rate
environments and increases in the net interest margin in falling interest rate
environments. The Company may utilize the following strategies to mitigate its
interest rate risk, which is generally assumed to be adverse in a rising rate
environment: (i) the Company seeks to originate and hold a variety of ARMs or
other mortgage loans with short- to medium-term average lives and invests in
primarily mortgage-backed and related securities with short- to medium-term
average lives; (ii) the Company seeks to lengthen the maturities of deposits
when deemed cost effective through the pricing and promotion of certificates of
deposit with terms of one to five years, and periodically utilizes deposit
marketing programs offering maturity and repricing terms structured to
complement the repricing and maturity characteristics of the existing
asset/liability mix; (iii) the Company has utilized short term and long term
borrowings, principally secured from the FHLB, as well as, brokered certificates
of deposits with risk characteristics that are similar to the Company's assets;
and (iv) the Company may use off-balance sheet instruments such as interest rate
swaps to hedge the Company's interest rate risk on selected assets or
liabilities.
At December 31, 2001, the Company's estimated cumulative one-year gap between
assets and liabilities was a positive 3.53% of total assets. A positive gap
occurs when a greater dollar amount of interest-earning assets are repricing or
maturing than interest-bearing liabilities. The Company's three-year cumulative
gap as of December 31, 2001 was a negative 8.41% 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 change in the Company's
gap position is due to the decline in interest rates during fiscal 2001 and
2002. As interest rates declined, the terms of the Company's assets shortened
and the terms of the liabilities lengthened. The shortening of assets is
24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
primarily due to the shortening of prepayments on the Company's mortgage-related
assets. The lengthening of the liabilities is due to both renewals of brokered
certificates of deposit and to a lesser extent retail deposits, at longer terms
and to the lengthening of the repricing characteristics of the Company's fixed
rate puttable FHLB advances.
With a positive gap position, during periods of rising interest rates it is
expected that the yield of the Company's interest-earning assets will rise more
quickly than the cost on its interest-bearing liabilities, which will have a
positive 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.
The Company's interest rate risk position, as defined by gap, is dynamic as
interest rates change. While static gap analysis may be a useful measure of
determining short-term risk to future net income under certain circumstances, it
does not measure the sensitivity of the market value of assets and liabilities
to changes in interest rates. For example, gap analysis is limited in its
ability to predict trends in future earnings and makes no assumptions about
changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the market
interest rate environment. In the event market interest rates increase
significantly from the current rates at December 31, 2001, the Company expects
that its one-year positive gap would become negative due to the anticipated
shortening of the term of FHLB puttable advances and to a lesser extent, the
lengthening of the term of mortgage-related assets assuming prepayments slow.
25
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 December 31,
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......................... $ 23,375 $ 82,986 $ 68,212 $ 19,106 $ 50,311 $ 243,990
Commercial.......................... 136,422 123,619 226,936 59,433 116,214 662,624
Consumer............................ 176,169 20,233 38,633 71,752 22,579 329,366
Mortgage-backed and related securities... 15,941 25,303 29,576 9,315 5,665 85,800
Assets available for sale:
Mortgage loans...................... 57,594 - - - - 57,594
Fixed rate mortgage related......... 271,530 - - - - 271,530
Variable rate mortgage related...... 57,333 93,979 101,938 34,853 31,069 319,172
Investment securities............... 22,881 1,028 - - - 23,909
Other assets............................. 64,380 - - - - 64,380
----------------------------------------------------------------------------------
Total............................... $ 825,625 $ 347,148 $ 465,295 $ 194,459 $ 225,838 $2,058,365
==================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts........................ $ 7,681 $ 23,042 $ 34,375 $ 15,431 $ 11,348 $ 91,877
Passbook savings accounts........... 3,261 9,782 18,345 12,278 42,406 86,072
Money market deposit accounts....... 106,710 318,473 2,950 1,062 597 429,792
Certificates of deposit............. 174,694 290,648 190,280 19,697 58,383 733,702
Borrowings (4)........................... 76,263 24,680 481,978 3,155 - 586,076
Impact of interest rate swaps............ 60,000 - - - (60,000) -
----------------------------------------------------------------------------------
Total............................... $ 428,609 $ 666,625 $ 727,928 $ 51,623 $ 52,734 $1,927,519
==================================================================================
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities.............. $ 397,016 $(319,477) $(262,633) $ 142,836 $ 173,104 $ 130,846
=================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities.............. $ 397,016 $ 77,539 $(185,094) $ (42,258) $ 130,846
====================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets.................. 18.05% 3.53% (8.41%) (1.92%) 5.95%
====================================================================
--------------------------------------------------------------------------------
(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 $73.2 million at December 31,
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 $61.3 million or 2.8% 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.
Borrowings includes fixed rate puttable FHLB advances of $420 million
maturing in one to three years.
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
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 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.
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 $40.9 million and
$38.1 million as of December 31, 2001 and September 30, 2001, 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 December 31, 2001, the Company had
additional borrowing capacity of $257.1 million available from the FHLB.
In fiscal 2001 the Company continued to reduce the size of its mortgage-backed
securities and investment securities portfolios as part of a strategy to
decrease the proportion of earnings from that segment of its balance sheet. The
reduction was primarily accomplished through the repayment of principal,
scheduled maturities and the sale of available-for-sale securities. Funds
generated from the repayment of principal, maturities and sales from the
mortgage-backed securities and investment securities portfolios were used to
grow and diversify the Company's loan portfolio, to reduce the Company's
wholesale debt and as an additional source of liquidity. Management anticipates
that this form of "balance sheet restructuring" will be an ongoing strategic
initiative of the Company in fiscal 2002.
The Company is in the midst of a share repurchase program where it may purchase
up to 460,000 shares, or approximately five percent, of its common stock in the
open market. As of December 31, 2001, the Company had purchased 70,300 shares
under the current authorization at an average price of $20.78 per share. The
Company may purchase an additional 389,700 shares under the current
authorization. The Company's share repurchase program is funded through
dividends received from the Bank and the Company's line of credit. Due to the
Company's access to liquidity, shares repurchased have a minimal effect on the
Company's liquidity.
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.
27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
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 December 31, 2001:
Tangible capital.............. $ 176,767 8.09% => $ 87,428 =>4.0% => $109,286 => 5.0%
Core capital ................. 176,767 8.09% => 87,428 =>4.0% => 109,286 => 5.0%
Tier 1 risk-based capital..... 176,767 11.28% => 62,677 =>4.0% => 94,015 => 6.0%
Risk-based capital............ 188,710 12.04% => 125,354 =>8.0% => 156,692 => 10.0%
As of September 30, 2001:
Tangible capital.............. $ 178,436 8.14% => $ 87,666 =>4.0% => $109,582 => 5.0%
Core capital ................. 178,436 8.14% => 87,666 =>4.0% => 109,582 => 5.0%
Tier 1 risk-based capital..... 178,436 12.61% => 56,586 =>4.0% => 84,879 => 6.0%
Risk-based capital............ 189,656 13.41% => 113,172 =>8.0% => 141,465 => 10.0%
The capital of the Company and the Bank exceed all regulatory capital
requirements.
28
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
December 31, 2001.
More than More than More than More than
Within One Year Two Years Three Years Four Years
One Year to Two Years to Three Years To Four Years to Five Years
---------------- ------------------ ----------------- ------------------- ----------------
Interest earning assets (Dollars in millions)
Loans:
Residential....... $ 1.3 9.40% $ 1.1 7.99% $ 3.4 7.54% $ 0.2 7.70% $ 23.0 6.79%
Commercial........ 92.8 5.13% 37.3 6.65% 51.6 7.25% 35.5 6.29% 94.4 7.72%
Consumer.......... 29.6 5.64% 39.3 5.84% 101.3 6.01% 105.6 6.41% 21.4 8.51%
Mortgage-backed
securities:
Fixed rate........ 192.5 5.94% 65.8 5.94% 65.7 5.94% 22.1 5.94% 22.1 5.94%
Adjustable rate... 54.3 2.87% 46.2 2.87% 35.3 2.87% 32.6 2.87% 29.9 2.87%
Debt and equity
securities.......... 23.9 5.91% - - - - - - - -
Other................. 64.4 5.75% - - - - - - - -
Total interest --------- --------- ---------- ---------- -------
earning assets...... $ 458.8 5.37% $189.7 5.32% $ 257.3 5.83% $ 196.0 5.75% $190.8 6.73%
========= ========= ========== ========== =======
Interest bearing liabilities
Deposits:
NOW accounts...... $ 30.7 0.50% $ 17.2 0.50% $ 17.2 0.50% $ 7.7 0.50% $ 7.7 0.50%
Passbooks......... 13.0 0.75% 9.2 0.75% 9.2 0.75% 6.2 0.75% 6.1 0.75%
Money market...... 425.2 2.95% 1.5 2.95% 1.5 2.95% 0.5 2.95% 0.5 2.95%
Certificates...... 465.2 4.68% 140.9 4.51% 49.4 4.51% 17.0 5.23% 2.7 5.26%
Borrowings
Fixed rate........ 26.2 4.85% 250.7 5.47% 181.2 5.65% 53.2 6.15% - -
Adjustable rate... 74.7 1.90% - - - - - - - -
Total interest ---------- ---------- ---------- ---------- --------
bearing
liabilities........... $1,035.0 3.60% $419.5 4.83% $258.5 4.90% $ 84.6 5.04% $ 17.0 1.41%
========== ========== ========== ========== ========
Fair
Over Market
Five Years Total Value
--------------- ------------------------------
Interest earning assets
Loans:
Residential....... $ 272.5 7.22% $ 301.5 7.20% $ 303.8
Commercial........ 351.1 7.50% 662.7 7.07% 667.6
Consumer.......... 32.2 9.30% 329.4 6.57% 334.3
Mortgage-backed
securities:
Fixed rate........ 36.7 5.94% 404.9 5.94% 406.1
Adjustable rate... 73.3 2.87% 271.6 2.87% 271.5
Debt and equity
securities.......... - - 23.9 5.91% 23.9
Other................. - - 64.4 5.75% 64.4
Total interest --------- --------- ---------
earning assets...... $ 765.8 6.96% $2,058.4 6.18% $2,071.6
========= ========= =========
Interest bearing liabilities
Deposits:
NOW accounts...... $ 11.4 0.50% $ 91.9 0.50% $ 83.8
Passbooks......... 42.4 0.75% 86.1 0.75% 64.5
Money market...... 0.6 2.95% 429.8 2.95% 429.8
Certificates...... 58.5 6.08% 733.7 4.76% 741.6
Borrowings
Fixed rate........ - - 511.3 5.57% 540.5
Adjustable rate... - - 74.7 1.90% 74.7
Total interest bearing -------- --------- ---------
liabilities........ $ 112.9 3.50% $1,927.5 4.08% $1,934.9
======== ========= =========
29
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
The Annual Meeting of Shareholders was held on January 23, 2002.
Only shareholders of record at the close of business on November
30, 2001 (the "Voting Record Date") were entitled to vote at the
Annual Meeting. On the Voting Record Date, there were 9,175,744
shares of common stock outstanding, and 8,177,221 shares present
at the meeting by the holders thereof in person or by proxy, which
constituted a quorum. The following is a summary of the matters
voted upon at the Annual Meeting.
NUMBER OF VOTES
--------------------------------------------------------------
BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--- -------- ----------- ---------
NOMINEES FOR DIRECTOR FOR THREE-YEAR
TERM EXPIRING IN 2005:
David J. Drury 8,134,971 42,250 - -
Gerald A. Kiefer 8,135,271 41,950 - -
Thomas R. Perz 7,682,335 494,886 - -
RATIFICATION OF APPOINTMENT OF
KPMG LLP AS AUDITORS 8,119,315 30,168 27,738 -
ITEM 5. OTHER INFORMATION
On January 18, 2002, the Company announced the declaration of a
dividend of $0.15 per share on the Company's common stock for the
quarter ended December 31, 2001. The dividend is payable on
February 20, 2002 to shareholders of record as of February 11,
2002. This will be the 26th 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.
30
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: February 14, 2002 By: /s/ Jon D. Sorenson
------------------- --------------------------
Jon D. Sorenson
Chief Financial Officer
31