UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 | |
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,350,873 at July 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 ....................................... 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ...... 32
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................... 32
ITEM 2. Changes In Securities and Use of Proceeds ....................... 32
ITEM 3. Defaults Upon Senior Securities ................................. 32
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 32
ITEM 5. Other Information ............................................... 32
ITEM 6. Exhibits and Reports on Form 8-K ................................ 32
SIGNATURES ............................................................... 34
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
--------------------------------------------------------------------------------
June 30, September 30,
2002 2001
----------- -------------
(In thousands, except share data)
ASSETS
Cash and due from banks ................................................. $ 44,601 $ 37,989
Federal funds sold and overnight deposits ............................... 459 111
----------- -----------
Cash and cash equivalents ............................................... 45,060 38,100
----------- -----------
Securities available for sale, at fair value:
Debt and equity securities ......................................... 55,742 41,661
Mortgage-backed and related securities ............................. 571,854 616,969
Mortgage loans held for sale, at lower of cost or market ................ 32,482 18,974
Securities held to maturity, at amortized cost:
Mortgage-backed and related securities (fair values of $105,482
and $96,237, respectively) ......................................... 104,127 95,384
Loans receivable, net ................................................... 1,264,642 1,237,900
Federal Home Loan Bank stock, at cost ................................... 64,974 62,691
Accrued interest receivable ............................................. 10,491 11,115
Foreclosed properties ................................................... 1,865 401
Real estate held for investment ......................................... 31,838 26,255
Premises and equipment, net ............................................. 29,501 29,128
Goodwill ................................................................ 13,351 13,351
Other assets ............................................................ 19,711 14,337
----------- -----------
Total assets ............................................................ $ 2,245,638 $ 2,206,266
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ................................................................ $ 1,396,919 $ 1,449,320
Short term borrowings ................................................... 564,478 497,152
Long term borrowings .................................................... 88,325 74,281
Advances from borrowers for taxes and insurance ......................... 6,919 10,350
Accrued interest payable and other liabilities .......................... 14,350 14,688
----------- -----------
Total liabilities ....................................................... 2,070,991 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, 9,342,353 and 9,208,244 shares, respectively .......... 146 146
Additional paid-in-capital .............................................. 89,309 88,826
Accumulated other comprehensive income .................................. 1,816 1,137
Treasury stock at cost (5,236,887 and 5,370,996 shares, respectively) ... (72,633) (74,264)
Retained earnings, substantially restricted ............................. 156,009 144,630
----------- -----------
Total shareholders' equity .............................................. 174,647 160,475
----------- -----------
Total liabilities and shareholders' equity .............................. $ 2,245,638 $ 2,206,266
=========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
--------------------------------------------------------------------------------
Nine months ended Three Months Ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
------- --------- -------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans ........................................................... $66,327 $ 79,234 $ 21,524 $ 25,217
Mortgage-backed and related securities .......................... 23,075 37,274 7,565 11,055
Debt and equity securities ...................................... 1,365 6,866 734 1,093
Federal funds sold and overnight deposits ....................... 38 143 3 71
Federal Home Loan Bank stock .................................... 2,518 1,690 810 521
Trading account securities ...................................... -- 8 -- --
------- --------- -------- --------
Total interest and dividend income .................................... 93,323 125,215 30,636 37,957
------- --------- -------- --------
INTEREST EXPENSE:
Deposits ........................................................ 28,465 53,110 8,309 15,577
Advances and other borrowings ................................... 23,189 33,021 7,940 8,691
------- --------- -------- --------
Total interest expense ................................................ 51,654 86,131 16,249 24,268
------- --------- -------- --------
Net interest income before provision for loan losses .................. 41,669 39,084 14,387 13,689
Provision for loan losses ............................................. 2,733 4,619 913 3,310
------- --------- -------- --------
Net interest income ................................................... 38,936 34,465 13,474 10,379
------- --------- -------- --------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan-related fees ............................ 2,057 2,567 (51) 897
Depository fees and service charges ............................. 4,155 3,905 1,383 1,320
Securities gains ................................................ 1,056 751 322 275
Gain on sales of loans .......................................... 7,550 3,742 2,273 1,642
Insurance, annuity and brokerage commissions .................... 1,208 930 397 329
Gain (loss) on foreclosed properties ............................ 53 (16) 28 (6)
Income from real estate held for investment ..................... 2,331 2,259 782 753
Other income .................................................... 618 1,265 151 689
------- --------- -------- --------
Total other operating income, net ..................................... 19,028 15,403 5,285 5,899
------- --------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits ........................ 20,222 16,327 6,528 5,938
Occupancy expenses, including depreciation ...................... 3,658 3,530 1,260 1,117
Furniture and equipment, including depreciation ................. 2,926 3,174 976 1,024
Real estate held for investment expenses ........................ 2,255 2,329 702 800
Goodwill amortization ........................................... -- 925 -- 309
Other general and administrative expenses ....................... 6,761 6,573 2,446 2,253
------- --------- -------- --------
Total general and administrative expenses ............................. 35,822 32,858 11,912 11,441
------- --------- -------- --------
Income before income tax expense and cumulative effect of
change in accounting principle .................................... 22,142 17,010 6,847 4,837
Income tax expense .................................................... 6,157 4,410 1,783 1,365
------- --------- -------- --------
Income before cumulative effect of change in accounting
principle ......................................................... $15,985 $ 12,600 $ 5,064 $ 3,472
Cumulative effect of a change in accounting for derivative
instruments and hedging activities (net of income taxes of $55) ... -- (84) -- --
------- --------- -------- --------
Net income ............................................................ $15,985 $ 12,516 $ 5,064 $ 3,472
======= ========= ======== ========
Basic earnings per share:
Before cumulative effect of change in accounting principle ........ $ 1.73 $ 1.34 $ 0.55 $ 0.37
Cumulative effect of change in accounting principle ............... -- (0.01) -- --
------- --------- -------- --------
$ 1.73 $ 1.33 $ 0.55 $ 0.37
======= ========= ======== ========
Diluted earnings per share:
Before cumulative effect of change in accounting principle ........ $ 1.65 $ 1.31 $ 0.52 $ 0.36
Cumulative effect of change in accounting principle ............... -- (0.01) -- --
------- --------- -------- --------
$ 1.65 $ 1.30 $ 0.52 $ 0.36
======= ========= ======== ========
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)
Nine months ended June 30, 2001
Balance at September 30, 2000 ............ 9,437,197 $ 146 $88,799 $ 130,399 $(18,923) $(69,498) $ 130,923
Net income ............................... -- -- -- 12,516 -- -- 12,516
Change in unrealized loss on securities
available for sale .................. -- -- -- -- 25,719 -- 25,719
Reclassification adjustment for gains
realized in net income .............. -- -- -- -- (751) -- (751)
Income taxes ............................. -- -- -- -- (9,651) -- (9,651)
---------
Comprehensive income ..................... 27,833
Cash dividend - $0.30 per share .......... -- -- -- (2,821) -- -- (2,821)
Purchase of treasury stock ............... (113,776) -- -- -- -- (2,121) (2,121)
Exercise of stock options, net ........... 16,000 31 217 248
---------- ----- ------- --------- -------- -------- ---------
Balance at June 30, 2001 ................. 9,339,421 $ 146 $88,799 $ 140,125 $ (3,606) $(71,402) $ 154,062
========== ===== ======= ========= ======== ======== =========
Nine months ended June 30, 2002
Balance at September 30, 2001 ............ 9,208,244 $ 146 $88,826 $ 144,630 $ 1,137 $(74,264) $ 160,475
Net income ............................... -- -- -- 15,985 -- -- 15,985
Change in unrealized gain on securities
available for sale .................. -- -- -- -- 2,018 -- 2,018
Reclassification adjustment for gains
realized in net income .............. -- -- -- -- (1,056) -- (1,056)
Income taxes ............................. -- -- -- -- (283) -- (283)
---------
Comprehensive income ..................... 16,664
Cash dividend - $0.45 per share .......... -- -- -- (4,156) -- -- (4,156)
Purchase of treasury stock ............... (32,479) -- -- -- -- (679) (679)
Exercise of stock options, net ........... 166,588 -- 483 (450) -- 2,310 2,343
---------- ----- ------- --------- -------- -------- ---------
Balance at June 30, 2002 ................. 9,342,353 $ 146 $89,309 $ 156,009 $ 1,816 $(72,633) $ 174,647
========== ===== ======= ========= ======== ======== =========
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
--------------------------------------------------------------------------------
Nine months ended
June 30,
------------------------
2002 2001
--------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................. $ 15,985 $ 12,516
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ...................................................... 2,733 4,619
Depreciation, accretion and amortization ....................................... 6,393 5,724
Deferred income taxes .......................................................... (663) (5,932)
Securities gains ............................................................... (1,056) (751)
Impairment write-down on mortgage servicing assets ............................. 900 --
Originations of loans held for sale ............................................ (556,399) (320,209)
Proceeds from sales of loans held for sale ..................................... 550,441 304,988
Gain on sale of loans .......................................................... (7,550) (3,742)
Stock dividends received on Federal Home Loan Bank stock ....................... (2,283) (1,752)
Other, net ..................................................................... (11,122) (7,142)
--------- ---------
Net cash used in operating activities .................................................. (2,621) (11,701)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed and related securities held to maturity .............. (58,684) (72,533)
Principal repayments on mortgage-backed and related securities held to maturity ... 49,941 6,788
Purchases of mortgage-backed and related securities available for sale ............ (238,144) --
Proceeds from sales of mortgage-backed securities available for sale .............. 85,517 59,451
Principal repayments on mortgage-backed securities available for sale ............. 198,560 80,923
Purchases of debt and equity securities available for sale ........................ (61,264) (261)
Proceeds from sales of debt and equity securities available for sale .............. 12,321 30,663
Proceeds from maturities of debt and equity securities available for sale ......... 35,006 143,232
Purchase of loans ................................................................. (232,599) (137,518)
Decrease in loans, net of loans held for sale ..................................... 205,857 193,313
Increase in real estate held for investment ....................................... (6,583) (93)
Purchases of premises and equipment, net .......................................... (2,860) (1,036)
--------- ---------
Net cash provided by (used in) investing activities .................................... (12,932) 302,929
--------- ---------
See accompanying Notes to Unaudited Consolidated Financial Statements
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
(Unaudited)
--------------------------------------------------------------------------------
Nine months ended
June 30,
------------------------
2002 2001
--------- ---------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits .......................................................... (52,934) (1,510)
Proceeds from advances and other borrowings ....................................... 172,062 562,096
Repayments on advances and other borrowings ....................................... (151,337) (627,823)
Increase (decrease) in securities sold under agreements to repurchase ............. 60,645 (203,962)
Decrease in advances from borrowers for taxes and insurance ....................... (3,431) (2,937)
Dividends paid .................................................................... (4,156) (2,821)
Stock option transactions ......................................................... 2,343 248
Purchase of treasury stock ........................................................ (679) (2,121)
--------- ---------
Net cash provided by (used in) financing activities .................................... 22,513 (278,830)
--------- ---------
Increase in cash and cash equivalents .................................................. 6,960 12,398
Cash and cash equivalents:
Beginning of period ............................................................ 38,100 34,747
--------- ---------
End of period .................................................................. $ 45,060 $ 47,145
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................................................... $ 53,262 $ 86,880
Income taxes ................................................................... 8,513 14,612
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans secured as mortgage-backed securities ........................... $ -- $ 1,432
Transfer from loans to foreclosed properties ................................... 1,559 372
Transfer of mortgage loans to mortgage loans held for sale ..................... 75,750 62,579
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 nine and three month periods ended June 30, 2002
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)
June 30, September 30,
2002 2001
-------- -------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans ................................ $ 13,714 $ 19,375
Variable-rate loans ............................. 28,602 29,157
Fixed/variable-rate loans at borrower option .... 6,975 --
Mortgage loans sold with recourse ................... 13,060 15,090
Guarantees under IRB issues ......................... 38,017 38,080
Interest rate swap agreements (notional amount) ..... 20,000 80,000
Unused and open-ended lines of credit:
Consumer ......................................... 269,300 232,046
Commercial ....................................... 60,767 24,423
Commitments to fund equity investments ............... -- 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 June 30, 2002 have interest rates ranging from 5.88% to
9.38%. Because some commitments expire without being drawn upon, the total
commitment amounts do not necessarily represent cash requirements. The
Company evaluates the creditworthiness of each customer on a case-by-case
basis. The
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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 June 30, 2002, 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 June 30, 2002, the Company had $20 million in fixed
receive-floating pay agreements with a maturity date of 2009 and a call
date of July 2002. The agreements have fixed interest rates of 6.00% and
variable interest rates ranging from 1.789% to 1.88%. The $20 million in
fixed receive-floating pay agreements were called in July 2002.
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 June
30, 2002 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 .................... $ 55,003 $ 237 $ -- $ 55,240
Marketable equity securities .................... 502 -- -- 502
-------- ------ ------- --------
TOTAL DEBT AND EQUITY SECURITIES ................ $ 55,505 $ 237 $ -- $ 55,742
======== ====== ======= ========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FNMA .......................................... $ 35,836 $ -- $ (120) $ 35,716
Private issue ................................. 13,519 -- (520) 12,999
REMICs:
FHLMC ......................................... 72,775 607 (544) 72,838
FNMA .......................................... 13,715 140 -- 13,855
Private issue ................................. 433,312 3,585 (487) 436,410
CMO residual .................................... 36 -- -- 36
-------- ------ ------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................. $569,193 $4,332 $(1,671) $571,854
======== ====== ======= ========
SECURITIES HELD TO MATURITY
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
GNMA .......................................... $ 8,295 $ 254 $ -- $ 8,549
REMICs:
FNMA .......................................... 18,259 328 -- 18,587
FHASI ......................................... 8,253 -- -- 8,253
Private issue ................................. 69,320 778 (5) 70,093
-------- ------ ------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................. $104,127 $1,360 $ (5) $105,482
======== ====== ======= ========
During the nine month periods ended June 30, 2002 and 2001, gross proceeds
from the sale of securities available for sale totaled approximately $97.8
million and $90.1 million, respectively. The gross realized gains on such
sales totaled approximately $1.0 million and $593,000 for the nine month
periods ended June 30, 2002 and 2001, respectively. The gross realized
losses on such sales totaled approximately $50,000 for both of the nine
month periods ended June 30, 2002 and 2001, respectively.
During the three month periods ended June 30, 2002 and 2001, gross
proceeds from the sale of securities available for sale totaled
approximately $53.9 million and $48.3 million, respectively. The gross
realized gains on such sales totaled approximately $312,000 and $226,000
for the three month periods ended June 30, 2002 and 2001, respectively.
The gross realized losses on such sales totaled approximately $48,000 and
$1,000 for the three month periods ended June 30, 2002 and 2001,
respectively.
At June 30, 2002, $478.9 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:
June 30, September 30,
2002 2001
---------- -------------
(In thousands)
First mortgage - one- to four-family ........ $ 238,829 $ 298,617
First mortgage - residential construction ... 72,716 68,936
First mortgage - multi-family ............... 153,413 126,338
Commercial real estate ...................... 399,722 362,329
Home equity ................................. 259,490 221,559
Commercial .................................. 146,747 140,826
Consumer secured by real estate ............. 60,649 71,325
Interim financing and consumer loans ........ 24,814 18,027
Indirect auto ............................... 7,497 15,632
Education ................................... 378 3,253
---------- ----------
Total gross loans ....................... 1,364,255 1,326,842
---------- ----------
Less:
Loans in process ........................ 52,075 57,153
Unearned insurance premiums ............. 95 136
Deferred loan and guarantee fees ........ 617 445
Purchased loan discount ................. 439 548
Allowance for loan losses ............... 13,905 11,686
---------- ----------
Total deductions ........................ 67,131 69,968
---------- ----------
Total loans receivable ...................... 1,297,124 1,256,874
Less: First mortgage loans held for sale ... 32,482 18,974
---------- ----------
Loans receivable, net ....................... $1,264,642 $1,237,900
========== ==========
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Nine months ended Three months ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Beginning balance .......... $ 11,686 $ 10,404 $ 13,135 $ 11,379
Charge-offs:
Real estate - mortgage ... (23) (27) -- --
Commercial loans ......... (137) (3,638) (27) (3,514)
Home equity loans ........ (2) (95) -- (25)
Consumer ................. (454) (264) (122) (129)
-------- -------- -------- --------
Total charge-offs .......... (616) (4,024) (149) (3,668)
-------- -------- -------- --------
Recoveries:
Real estate - mortgage ... 18 -- -- --
Commercial loans ......... 64 10 -- 2
Home equity loans ........ 2 12 1 12
Consumer ................. 18 25 5 11
-------- -------- -------- --------
Total recoveries ........... 102 47 6 25
-------- -------- -------- --------
Net charge-offs ............ (514) (3,977) (143) (3,643)
-------- -------- -------- --------
Provision .................. 2,733 4,619 913 3,310
-------- -------- -------- --------
Ending balance ............. $ 13,905 $ 11,046 $ 13,905 $ 11,046
======== ======== ======== ========
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(7) Earnings Per Share
Basic earnings per share of common stock for the nine and three month
periods ended June 30, 2002 and 2001, have been determined by dividing net
income for the period by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share of common
stock for the nine and three month periods ended June 30, 2002 and 2001,
have been determined by dividing net income for the period by the weighted
average number of shares of common stock outstanding during the period
adjusted for the dilutive effect of outstanding stock options. Book value
per share of common stock at June 30, 2002 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.
The computation of earnings per common share is as follows:
Nine months ended Three months ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ------------ ----------- -----------
Income before cumulative effect of change in
accounting principle ........................................ $15,985,000 $ 12,600,000 $ 5,064,000 $ 3,472,000
Cumulative effect of change in accounting principle ............. -- (84,000) -- --
----------- ------------ ----------- -----------
Net income for the period ....................................... $15,985,000 $ 12,516,000 $ 5,064,000 $ 3,472,000
=========== ============ =========== ===========
Common shares issued ............................................ 14,579,240 14,579,240 14,579,240 14,579,240
Weighted average treasury shares ................................ 5,346,185 5,178,408 5,288,235 5,192,235
----------- ------------ ----------- -----------
Weighted average common shares
outstanding during the period ............................... 9,233,055 9,400,832 9,291,005 9,387,005
Effect of dilutive stock options outstanding .................... 471,361 205,427 494,802 372,259
----------- ------------ ----------- -----------
Diluted weighted average common shares
outstanding during the period ............................... 9,704,416 9,606,259 9,785,807 9,759,264
=========== ============ =========== ===========
Basic earnings per share:
Before cumulative effect of change in accounting principle .. $ 1.73 $ 1.34 $ 0.55 $ 0.37
Cumulative effect of change in accounting principle ......... -- (0.01) -- --
----------- ------------ ----------- -----------
$ 1.73 $ 1.33 $ 0.55 $ 0.37
=========== ============ =========== ===========
Diluted earnings per share:
Before cumulative effect of change in accounting principle .. $ 1.65 $ 1.31 $ 0.52 $ 0.36
Cumulative effect of change in accounting principle ......... -- (0.01) -- --
----------- ------------ ----------- -----------
$ 1.65 $ 1.30 $ 0.52 $ 0.36
=========== ============ =========== ===========
The computation of book value per common share is as follows:
June 30, September 30,
2002 2001
------------ -------------
Common shares outstanding at the end of the period ... 9,342,353 9,208,244
Incremental shares relating to dilutive stock
options outstanding at the end of the period ..... 502,576 424,891
------------ ------------
9,844,929 9,633,135
============ ============
Total shareholders' equity at the end of the period .. $174,647,000 $160,475,000
Book value per common share .......................... $ 17.74 $ 16.66
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less than
the fair value of the underlying common stock as of the date of the option
grant, and the maximum term cannot exceed ten years. Stock options awarded
to directors may be exercised at any time or on a cumulative basis over
varying time periods, provided the optionee remains a director of the
Company. The stock options awarded to officers are exercisable on a
cumulative basis over varying time periods, depending on the individual
option grant terms, which may include provisions for acceleration of
vesting periods.
At June 30, 2002, 60,650 shares were reserved for future grants. Further
information concerning the options is as follows:
Nine months ended June 30,
----------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------
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 .............................. -- -- 10,000 21.75
Canceled ............................. (11,302) 17.03 (44,650) 18.48
Exercised ............................ (166,588) 12.32 (16,000) 15.59
--------- ------------- --------- -------------
Outstanding at end of period ......... 1,437,008 $16.12 1,649,498 $15.75
========= ============= ========= =============
Options exercisable .................. 954,998 $5.00 - 22.00 867,894 $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:
Nine months ended Three months ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
(In thousands)
Federal income tax expense at statutory rate of 35% .... $ 7,750 $ 5,954 $ 2,497 $ 1,742
State income taxes, net of Federal income tax benefit .. 624 74 182 10
Tax exempt interest .................................... (50) (70) (16) (21)
Acquisition intangible amortization .................... -- 171 -- 57
Affordable housing credits ............................. (1,956) (1,956) (652) (652)
Other, net ............................................. (211) 237 (228) 229
------- ------- ------- -------
$ 6,157 $ 4,410 $ 1,783 $ 1,365
======= ======= ======= =======
13
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 June 30, 2002, the Company had $20.0 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
$20.0 million at June 30, 2002 and were entered into to hedge interest
rates on fixed rate certificates of deposits. Fixed receive-floating pay
swaps will provide for a lower interest expense (or interest income) in a
falling rate environment while adding to interest expense in a rising rate
environment. During the nine month period ended June 30, 2002, the Company
recorded a net reduction of interest expense of $1.4 million as a result
of the Company's interest rate swap agreements compared with a net
reduction of $1.0 million for the nine month period ended June 30, 2001.
14
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 June
30, 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 affect the results
of operations or financial position of the Company.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing, or other exit
or disposal activity. SFAS No. 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. Adoption of this
standard is not expected to materially affect the results of operations or
financial position of the Company.
(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. Goodwill amortization is allocated to the
Retail Banking segment. 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.
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
--------- --------- -------- ----------- ----------
(In thousands)
NINE MONTHS ENDED JUNE 30, 2002
Net interest income ................... $ 11,193 $ 18,558 $ 7,187 $ (1,341) $ 35,597
Provision for loan losses ............. 1,134 1,476 123 -- 2,733
Other operating income ................ 6,258 812 6,485 1,056 14,611
General and administrative expenses ... 17,011 2,555 3,902 592 24,060
Income taxes (benefit) ................ (236) 5,225 3,297 (299) 7,987
--------- --------- -------- --------- ----------
Segment profit (loss) ................. $ (458) $ 10,114 $ 6,349 $ (578) $ 15,428
========= ========= ======== ========= ==========
Segment average assets ................ $ 338,481 $ 664,510 $276,696 $ 775,008 $2,054,695
========= ========= ======== ========= ==========
NINE MONTHS ENDED JUNE 30, 2001
Net interest income ................... $ 16,630 $ 11,071 $ 5,805 $ 2,623 $ 36,129
Provision for loan losses ............. 664 3,584 371 -- 4,619
Other operating income ................ 5,478 817 4,037 616 10,947
General and administrative expenses ... 16,087 2,179 3,072 745 22,083
Income taxes .......................... 1,587 2,556 1,902 739 6,784
--------- --------- -------- --------- ----------
Segment profit ........................ $ 3,769 $ 3,570 $ 4,498 $ 1,755 $ 13,591
========= ========= ======== ========= ==========
Segment average assets ................ $ 321,534 $ 597,942 $408,333 $ 974,703 $2,302,512
========= ========= ======== ========= ==========
THREE MONTHS ENDED JUNE 30, 2002
Net interest income ................... $ 3,821 $ 6,747 $ 2,389 $ (134) $ 12,823
Provision for loan losses ............. 378 492 43 -- 913
Other operating income ................ 2,022 195 1,258 322 3,796
General and administrative expenses ... 5,773 838 1,163 179 7,952
Income taxes (benefit) ................ (102) 1,845 787 9 2,539
--------- --------- -------- --------- ----------
Segment profit(loss) .................. $ (206) $ 3,767 $ 1,654 $ -- $ 5,215
========= ========= ======== ========= ==========
Segment average assets ................ $ 349,151 $ 689,680 $250,990 $ 787,850 $2,077,671
========= ========= ======== ========= ==========
THREE MONTHS ENDED JUNE 30, 2001
Net interest income ................... $ 4,864 $ 4,101 $ 2,144 $ 954 $ 12,064
Provision for loan losses ............. 221 2,961 127 -- 3,310
Other operating income ................ 1,892 231 1,617 275 4,015
General and administrative expenses ... 5,408 767 1,258 252 7,685
Income taxes .......................... 438 1,055 806 327 2,625
--------- --------- -------- --------- ----------
Segment profit ........................ $ 689 $ (451) $ 1,570 $ 651 $ 2,458
========= ========= ======== ========= ==========
Segment average assets ................ $ 322,620 $ 604,658 $372,429 $ 876,145 $2,175,852
========= ========= ======== ========= ==========
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Nine months ended June 30, Three months ended June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments ............................................. $ 50,208 $ 47,076 $ 16,619 $ 16,078
Unallocated transfer pricing credit (primarily on capital) ..... 7,244 5,492 1,841 2,368
Income from affordable housing subsidiary ...................... 2,331 2,259 782 753
Holding company interest expense ............................... (701) (1,855) (158) (504)
Elimination of intercompany interest income .................... (789) (1,132) (251) (581)
Other .......................................................... 2,405 2,647 839 1,474
----------- ----------- ----------- -----------
Consolidated total revenue ..................................... $ 60,697 $ 54,487 $ 19,672 $ 19,588
=========== =========== =========== ===========
PROFIT
Total for segments ............................................. $ 15,428 $ 13,591 $ 5,215 $ 2,458
Unallocated transfer pricing credit (primarily on capital) ..... 4,346 3,295 1,104 1,421
Unallocated administrative and centralized support costs (a) ... (4,231) (4,066) (1,366) (1,364)
Holding company net loss ....................................... (899) (1,543) (318) (432)
Elimination of intercompany interest income .................... (473) (679) (151) (349)
Affordable housing tax credits ................................. 1,956 1,956 652 652
Other .......................................................... (142) (38) (72) 1,086
----------- ----------- ----------- -----------
Consolidated net income ........................................ $ 15,985 $ 12,516 $ 5,064 $ 3,472
=========== =========== =========== ===========
AVERAGE ASSETS
Total for segments ............................................. $ 2,054,695 $ 2,302,512 $ 2,077,671 $ 2,175,852
Elimination of intercompany loans .............................. (14,692) (13,338) (16,184) (13,362)
Other assets not allocated ..................................... 155,664 113,618 166,658 132,254
----------- ----------- ----------- -----------
Consolidated average assets .................................... $ 2,195,667 $ 2,402,792 $ 2,228,145 $ 2,294,744
=========== =========== =========== ===========
----------
(a) After-tax effect of $7.1 million and $6.8 million of general and
administrative expenses for the nine month periods ended June 30,
2002 and 2001, respectively. After-tax effect of $2.3 million of
general and administrative expenses for each of the three month
periods ended June 30, 2002 and 2001, respectively.
(13) Goodwill and Intangible Assets - Adoption of SFAS No. 142
Effective October 1, 2001, the Company adopted Financial Accounting
Statement 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
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. 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.
Net income and earnings per share adjusted for the adoption of SFAS No.
142 is as follows:
Nine months ended Three months ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands, except per share data)
Net income, as reported ............................... $ 15,985 $ 12,516 $ 5,064 $ 3,472
Add back: Goodwill amortization, net of tax benefit ... -- 773 -- 258
---------- ---------- ---------- ----------
Adjusted net income ................................... $ 15,985 $ 13,289 $ 5,064 $ 3,730
========== ========== ========== ==========
BASIC EARNINGS PER SHARE:
Net income, as reported .......................... $ 1.73 $ 1.33 $ 0.55 $ 0.37
Goodwill amortization, net of tax benefit ........ -- 0.08 -- 0.03
---------- ---------- ---------- ----------
Adjusted net income .............................. $ 1.73 $ 1.41 $ 0.55 $ 0.40
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net income, as reported .......................... $ 1.65 $ 1.30 $ 0.52 $ 0.36
Goodwill amortization, net of tax benefit ........ -- 0.08 -- 0.03
---------- ---------- ---------- ----------
Adjusted net income .............................. $ 1.65 $ 1.38 $ 0.52 $ 0.39
========== ========== ========== ==========
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
In addition to goodwill, the Company's other intangible assets consist of
mortgage servicing rights which are included in other assets on the consolidated
balance sheet. Mortgage servicing rights are not subject to SFAS No. 142 but
rather, are amortized over their expected life and subject to periodic
impairment testing. The results for the nine and three month periods ended June
30, 2002 include a $900,000 charge related to an impairment write-down of the
Company's mortgage servicing rights. The write-down was the result of an
increase in forecasted prepayment speeds, which resulted primarily from the
current lower interest rate environment. At June 30, 2002 and September 30, 2001
the valuation reserve totaled $900,000 and zero, respectively. The Company's
mortgage servicing rights had total carrying and aggregate market values as
follows:
June 30, September 30,
2002 2001
-------- -------------
(In thousands)
Mortgage servicing rights, carrying value ... $7,457 $6,287
====== ======
Mortgage servicing rights, market value ..... $8,226 $6,963
====== ======
Amortization expense for the mortgage servicing rights asset are based on
assumptions made during each reporting period. Such assumptions include, but are
not limited to, the current level of interest rates and the forecast prepayment
speeds as estimated by major mortgage dealers. Actual amortization expense is
also affected by the amount of loans sold with servicing retained.
Actual amortization expense (exclusive of impairment charges) is as follows:
Nine months ended Three months ended
June 30, June 30,
------------------- ------------------
2002 2001 2002 2001
------ ----- ----- ----
(In thousands)
Amortization of mortgage servicing rights ... $1,452 $ 828 $ 513 $351
====== ===== ===== ====
The following table shows the future estimated amortization expense for
originated mortgage servicing rights based on existing balances and the interest
rate environment as of June 30, 2002. The Company's actual amortization expense
in any given period may be significantly different from the estimated amounts
displayed depending on changes in mortgage interest rates, estimated prepayment
speeds and market conditions.
Estimated future amortization expense: Amount
--------------
(In thousands)
Three months ended September 30, 2002 ..................... $ 516
For the year ended September 30, 2003 ..................... 1,853
For the year ended September 30, 2004 ..................... 1,076
For the year ended September 30, 2005 ..................... 886
For the year ended September 30, 2006 ..................... 729
For the year ended September 30, 2007 ..................... 599
18
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 operations 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 June 30, 2002 were $2.25 billion, an increase of
$39.4 million from September 30, 2001. Increases in loans and debt and equity
securities were offset by a decrease in mortgage-backed and related securities.
Total capital increased to $174.6 million at June 30, 2002 compared with $160.5
million at September 30, 2001. The Company's ratio of shareholders' equity to
total assets was 7.78% at June 30, 2002, compared to 7.27% at September 30,
2001. The Company's fully dilutive book value per share was $17.74 at June 30,
2002, 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 has continued to
reduce the size of its combined mortgage-backed securities and debt and equity
securities portfolios as repayments, scheduled maturities and sales occur. Funds
received from these repayments, maturities and sales have been and are expected
to be used to grow and diversify the Company's loan portfolio, to reduce the
Company's wholesale debt and as an additional source of liquidity. This
restructuring is part of a long-range plan to make the Company's balance sheet
composition more representative of "community banks" with a greater percentage
of assets in the loan portfolio as opposed to investments. Management
anticipates that this restructuring should improve the Company's margins due to
the generally higher interest rates on loans, 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 $40.3
million to $1.3 billion at June 30, 2002 from $1.26 billion at September 30,
2001. During the nine month period ended June 30, 2002, increases of $27.1
million in multi-family mortgage loans, $37.4 million in commercial real estate
loans, $5.9 million in commercial loans and $23.0 million in consumer and
interim financing loans were partially offset by a decrease of $56.0 million in
one- to four-family mortgage 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, 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 nine month period ended June 30, 2002, the Company originated
approximately $785.2 million in loans, as compared to $512.7 million for the
same period in the prior year. Of the $785.2 million in loans originated, $377.6
million were first mortgage loans, $153.4 were home equity loans, $80.6 million
were commercial real estate loans, $63.5 million were consumer and interim
financing loans, $61.6 million were multi-family loans and $48.5 million were
commercial loans. For the nine month period ended June 30, 2002, the Company
purchased $232.6 million one- to four-family loans, as compared to $137.5
million for the same period in the prior year. The increase in loans purchased
during the current year is primarily due to increased activity in the Company's
mortgage banking operation in Illinois. For the nine month period ended June 30,
2002, the Company sold $542.9 million one- to four-family loans, as compared to
$301.2 million for the same period in the prior year. During periods of
declining or generally low interest rates, as experienced during the nine month
period ended June 30, 2002, 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 $36.4 million to $676.0 million at June 30, 2002 from $712.4 million
at September 30, 2001. The decreases were due to accelerated repayments,
scheduled maturities and sales during the current fiscal year. The decrease in
mortgage-backed securities was partially offset by purchases of $296.8 million
during the nine month period ended June 30, 2002. During the nine month period
ended June 30, 2002, the debt and equity securities component of the Company's
combined mortgage-backed securities and debt and equity securities portfolios
increased
19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
$14.0 million to $55.7 million at June 30, 2002 from $41.7 million at September
30, 2001. The increase resulted from the debt and equity of funds generated from
the sale of fixed rate one- to four-family mortgage loans in the secondary
market during the period. As noted above, in connection with the balance sheet
restructuring program, in fiscal 2000, the Company began reducing the size of
its combined mortgage-backed and debt and equity securities portfolios.
Management anticipates these reductions will continue to be an ongoing strategic
initiative of the Company in fiscal 2002. As part of this effort since fiscal
2000, the Company has reduced the size of the mortgage-backed securities and
debt and equity 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 continue to reduce the size of its combined
mortgage-backed securities and debt and equity securities portfolios as
necessary to accommodate growth in the loan portfolio.
Deposits decreased $52.4 million to $1.40 billion at June 30, 2002 from $1.45
billion at September 30, 2001. The decrease in deposits was due primarily to
decreases of $39.4 million in certificates of deposit and $43.1 million in money
market demand account deposits, partially offset by increases of $22.5 million
in checking accounts and $7.6 million in passbook accounts. At June 30, 2002,
the Company had approximately $155.6 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 accounts. 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 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 $81.4 million to $652.8 million at
June 30, 2002 from $571.4 million at September 30, 2001. Short term borrowings
increased $67.3 million to $564.5 million at June 30, 2002, compared to $497.2
million at September 30, 2001. At June 30, 2002, $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 increased $14.0 million to $88.3 million at
June 30, 2002, compared to $74.3 million at September 30, 2001. The increase in
advances and other borrowings is primarily the result of replacing the funding
needed due to the decrease in brokered deposits. At June 30, 2002, the Company
had an additional borrowing capacity of $251.4 million available from the FHLB.
RESULTS OF OPERATIONS
NET INCOME. Net income for the nine month period ended June 30, 2002 increased
to $16.0 million compared with $12.5 million for the nine month period ended
June 30, 2001. Net income for the three month period ended June 30, 2002 was
$5.1 million compared with $3.5 million for the three month period ended June
30, 2001. Net income for the nine and three month periods ended June 30, 2002
includes a $900,000 charge related to an impairment write-down of the Company's
mortgage servicing rights. The results for the prior year's nine and three month
periods included an after-tax effect of $1.5 million on a specific provision for
loan losses related to a commercial credit. The results for the prior year's
nine month period also 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." The prior fiscal year also
included goodwill amortization of $925,000 and $309,000 for the nine and three
month periods ended June 30, 2001. This expense was eliminated with the
Company's adoption of Financial Accounting Standards No. 142 effective on
October 1, 2001. Net income for the nine and three month periods ended June 30,
2002 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:
Nine months ended Three months ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
----- ----- ----- ----
Return on average assets .... 0.97% 0.70% 0.91% 0.61%
Return on average equity .... 12.73% 11.46% 11.86% 9.03%
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $2.6 million to $41.7 million and $698,000 to $14.4 million for the
nine and three month periods ended June 30, 2002 compared to $39.1 million and
$13.7 million for the same periods in the prior year. The increase in net
interest income was due to an increase in the net interest margin partially
offset by a decrease in average earning assets. The net interest margin
increased to 2.69% and 2.75%, respectively, for the nine and three month periods
ended June 30, 2002 compared to 2.27% and 2.52%, respectively, in the prior
year. 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 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. Average earning assets decreased $230.0 million and
$82.8 million, respectively, for the nine and three month periods ended June 30,
2002. The decrease in average earning assets is largely the result of the
Company's restructuring efforts aimed at reducing the amount of debt and equity
and mortgage-backed securities, and a decrease in the portfolio of one- to
four-family loans, which have been refinancing in the recent lower interest rate
environment.
Total interest income decreased $31.9 million or 25.5% to $93.3 million and
decreased $7.3 million or 19.3% to $30.7 million, respectively, for the nine and
three month periods ended June 30, 2002, compared to $125.2 million and $38.0
million, respectively, for the same periods in the prior year. 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 $1.28 billion from $1.32 billion for the nine month period
ended June 30, 2002 and 2001, respectively, and a decrease in the average yield
on loans to 6.92% from 8.01% for the same periods. The decrease in interest
income on loans for the three month period ended June 30, 2002 compared with the
three month period ended June 30, 2001 was the result of a decrease in the
average balance of loans to $1.29 billion from $1.3 billion, respectively, in
conjunction with a decrease in the average yield on loans to 6.69% from 7.78%
for the same periods. The decrease in the average balance of loans is primarily
due to the aforementioned decrease in the one- to four-family loan portfolio.
The decrease in interest income on mortgage-backed and related securities was
due to a decrease in the average balance of such securities to $680.6 million
from $790.4 million for the nine month period ended June 30, 2002 and 2001,
respectively, and a decrease in the average yield on such securities to 4.53%
from 6.30% for the same periods. The decrease in interest income on
mortgage-backed and related securities for the three month period ended June 30,
2002 compared to the three month period ended June 30, 2001 was due to a
decrease in the average balance of such securities to $676.1 million from $769.2
million, and a decrease in the average yield on such securities to 4.49% from
5.76% for the same periods. The decrease in interest on debt and equity
securities was the result of a decrease in the average balance of such
securities to $41.1 million from $151.2 million for the nine month periods ended
June 30, 2002 and 2001, respectively, and a decrease in the average yield on
such securities to 4.44% from 6.07% for the same periods. The decrease in
interest income on debt and equity securities for the three month period ended
June 30, 2002 compared to the three month period ended June 30, 2001 was due to
a decrease in the average balance of such securities to $67.0 million from $75.1
million, and a decrease in the average yield on such securities to 4.40% from
5.84% for the same periods. See "Financial Condition" for a further discussion
of the Company's balance sheet restructuring activities.
Total interest expense decreased $34.5 million or 40.0% to $51.7 million for the
nine month period ended June 30, 2002, compared to $86.1 million for the nine
month period ended June 30, 2001. For the three month period ended June 30,
2002, total interest expense decreased $8.0 million or 33.0% to $16.3 million
compared to $24.3 million for the three month period ended June 30, 2001. 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 2.85% and 2.55% for the nine and three
month periods ended June 30, 2002, respectively, from 5.03% and 4.43% for the
same periods in the prior year. The average balances of deposits decreased to
$1.33 billion and $1.31 billion for the nine and three month periods ended June
30, 2002, respectively, as compared to $1.41 billion for the same periods 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
$593.2 million and increased to $643.9 million for the nine and three month
periods ended June 30, 2002, respectively, as compared to $745.3 million and
$627.2 million for the same periods in the prior year. The average cost of
advances and other borrowings decreased to 5.22% and 4.95% for the nine and
three month periods ended June 30, 2002, respectively, from 5.92% and 5.56% for
the same periods 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 nine and three month periods
ended June 30, 2002 and 2001, respectively. Tax-exempt investments are not
material and the tax-equivalent method of presentation is not included in the
schedule.
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
NINE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits ... $ 2,799 $ 38 1.82% $ 3,841 $ 143 4.98%
Trading account securities .................. -- -- -- 131 8 8.16
Debt and equity securities .................. 41,127 1,365 4.44 151,249 6,866 6.07
Mortgage-backed and related securities ...... 680,577 23,075 4.53 790,434 37,274 6.30
Loans:
First mortgage ............................ 793,609 43,124 7.27 848,111 49,727 7.84
Home equity ............................... 236,151 10,130 5.74 201,358 12,952 8.60
Consumer .................................. 102,176 6,349 8.31 119,687 7,778 8.69
Commercial and agricultural ............... 149,412 6,724 6.02 153,537 8,777 7.64
----------- ------- ----------- --------
Total loans ........................... 1,281,348 66,327 6.92 1,322,693 79,234 8.01
Federal Home Loan Bank stock ................ 64,118 2,518 5.25 31,577 1,690 7.16
----------- ------- ----------- --------
Total earning assets .................. 2,069,969 93,323 6.03 2,299,925 125,215 7.28
------- --------
Valuation allowances ........................ (11,026) (25,085)
Cash and due from banks ..................... 32,761 28,144
Other assets ................................ 103,963 99,808
----------- -----------
Total assets .......................... $ 2,195,667 $ 2,402,792
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts .............................. $ 89,036 203 0.30 $ 78,996 358 0.61
Money market demand accounts .............. 431,271 4,459 1.38 392,280 13,494 4.60
Passbook .................................. 89,677 535 0.80 87,838 1,205 1.83
Certificates of deposit ................... 724,311 23,268 4.30 852,209 38,053 5.97
----------- ------- ----------- --------
Total interest-bearing deposits ............. 1,334,295 28,465 2.85 1,411,323 53,110 5.03
Advances and other borrowings ............... 593,219 23,181 5.22 745,342 33,010 5.92
Advances from borrowers for taxes and
insurance ................................. 5,859 8 0.18 6,169 11 0.24
----------- ------- ----------- --------
Total interest-bearing liabilities ... 1,933,373 51,654 3.57 2,162,834 86,131 5.32
Non interest-bearing deposits ............... 78,616 75,843
Other liabilities ........................... 15,737 18,130
Shareholders' equity ........................ 167,941 145,985
----------- -----------
Total liabilities and shareholders' equity .. $ 2,195,667 $ 2,402,792
=========== ===========
Net interest income ......................... $41,669 $ 39,084
======= ========
Net yield on interest-earning assets ........ 2.69 2.27
Interest rate spread ........................ 2.46 1.95
Ratio of earning assets to interest-
bearing liabilities ....................... 107.07 106.34
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits ... $ 981 $ 3 1.23% $ 6,537 $ 71 4.36%
Trading account securities .................. -- -- -- 1 -- --
Debt and equity securities .................. 66,967 734 4.40 75,107 1,093 5.84
Mortgage-backed and related securities ...... 676,073 7,565 4.49 769,210 11,055 5.76
Loans:
First mortgage ............................ 790,725 13,973 7.09 825,179 15,930 7.74
Home equity ............................... 250,487 3,293 5.27 208,266 4,091 7.88
Consumer .................................. 98,592 2,006 8.16 113,985 2,475 8.71
Commercial and agricultural ............... 150,646 2,252 6.00 151,801 2,721 7.19
----------- ------- ----------- -------
Total loans ........................... 1,290,450 21,524 6.69 1,299,231 25,217 7.78
Federal Home Loan Bank stock ................ 64,958 810 5.00 32,153 521 6.50
----------- ------- ----------- -------
Total earning assets .................. 2,099,429 30,636 5.85 2,182,239 37,957 6.98
------- -------
Valuation allowances ........................ (13,060) (17,309)
Cash and due from banks ..................... 35,775 28,988
Other assets ................................ 106,001 100,826
----------- -----------
Total assets .......................... $ 2,228,145 $ 2,294,744
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts .............................. $ 92,732 59 0.26 $ 80,574 120 0.60
Money market demand accounts .............. 409,955 1,060 1.04 420,512 4,083 3.89
Passbook .................................. 93,047 146 0.63 88,678 363 1.64
Certificates of deposit ................... 712,923 7,044 3.96 819,651 11,011 5.39
----------- ------- ----------- -------
Total interest-bearing deposits ............. 1,308,657 8,309 2.55 1,409,415 15,577 4.43
Advances and other borrowings ............... 643,855 7,938 4.95 627,182 8,687 5.56
Advances from borrowers for taxes and
insurance ................................. 5,669 2 0.14 6,213 4 0.26
----------- ------- ----------- -------
Total interest-bearing liabilities ... 1,958,181 16,249 3.33 2,042,810 24,268 4.76
Non interest-bearing deposits ............... 84,394 79,541
Other liabilities ........................... 14,309 18,186
Shareholders' equity ........................ 171,261 154,207
----------- -----------
Total liabilities and shareholders' equity .. $ 2,228,145 $ 2,294,744
=========== ===========
Net interest income ......................... $14,387 $13,689
======= =======
Net yield on interest-earning assets ........ 2.75 2.52
Interest rate spread ........................ 2.52 2.21
Ratio of earning assets to interest-
bearing liabilities ....................... 107.21 106.83
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
Nine months ended Three months ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in thousands)
Beginning balance ........................ $ 11,686 $ 10,404 $ 13,135 $ 11,379
Provision for loan losses ................ 2,733 4,619 913 3,310
Recoveries ............................... 102 47 6 25
Charge-offs .............................. (616) (4,024) (149) (3,668)
-------- -------- -------- --------
Ending balance ........................... $ 13,905 $ 11,046 $ 13,905 $ 11,046
======== ======== ======== ========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period ....................... 1.02% 0.83% 1.02% 0.83%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ................... 447.25% 110.77% 447.25% 110.77%
Ratio of net charge-offs to average
gross loans (annualized) ............ 0.05% 0.40% 0.04% 1.13%
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. 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
period is a function of several factors, including but not limited to changes in
the loan portfolio, net charge-offs and non-performing loans. At June 30, 2002,
gross loans receivable were $1.36 billion compared to $1.34 billion at June 30,
2001. Net charge-offs for the nine and three month periods ended June 30, 2002
were $514,000 and $143,000, respectively, compared to $4.0 million and $3.6
million for the same periods in the prior year. Nonaccrual loans decreased to
$3.1 million or 0.23% of gross loans at June 30, 2002 compared to $10.3 million
or 0.77% of gross loans at September 30, 2001. For the nine and three month
periods ended June 30, 2002, the provision for loan losses was $2.7 million and
$913,000, respectively, compared to $4.6 million and $3.3 million for the same
periods in the prior year. The higher charge-off and provision amounts in the
prior year were due to a single commercial credit that has since been
restructured. The restructured credit has a current balance of $2.8 million and
was returned to accrual status in the current quarter. The loan is classified as
a troubled debt restructuring and is included in the non-performing assets
total. At June 30, 2002, the increase in the ratio of the allowance for loan
losses to total non-performing loans is due to the decrease in non-performing
loans. (See "Asset Quality").
Management believes that the allowance for loan losses at June 30, 2002 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 if loan quality deteriorates.
23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
OTHER OPERATING INCOME. Other operating income increased by $3.6 million to
$19.0 million and decreased by $614,000 to $5.3 million for the nine and three
month periods ended June 30, 2002, respectively, compared to the same periods in
the prior year. The following table shows the percentage of other operating
income to average assets for each period:
Nine months ended Three months ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in thousands)
Other operating income ................... $ 19,028 $ 15,403 $ 5,285 $ 5,899
Percent of average assets (annualized) ... 1.16% 0.86% 0.95% 1.03%
The results for the nine and three months ended June 30, 2002 include a $900,000
charge related to an impairment write-down of the Company's mortgage servicing
rights, which is recorded as a valuation reserve at June 30, 2002. The Company's
mortgage servicing rights are required to be accounted for at the lower of book
or market value. As part of the calculation of the market value of mortgage
servicing rights, the Company calculates the present value of the future stream
of servicing fee income expected to be received from its mortgage loan servicing
portfolio, relying in part on median loan prepayment speeds as forecast by the
major mortgage dealers. These mortgage dealer forecasts utilize a number of
assumptions, including an assumption as to the future direction of interest
rates. The forecasted prepayment speeds increased primarily in the 30-year
fixed-rate category of the Company's loan servicing portfolio as compared to the
previous quarter (reflecting forecasts for continued low interest rates and a
correspondingly high level of mortgage repayments and refinancings) and resulted
in the impairment write-down. The Company has $7.5 million in mortgage servicing
rights and over $750 million in mortgage loans serviced for others.
Other than the aforementioned impairment on mortgage servicing rights, the
increase for the nine and three month periods ended June 30, 2002 was due
primarily to increases in gains on the sale of loans. Gains on the sale of loans
increased to $7.6 million and $2.3 million for the nine and three month periods
ended June 30, 2002, respectively, compared to gains of $3.7 million and $1.6
million for the same periods in the prior year. The Company's volume of mortgage
loan sales were $542.9 million and $148.7 million for the nine and three month
periods ended June 30, 2002, compared to $301.2 million and $147.1 million for
the nine and three month periods ended June 30, 2001. 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $3.0 million or 9.0% to $35.8 million and $471,000 or 4.1% to $11.9
million for the nine and three month periods ended June 30, 2002, respectively,
compared to the same periods in the prior year. The following table shows the
percentage of general and administrative expenses to average assets for each
period:
Nine months ended Three months ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in thousands)
General and administrative expenses ...... $ 35,822 $ 32,858 $ 11,912 $ 11,441
Percent of average assets (annualized) ... 2.18% 1.83% 2.14% 2.00%
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 $1.4 million and $100,000
for the nine and three month periods ended June 30, 2002, respectively, compared
to the prior year. Retirement plan expenses increased to $1.3 million and
$344,000 for the nine and three month periods ended June 30, 2002, compared to
$541,000 and $219,000 for the same periods in the prior year. The increase in
benefit costs in the current year are the result of lower benefit costs during
the prior year periods. 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.
24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The prior fiscal year also included goodwill amortization of $925,000 and
$308,000 for the nine and three month periods ended June 30, 2001. 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 $6.2 million and $1.8
million for the nine and three month periods ended June 30, 2002, compared to
$4.4 million and $1.4 million for the same periods in the prior year. The
effective tax rates for the nine and three month periods ended June 30, 2002
were 27.81% and 26.04%, respectively, compared with 25.93% and 28.22% for the
nine and three month periods ended June 30, 2001. The increase in the effective
tax rate for the nine month period ended June 30, 2002 is primarily due to an
increase in state taxes of $550,000, partially offset by a decrease in
acquisition intangible amortization of $171,000. The income tax credits received
on the Company's affordable housing investments were $1.9 million and $652,000
for each of the nine and three month periods ended June 30, 2002 and 2001.
ASSET QUALITY
Total non-performing assets were $7.8 million, or 0.35% of total assets at June
30, 2002, 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, property waiting to be sold after entry of a judgment of foreclosure and
troubled debt restructurings.
Non-performing assets are summarized as follows:
June 30, September 30,
2002 2001
-------- -------------
(Dollars in thousands)
Nonaccrual loans ......................... $3,109 $10,262
Foreclosed properties .................... 1,865 401
Troubled debt restructurings ............. 2,833 --
------ -------
Non-performing assets .................... $7,807 $10,663
====== =======
Nonaccrual loans to gross loans .......... 0.23% 0.77%
Non-performing assets to total assets .... 0.35% 0.48%
Except as disclosed above, management is not aware of any material loans where
serious doubts exist as to the ability of the borrower to comply with the loan
terms. The Company's largest non-performing credit at September 30, 2001 was a
$5.1 million commercial credit, which was restructured in the current fiscal
year. At June 30, 2002, the restructured credit has a balance of $2.8 million
and was returned to accrual status during the current quarter. No additional
charge-off or provision was required during the quarter in connection with the
loan restructuring.
Impaired loans totaled $3.0 million at June 30, 2002 compared to $7.8 million at
September 30, 2001. These loans had associated impairment reserves of $1.3
million at June 30, 2002 and September 30, 2001. For the nine month period ended
June 30, 2002, the average balance of impaired loans was $7.6 million compared
to $11.0 million for the year ended September 30, 2001. Interest income on
impaired loans for the nine month periods ended June 30, 2002 and 2001 was
$208,000 and $116,000, 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;
25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
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 June 30, 2002, the Company's estimated cumulative one-year gap between assets
and liabilities was a positive 9.81% 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
June 30, 2002 was a negative 1.37% 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 primarily due to the
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 callable 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 June 30, 2002, the Company expects that
its one-year positive gap would become negative due to the anticipated
shortening of the term of FHLB callable advances and to a lesser extent, the
lengthening of the term of mortgage-related assets assuming prepayments slow.
The Company's current interest rate risk position, as defined by its positive
gap position, implies that further declines in interest rates would be
detrimental to the Company's net interest margin. In most prior interest rate
environments, falling interest rates have tended to result in an improvement in
net interest income as the cost on interest bearing liabilities decreases more
rapidly than the yield on interest bearing assets. However, in the current
situation, where historically low interest rates are already reflected in
reduced interest bearing liability costs, management believes further rate
declines may not reduce costs sufficiently to offset decreasing rates on
interest earning assets.
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of June 30, 2002.
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 ........................... $ 29,445 $ 64,780 $ 72,924 $ 21,537 $ 27,860 $ 216,546
Commercial ............................ 128,454 130,958 255,684 57,731 123,008 695,835
Consumer .............................. 249,649 24,026 31,855 29,394 17,337 352,261
Mortgage-backed and related securities ...... 15,598 37,014 27,756 12,989 10,770 104,127
Assets available for sale:
Mortgage loans ........................ 32,482 -- -- -- -- 32,482
Fixed rate mortgage related ........... 42,285 109,389 104,451 45,965 37,095 339,185
Variable rate mortgage related ........ 232,669 -- -- -- -- 232,669
Investment securities ................. 6,517 49,225 -- -- -- 55,742
Other assets ................................ 65,433 -- -- -- -- 65,433
-------- --------- --------- --------- --------- ----------
Total ................................. $802,532 $ 415,392 $ 492,670 $ 167,616 $ 216,070 $2,094,280
======== ========= ========= ========= ========= ==========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts .......................... $ 7,828 $ 23,483 $ 35,033 $ 15,726 $ 12,810 $ 94,880
Passbook savings accounts ............. 3,349 10,046 19,366 13,381 48,162 94,304
Money market deposit accounts ......... 97,823 293,466 1,017 1,195 672 394,173
Certificates of deposit ............... 135,964 236,287 279,823 34,978 19,360 706,412
Borrowings (4) .............................. 119,734 49,680 408,389 75,000 -- 652,803
Impact of interest rate swaps ............... 20,000 -- -- -- (20,000) --
-------- --------- --------- --------- --------- ----------
Total ................................. $384,698 $ 612,962 $ 743,628 $ 140,280 $ 61,004 $1,942,572
======== ========= ========= ========= ========= ==========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities .... $417,834 $(197,570) $(250,958) $ 27,336 $ 155,066 $ 151,708
======== ========= ========= ========= ========= ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities ......................... $417,834 $ 220,264 $ (30,694) $ (3,358) $ 151,708
======== ========= ========= ========= =========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets ...................................... 18.61% 9.81% (1.37%) (0.15%) 6.76%
======== ========= ========= ========= =========
--------------------------------------------------------------------------------
(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 $67.1 million at June 30,
2002.
(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 excess of interest-earning assets to
interest-bearing liabilities would have been $72.9 million or 3.2% of
total assets.
(4) Fixed rate callable 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 callable FHLB advances of $370 million
maturing in one to three years and $75 million maturing in three to five
years.
27
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.
CRITICAL ACCOUNTING POLICES
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ significantly from those estimates under different assumptions and
conditions. The Company believes the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results and
require management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
ALLOWANCE FOR LOAN LOSSES - 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.
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.
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 if loan quality deteriorates.
ACCOUNTING FOR INCOME TAXES - As part of the process of preparing the
consolidated financial statements the Company is required to estimate income
taxes for federal and state purposes. This process involves estimating the
Company's actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the Company's consolidated
balance sheet. Management must then assess the likelihood that the deferred tax
assets will be recovered from future taxable income and to the extent management
believes that recovery is not likely, a valuation allowance must be established.
To the extent the Company establishes a valuation allowance or increases this
allowance in a period, the Company would include an expense within the tax
provision in the statement of operations.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. A valuation allowance is based on
management's estimates of taxable income in the jurisdictions in which the
Company operates and the period over which deferred tax assets will be
recoverable. In the event actual results differ from these estimates, or if
management adjusts these estimates in future periods the Company may need to
establish an additional valuation allowance which could materially impact the
financial position and results of operations.
MORTGAGE SERVICING RIGHTS - The Company recognizes as a separate asset the
rights to service mortgage loans for others. The value of mortgage servicing
rights is amortized in relation to the servicing revenue expected to be earned.
Estimating the fair value of the mortgage servicing rights involves judgment,
particularly of estimated prepayment speeds of the underlying mortgages
28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
serviced. Net income could be affected if management's estimate of the
prepayment speeds or other factors differ materially from actual prepayments.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need for
management's judgement in their application. There are also areas in which
management's judgement in selecting any available alternative would not produce
a materially different result. For further information refer to footnote 1
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2001.
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 $45.1 million and
$38.1 million as of June 30, 2002 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 June 30, 2002, the Company had
additional borrowing capacity of $251.4 million available from the FHLB.
In fiscal 2001 the Company continued to reduce the size of its mortgage-backed
securities and debt and equity securities portfolios. 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 debt and equity securities portfolios were used to grow and diversify the
generally higher yielding assets in 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 June 30, 2002, 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 capital,
shares repurchased or to be repurchased will not have a material 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.
29
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:
For Capital
Actual Adequacy Purposes
----------------- ----------------------------------------------------------------------
Amount Ratio Amount Ratio
-------- ------ ----------------------------------- -------------------------------
(Dollars in thousands)
As of June 30, 2002:
Tangible capital ........... $174,636 7.83% (greater than or equal to) $ 89,218 (greater than or equal to) 4.0%
Core capital ............... 174,636 7.83% (greater than or equal to) 89,218 (greater than or equal to) 4.0%
Tier 1 risk-based capital .. 174,636 10.79% (greater than or equal to) 64,747 (greater than or equal to) 4.0%
Risk-based capital ......... 188,168 11.62% (greater than or equal to) 129,493 (greater than or equal to) 8.0%
As of September 30, 2001:
Tangible capital ........... $178,436 8.14% (greater than or equal to) $ 87,666 (greater than or equal to) 4.0%
Core capital ............... 178,436 8.14% (greater than or equal to) 87,666 (greater than or equal to) 4.0%
Tier 1 risk-based capital .. 178,436 12.61% (greater than or equal to) 56,586 (greater than or equal to) 4.0%
Risk-based capital ......... 189,656 13.41% (greater than or equal to) 113,172 (greater than or equal to) 8.0%
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------------------------------------------
Amount Ratio
----------------------------------- --------------------------------
(Dollars in thousands)
As of June 30, 2002:
Tangible capital ........... (greater than or equal to) $111,522 (greater than or equal to) 5.0%
Core capital ............... (greater than or equal to) 111,522 (greater than or equal to) 5.0%
Tier 1 risk-based capital .. (greater than or equal to) 97,120 (greater than or equal to) 6.0%
Risk-based capital ......... (greater than or equal to) 161,867 (greater than or equal to) 10.0%
As of September 30, 2001:
Tangible capital ........... (greater than or equal to) $109,582 (greater than or equal to) 5.0%
Core capital ............... (greater than or equal to) 109,582 (greater than or equal to) 5.0%
Tier 1 risk-based capital .. (greater than or equal to) 84,879 (greater than or equal to) 6.0%
Risk-based capital ......... (greater than or equal to) 141,465 (greater than or equal to) 10.0%
The capital of the Company and the Bank exceed all regulatory capital
requirements.
30
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
June 30, 2002.
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years To Four Years
-------- ------------ -------------- -------------
Interest earning assets (Dollars in millions)
Loans:
Residential ............... $ 1.2 9.40% $ 1.2 8.11% $ 2.0 7.16% $ 0.3 7.93%
Commercial ................ 86.7 5.02% 45.9 6.35% 57.7 6.70% 37.5 5.89%
Consumer .................. 38.9 5.30% 41.2 5.59% 108.5 5.48% 115.8 5.43%
Mortgage-backed
securities:
Fixed rate ................ 204.3 5.80% 66.1 5.80% 66.1 5.80% 29.5 5.80%
Adjustable rate ........... 46.5 3.68% 39.6 3.68% 30.3 3.68% 27.9 3.68%
Debt and equity
securities .................. 55.7 3.23% -- -- -- -- -- --
Other ......................... 65.4 5.00% -- -- -- -- -- --
Total interest ------ ------ ------ ------
earning assets .............. $498.7 5.04% $194.0 5.47% $264.6 5.63% $211.0 5.34%
====== ====== ====== ======
Interest bearing liabilities
Deposits:
NOW accounts .............. $ 31.3 0.25% $ 17.5 0.25% $ 17.5 0.25% $ 7.9 0.25%
Passbooks ................. 13.4 0.35% 9.7 0.35% 9.7 0.35% 6.7 0.35%
Money market .............. 391.3 1.07% 0.5 1.07% 0.5 1.07% 0.6 1.07%
Certificates .............. 372.3 3.81% 229.0 3.88% 50.8 4.44% 30.0 4.91%
Borrowings
Fixed rate ................ 45.0 3.72% 25.0 4.80% 363.8 5.62% 50.0 5.19%
Adjustable rate ........... 119.0 2.07% -- -- -- -- -- --
Total interest ------ ------ ------ ------
bearing liabilities ......... $972.3 2.33% $281.7 3.61% $442.3 5.15% $ 95.2 4.33%
====== ====== ====== ======
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
------------- ---------- ----- -----
Interest earning assets (Dollars in millions)
Loans:
Residential ............... $ 13.7 7.12% $230.6 6.84% $ 249.0 6.88% $ 250.3
Commercial ................ 139.2 7.02% 328.8 7.13% 695.8 6.69% 699.3
Consumer .................. 17.0 8.50% 30.9 9.01% 352.3 5.91% 354.9
Mortgage-backed
securities:
Fixed rate ................ 29.5 5.80% 47.9 5.80% 443.4 5.80% 444.7
Adjustable rate ........... 25.6 3.68% 62.8 3.68% 232.7 3.68% 232.7
Debt and equity
securities .................. -- -- -- -- 55.7 3.23% 55.7
Other ......................... -- -- -- -- 65.4 5.00% 65.4
Total interest ------ ------ -------- --------
earning assets .............. $225.0 6.60% $701.0 6.72% $2,094.3 5.91% $2,103.0
====== ====== ======== ========
Interest bearing liabilities
Deposits:
NOW accounts .............. $ 7.9 0.25% $ 12.8 0.25% $ 94.9 0.25% $ 91.1
Passbooks ................. 6.7 0.35% 48.1 0.35% 94.3 0.35% 87.7
Money market .............. 0.6 1.07% 0.7 1.07% 394.2 1.07% 392.9
Certificates .............. 4.9 4.95% 19.4 6.01% 706.4 3.99% 717.0
Borrowings
Fixed rate ................ 50.0 6.15% -- -- 533.8 5.43% 558.1
Adjustable rate ........... -- -- -- -- 119.0 2.07% 119.0
Total interest ------ ------ -------- --------
bearing liabilities ......... $ 70.1 4.80% $ 81.0 1.70% $1,942.6 3.32% $1,965.8
====== ====== ======== ========
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein pursuant to Item 305 of Regulation S-K is
contained in the section captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and is incorporated
herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management believes
are material to the financial condition and results of operations of the
Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 26, 2002, the Company announced the declaration of a dividend of
$0.15 per share on the Company's common stock for the quarter ended June
30, 2002. The dividend is payable on August 20, 2002 to shareholders of
record as of August 12, 2002. This will be the 28th consecutive cash
dividend payment since the Company became publicly-held in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of St. Francis Bank, F.S.B. (1)
3.4 By-laws of St. Francis Bank, F.S.B. (1)
3.5 Articles of Amendment to the Articles of Incorporation of
Registrant (3)
4.0 Shareholders' Rights Agreement, dated as of September 25,
1997, between the Registrant and Firstar Trust Company (4)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan (1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan (1)
10.4 Credit Agreement by and between St. Francis Bank, F.S.B.
Employee Stock Ownership Trust and Registrant (1)
10.5 St. Francis Bank, F.S.B. Management Recognition and Retention
Plan and Trust (1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock Option
Plan (1)
10.7 St. Francis Capital Corporation 1993 Stock Option Plan for
Outside Directors (1)
10.8 1986 Deferred Compensation Agreement, as amended-Thomas R.
Perz (4)
10.9 1987 Deferred Compensation Agreement-Thomas R. Perz (1)
10.10 1988 Deferred Compensation Agreement-Edward W. Mentzer (1)
10.11 2000 St. Francis Bank, F.S.B. Employment Agreement-Thomas R.
Perz (5)
32
10.12 2000 St. Francis Capital Corporation Employment
Agreement-Thomas R. Perz (5)
10.13 1996 Amended Employment Agreement-James C. Hazzard (5)
10.14 1997 Amended Employment Agreement-Bradley J. Smith (5)
10.15 1998 Amended Employment Agreement-Jon D. Sorenson (5)
10.16 1998 Amended Employment Agreement-James S. Eckel (5)
10.17 St. Francis Capital Corporation 1997 Stock Option Plan (3)
10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz (3)
11.1 Statement Regarding Computation of Earnings Per Share (See
Footnote 7 in "Notes to Unaudited Consolidated Financial
Statements") (6)
99.1 Certification of Chief Executive Officer and Chief Financial
Officer under the Sarbanes-Oxley Act of 2002 (6)
(1) Incorporated by reference to exhibits filed with the
Registrant's Form S-1 Registration Statement declared
effective on April 22, 1993. (Registration Number 33-58680).
(2) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995.
(3) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997.
(4) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1999.
(5) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 2000.
(6) Filed herewith.
(b) No reports on Form 8-K were filed during the quarter for which this
report was filed.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: August 14, 2002 By: /s/ Jon D. Sorenson
------------------------------------
Jon D. Sorenson
Chief Financial Officer
34