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 March 31, 2003
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.
Yes |x| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Exchange Act).
Yes |x| No | |
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,398,531 at April 30, 2003.
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............... 20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 33
ITEM 4. Controls and Procedures............................................................................. 33
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 33
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 33
ITEM 3. Defaults Upon Senior Securities..................................................................... 33
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 33
ITEM 5. Other Information................................................................................... 34
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 34
SIGNATURES.................................................................................................... 35
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
March 31, September 30,
2003 2002
------------- -------------
(In thousands, except share data)
ASSETS
Cash and due from banks ............................................. $ 41,776 $ 43,515
Federal funds sold and overnight deposits ........................... 3,251 2,320
------------- -------------
Cash and cash equivalents ........................................... 45,027 45,835
------------- -------------
Assets available for sale, at fair value:
Debt and equity securities ...................................... 42,848 16,596
Mortgage-backed and related securities .......................... 587,144 618,580
Mortgage loans held for sale, at lower of cost or market ............ 59,576 65,006
Securities held to maturity, at amortized cost:
Mortgage-backed and related securities (fair value of $105,680
and $91,318, respectively) ...................................... 104,791 90,246
Loans receivable, net ............................................... 1,220,022 1,257,466
Federal Home Loan Bank stock, at cost ............................... 109,241 90,784
Accrued interest receivable ......................................... 7,933 9,398
Foreclosed properties ............................................... 1,642 1,908
Real estate held for investment ..................................... 32,105 32,803
Premises and equipment, net ......................................... 30,707 29,824
Goodwill, net ....................................................... 12,891 12,891
Receivable for securities sales ..................................... 17,132 48,089
Other assets ........................................................ 22,378 19,691
------------- -------------
Total assets ........................................................ $ 2,293,437 $ 2,339,117
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ............................................................ $ 1,363,866 $ 1,416,979
Short-term borrowings ............................................... 669,807 605,236
Long-term borrowings ................................................ 10,200 36,827
Advances from borrowers for taxes and insurance ..................... 4,269 9,886
Payable for securities purchases .................................... 42,972 71,544
Accrued interest payable and other liabilities ...................... 15,436 19,564
------------- -------------
Total liabilities ................................................... 2,106,550 2,160,036
------------- -------------
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, 9,398,531 and 9,350,873 shares, respectively ....... 146 146
Additional paid-in-capital .......................................... 89,408 89,324
Accumulated other comprehensive income .............................. 291 1,632
Treasury stock at cost (5,180,709 and 5,228,367 shares, respectively) (71,854) (72,515)
Retained earnings, substantially restricted ......................... 168,896 160,494
------------- -------------
Total shareholders' equity .......................................... 186,887 179,081
------------- -------------
Total liabilities and shareholders' equity .......................... $ 2,293,437 $ 2,339,117
============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Six Months Ended Three Months Ended
March 31, March 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans ......................................... $ 40,702 $ 44,803 $ 19,199 $ 21,769
Mortgage-backed and related securities ........ 10,529 15,510 5,157 6,973
Debt and equity securities .................... 286 631 149 432
Federal funds sold and overnight deposits ..... 15 35 5 11
Federal Home Loan Bank stock .................. 2,543 1,708 1,156 791
-------- -------- -------- --------
Total interest and dividend income ................. 54,075 62,687 25,666 29,976
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits ...................................... 13,987 20,156 6,557 9,162
Advances and other borrowings ................. 15,178 15,249 7,444 7,572
-------- -------- -------- --------
Total interest expense ............................. 29,165 35,405 14,001 16,734
-------- -------- -------- --------
Net interest income before provision for loan losses 24,910 27,282 11,665 13,242
Provision for loan losses .......................... 553 1,820 172 909
-------- -------- -------- --------
Net interest income ................................ 24,357 25,462 11,493 12,333
-------- -------- -------- --------
OTHER OPERATING INCOME, NET:
Loan servicing and loan related fees .......... 3,225 2,108 1,555 864
Mortgage servicing impairment ................. (2,525) -- (1,075) --
Depository fees and service charges ........... 3,217 2,772 1,657 1,232
Securities gains .............................. 1,344 734 1,166 677
Gain on sales of loans ........................ 10,576 5,277 5,634 2,074
Insurance, annuity and brokerage commissions .. 835 811 465 434
Gain on foreclosed properties ................. 59 25 -- 26
Income from real estate held for investment ... 1,789 1,549 917 771
Other income .................................. 335 467 172 275
-------- -------- -------- --------
Total other operating income, net .................. 18,855 13,743 10,491 6,353
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits ...... 15,375 13,694 7,727 6,724
Occupancy expenses, including depreciation .... 2,537 2,398 1,343 1,228
Furniture and equipment, including depreciation 2,072 1,950 1,055 960
Real estate held for investment expenses ...... 1,812 1,553 908 780
Telephone and postage ......................... 920 839 474 429
Data processing ............................... 511 879 243 457
Other general and administrative expenses ..... 2,684 2,597 1,402 1,389
-------- -------- -------- --------
Total general and administrative expenses .......... 25,911 23,910 13,152 11,967
-------- -------- -------- --------
Income before income tax expense ................... 17,301 15,295 8,832 6,719
Income tax expense ................................. 4,931 4,374 2,540 1,792
-------- -------- -------- --------
Net income ......................................... $ 12,370 $ 10,921 $ 6,292 $ 4,927
======== ======== ======== ========
Basic earnings per share ........................... $ 1.32 $ 1.19 $ 0.67 $ 0.53
======== ======== ======== ========
Diluted earnings per share ......................... $ 1.26 $ 1.13 $ 0.64 $ 0.51
======== ======== ======== ========
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)
Six months ended March 31, 2002
Balance at September 30, 2001 ..... 9,208,244 $ 146 $ 88,826 $ 144,630 $ 1,137 $ (74,264) $ 160,475
Comprehensive income:
Net income ...................... -- -- -- 10,921 -- -- 10,921
Change in unrealized loss on
securities available for sale . -- -- -- -- (3,458) -- (3,458)
Reclassification adjustment for
gains realized in net income .. -- -- -- -- (734) -- (734)
Income taxes .................... -- -- -- -- 1,705 -- 1,705
----------
Comprehensive income .............. 8,434
Cash dividend - $0.30 per share ... -- -- -- (2,764) -- -- (2,764)
Purchase of treasury stock ........ (32,500) -- -- -- -- (679) (679)
Exercise of stock options, net .... 109,160 -- 124 (450) -- 1,513 1,187
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2002 ......... 9,284,904 $ 146 $ 88,950 $ 152,337 $ (1,350) $ (73,430) $ 166,653
========== ========== ========== ========== ========== ========== ==========
Six months ended March 31, 2003
Balance at September 30, 2002 ..... 9,350,873 $ 146 $ 89,324 $ 160,494 $ 1,632 $ (72,515) $ 179,081
Comprehensive income:
Net income ...................... -- -- -- 12,370 -- -- 12,370
Change in unrealized loss on
securities available for sale . -- -- -- -- (809) -- (809)
Reclassification adjustment for
gains realized in net income .. -- -- -- -- (1,344) -- (1,344)
Income taxes .................... -- -- -- -- 812 -- 812
----------
Comprehensive income .............. 11,029
Cash dividend - $0.40 per share ... -- -- -- (3,753) -- -- (3,753)
Exercise of stock options, net .... 47,658 -- 84 (215) -- 661 530
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2003 ......... 9,398,531 $ 146 $ 89,408 $ 168,896 $ 291 $ (71,854) $ 186,887
========== ========== ========== ========== ========== ========== ==========
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Six months ended
March 31,
----------------------
2003 2002
--------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 12,370 $ 10,921
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses ..................................................... 553 1,820
Depreciation, accretion and amortization ...................................... 7,403 4,146
Deferred income taxes ......................................................... 1,957 1,299
Securities gains .............................................................. (1,344) (734)
Impairment write-down on mortgage servicing rights ............................ 2,525 --
Originations of loans held for sale ........................................... (663,773) (401,292)
Proceeds from sales of loans held for sale .................................... 679,779 399,472
Gain on sale of loans ......................................................... (10,576) (5,277)
Stock dividends received on Federal Home Loan Bank stock ...................... (3,457) (1,492)
Other, net .................................................................... (14,883) (12,561)
--------- ---------
Net cash provided by (used in) operating activities ................................. 10,554 (3,698)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed and related securities held to maturity ............ (54,480) (21,720)
Principal repayments on mortgage-backed and related securities held to maturity . 39,935 35,126
Purchases of mortgage-backed and related securities available for sale .......... (547,665) (175,087)
Proceeds from sales of mortgage-backed securities available for sale ............ 252,588 34,748
Principal repayments on mortgage-backed securities available for sale ........... 326,625 154,309
Purchases of debt and equity securities available for sale ...................... (41,132) (61,264)
Proceeds from sales of debt and equity securities available for sale ............ -- 9,223
Proceeds from maturities of debt and equity securities available for sale ....... 15,001 25,003
Purchases of Federal Home Loan Bank stock ....................................... (15,000)
Purchase of loans ............................................................... (274,159) (143,309)
Decrease in loans, net of loans held for sale ................................... 311,603 155,573
Increase in real estate held for investment ..................................... (96) (4,914)
Proceeds from sale of foreclosed properties ..................................... 1,492 --
Purchases of premises and equipment, net ........................................ (2,065) (2,102)
--------- ---------
Net cash provided by investing activities ........................................... 12,647 5,586
--------- ---------
See accompanying Notes to Unaudited Consolidated Financial Statements
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
Six months ended
March 31,
----------------------
2003 2002
--------- ---------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ........................................................ (53,113) (39,094)
Proceeds from advances and other borrowings ..................................... 216,174 107,265
Repayments on advances and other borrowings ..................................... (213,350) (112,634)
Increase in securities sold under agreements to repurchase ...................... 35,120 49,976
Decrease in advances from borrowers for taxes and insurance ..................... (5,617) (6,329)
Dividends paid .................................................................. (3,753) (2,764)
Stock option transactions ....................................................... 530 1,187
Purchase of treasury stock ...................................................... -- (679)
--------- ---------
Net cash used in financing activities ............................................... (24,009) (3,072)
--------- ---------
Decrease in cash and cash equivalents ............................................... (808) (1,184)
Cash and cash equivalents:
Beginning of period ........................................................... 45,835 38,100
--------- ---------
End of period ................................................................. $ 45,027 $ 36,916
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 29,668 $ 37,087
Income taxes .................................................................. 2,285 8,062
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Transfer from loans to foreclosed properties .................................. $ 1,070 $ 237
Transfer of mortgage loans to mortgage loans held for sale .................... 33,899 56,196
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 six and three month periods ended March 31, 2003
are not necessarily indicative of the results which may be expected for
the entire year ending September 30, 2003. 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,
2002.
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)
March 31, September 30,
2003 2002
------------- --------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans .................... $ 58,024 $ 69,156
Variable-rate loans ................. 42,058 41,824
Mortgage loans sold with recourse .... 18,653 12,334
Guarantees under IRB issues .......... 29,565 28,675
Standby letters of credit ............ 8,685 7,906
Unused and open-ended lines of credit:
Consumer ........................... 290,351 273,704
Commercial ......................... 79,108 66,411
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 March 31, 2003 have interest rates ranging from 4.625%
to 7.875%. Because some commitments expire without being drawn upon, the
total commitment amounts do not necessarily represent cash requirements.
The Company evaluates the creditworthiness of each customer on a
case-by-case basis. The amount of collateral obtained if deemed necessary
by the Company upon extension of credit is based on management's credit
evaluation of the counterparty. The Company generally extends credit on a
secured basis. Collateral
8
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 March 31, 2003, appraised values of the real estate
collateral exceeded the amount of the guarantees.
Standby letters of credit are conditional commitments that the Company
issues to guarantee the performance of a customer to a third-party. The
guarantees frequently support public and private borrowing arrangements.
The Company receives an initial and annual fee for the guarantee. The
guarantees generally have a term of approximately one year and may be
automatically renewable within a specified period of time. Potential loss
on a guarantee is the notional amount of the guarantee less the value of
the collateral. Since the conditions requiring the Company to fund letters
of credit may not occur, the Company expects its future cash requirements
to be less than the total outstanding commitments.
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.
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 March
31, 2003 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 ................... $ 30,000 $ 182 $ -- $ 30,182
Marketable equity securities ................ 12,666 -- -- 12,666
----------- ----------- ----------- -----------
TOTAL DEBT AND EQUITY SECURITIES ............. $ 42,666 $ 182 $ -- $ 42,848
=========== =========== =========== ===========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FNMA ....................................... $ 46,884 $ 50 $ -- $ 46,934
Private issue .............................. 78,808 148 (287) 78,669
REMICs:
GNMA ....................................... 8,737 -- (52) 8,685
FNMA ....................................... 73,331 276 -- 73,607
FHLMC ...................................... 104,269 474 (281) 104,462
Private issue .............................. 274,801 734 (784) 274,751
CMO residual ................................ 36 -- -- 36
----------- ----------- ----------- -----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................ $ 586,866 $ 1,682 $ (1,404) $ 587,144
=========== =========== =========== ===========
SECURITIES HELD TO MATURITY
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ----------- -----------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
GNMA ....................................... $ 4,949 $ 241 $ -- $ 5,190
REMICs:
FHLMC ...................................... 24,213 214 -- 24,427
FNMA ....................................... 23,752 347 -- 24,099
Private issue .............................. 51,877 118 (31) 51,964
----------- ----------- ----------- -----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................ $ 104,791 $ 920 $ (31) $ 105,680
=========== =========== =========== ===========
During the six month periods ended March 31, 2003 and 2002, gross proceeds
from the sale of securities available for sale totaled approximately
$252.6 million and $44.0 million, respectively. The gross realized gains
on such sales totaled approximately $992,000 and $735,000 for the six
month periods ended March 31, 2003 and 2002, respectively. The gross
realized losses on such sales totaled approximately $70,000 and $1,000 for
the six month periods ended March 31, 2003 and 2002, respectively.
During the three month periods ended March 31, 2003 and 2002, gross
proceeds from the sale of securities available for sale totaled
approximately $170.7 million and $40.3 million, respectively. The gross
realized gains on such sales totaled approximately $949,000 and $678,000
for the three month periods ended March 31, 2003 and 2002, respectively.
The
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
gross realized losses on such sales totaled approximately $40,000 and zero
for the three month periods ended March 31, 2003 and 2002, respectively.
At March 31, 2003, $369.6 million of mortgage-related securities were
pledged as collateral for Federal Home Loan Bank ("FHLB") advances.
(5) Loans
Loans receivable are summarized as follows:
March 31, September 30,
2003 2002
------------- -------------
(In thousands)
First mortgage - one- to four-family ....... $ 223,644 $ 251,702
First mortgage - residential construction .. 56,307 62,973
First mortgage - multi-family .............. 152,854 158,320
Commercial real estate ..................... 394,164 395,473
Home equity ................................ 301,181 276,437
Commercial ................................. 123,111 148,716
Consumer secured by real estate ............ 51,169 56,231
Interim financing and consumer loans ....... 31,291 25,055
Indirect auto .............................. 2,869 5,598
Education .................................. 1,751 917
------------- -------------
Total gross loans ...................... 1,338,341 1,381,422
------------- -------------
Less:
Loans in process ....................... 43,630 43,644
Unearned insurance premiums ............ 60 86
Deferred loan and guarantee fees ....... 463 607
Purchased loan discount ................ 325 401
Allowance for loan losses .............. 14,265 14,212
------------- -------------
Total deductions ....................... 58,743 58,950
------------- -------------
Total loans receivable ..................... 1,279,598 1,322,472
Less: First mortgage loans held for sale .. 59,576 65,006
------------- -------------
Loans receivable, net ...................... $ 1,220,022 $ 1,257,466
============= =============
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Six months ended Three months ended
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
Beginning balance ........ $ 14,212 $ 11,686 $ 14,413 $ 12,382
Charge-offs:
Real estate - mortgage . (5) (23) (5) --
Commercial loans ....... (253) (110) (149) (110)
Home equity loans ...... (40) (2) (40) (2)
Consumer ............... (235) (332) (149) (118)
-------- -------- -------- --------
Total charge-offs ........ (533) (467) (343) (230)
-------- -------- -------- --------
Recoveries:
Real estate - mortgage . -- 18 -- --
Commercial loans ....... 15 64 15 64
Home equity loans ...... 1 1 1 1
Consumer ............... 17 13 7 9
-------- -------- -------- --------
Total recoveries ......... 33 96 23 74
-------- -------- -------- --------
Net charge-offs .......... (500) (371) (320) (156)
-------- -------- -------- --------
Provision ................ 553 1,820 172 909
-------- -------- -------- --------
Ending balance ........... $ 14,265 $ 13,135 $ 14,265 $ 13,135
======== ======== ======== ========
(7) Earnings Per Share
Basic earnings per share of common stock for the six-and three-month
periods ended March 31, 2003 and 2002, 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 six and three month periods ended March 31, 2003 and
2002, 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 March 31, 2003 and September 30, 2002,
have been determined by dividing total shareholders' equity by the number
of shares of common stock outstanding at period end adjusted for the
dilutive effect of outstanding stock options at the respective dates.
Stock options are regarded as potential common stock and are, therefore,
considered in per share calculations if not considered to be antidilutive.
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
Six months ended Three months ended
March 31, March 31,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income for the period .................. $12,370,000 $10,921,000 $ 6,292,000 $ 4,927,000
=========== =========== =========== ===========
Common shares issued ....................... 14,579,240 14,579,240 14,579,240 14,579,240
Weighted average treasury shares ........... 5,202,862 5,375,160 5,187,518 5,349,803
----------- ----------- ----------- -----------
Weighted average common shares
outstanding during the period ............. 9,376,378 9,204,080 9,391,722 9,229,437
Effect of dilutive stock options outstanding 428,160 454,387 428,654 465,128
----------- ----------- ----------- -----------
Diluted weighted average common shares
outstanding during the period ............. 9,804,538 9,658,467 9,820,376 9,694,565
=========== =========== =========== ===========
----------- ----------- ----------- -----------
Basic earnings per share ................... $ 1.32 $ 1.19 $ 0.67 $ 0.53
=========== =========== =========== ===========
----------- ----------- ----------- -----------
Diluted earnings per share ................. $ 1.26 $ 1.13 $ 0.64 $ 0.51
=========== =========== =========== ===========
The computation of book value per common share is as follows:
March 31, September 30,
2003 2002
------------- -------------
Common shares outstanding at the end of the period 9,398,531 9,350,873
Incremental shares relating to dilutive stock
options outstanding at the end of the period ... 382,864 427,745
------------- -------------
9,781,395 9,778,618
============= =============
Total shareholders' equity at the end of the period $ 186,887,000 $ 179,081,000
Book value per common share ....................... $ 19.11 $ 18.31
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less than
the fair value of the underlying common stock as of the date of the option
grant, and the maximum term cannot exceed ten years. Stock options awarded
to directors may be exercised at any time or on a cumulative basis over
varying time periods, provided the optionee remains a director of the
Company. The stock options awarded to officers are exercisable on a
cumulative basis over varying time periods, depending on the individual
option grant terms, which may include provisions for acceleration of
vesting periods.
At March 31, 2003, 60,650 shares were reserved for future grants. Further
information concerning the options is as follows:
Six months ended March 31,
-----------------------------------------------------------------
2003 2002
-----------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
-------------- -------------- -------------- --------------
Outstanding at beginning of period 1,428,508 $ 16.12 1,614,898 $ 15.74
Granted .......................... -- -- -- --
Canceled ......................... -- -- -- --
Exercised ........................ (47,658) 5.00 (109,160) 9.75
-------------- ------------- -------------- --------------
Outstanding at end of period ..... 1,380,850 $ 16.50 1,505,738 $ 16.17
============== ============= ============== ==============
Options exercisable .............. 1,104,344 $8.38 - 22.00 1,023,328 $5.00 - 22.00
============== ============= ============== ==============
For purposes of providing the pro forma disclosures required under SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123," ("SFAS No. 148") the
fair value of stock options granted was estimated using the Black-Scholes
option pricing model. There were no options granted during the six and
three month periods ended March 31, 2003 and 2002.
Had compensation cost for the Company's stock-based plans been determined
in accordance with SFAS No. 148, net income and earnings per share would
have been reduced to the pro forma amounts indicated below. This pro forma
net income reflects only options granted in the fiscal years 1997 through
March 31, 2003. Therefore, the full impact of calculating compensation
cost under SFAS No. 148 is not reflected in the pro-forma net income and
earnings per share amounts.
Six months ended Three months ended
March 31, March 31,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net income as reported ........................... $ 12,370,000 $ 10,921,000 $ 6,292,000 $ 4,927,000
Deduct stock based compensation, net of tax, that
would have been reported if the fair value based
method had been applied ........................ (207,000) (336,000) (104,000) (168,000)
-------------- -------------- -------------- --------------
Pro forma net income ............................. $ 12,163,000 $ 10,585,000 $ 6,188,000 $ 4,759,000
============== ============== ============== ==============
Basic earnings per share As reported ...... $ 1.32 $ 1.19 $ 0.67 $ 0.53
Pro forma ........ $ 1.30 $ 1.15 $ 0.66 $ 0.51
Diluted earnings per share As reported ...... $ 1.26 $ 1.13 $ 0.64 $ 0.51
Pro forma ........ $ 1.24 $ 1.10 $ 0.63 $ 0.49
14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(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:
Six months ended Three months ended
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
Federal income tax expense at statutory rate of 35% ... $ 6,056 $ 5,253 $ 3,092 $ 2,252
State income taxes, net of Federal income tax benefit . 630 442 314 180
Tax exempt interest ................................... (17) (34) (4) (17)
ESOP dividend deduction ............................... (188) -- (94) --
Affordable housing credits ............................ (1,537) (1,304) (757) (652)
Other, net ............................................ (13) 17 (11) 29
-------- -------- -------- --------
$ 4,931 $ 4,374 $ 2,540 $ 1,792
======== ======== ======== ========
(10) Derivative 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's mortgage banking activities include the issuance of
commitments to extend residential mortgage loans. When the loan is
originated or purchased, it may be recorded as a mortgage loan held for
sale. The loans held for sale are hedged with forward contracts and a fair
value hedge is designated. The Company is in a short position with forward
contracts, whereby the Company agrees to sell mortgage loans held for sale
at a pre-established price at some future date, and in a long position
with the mortgage loans held for sale. The hedging relationship is highly
effective and hedges changes in the fair value of the mortgage loans held
for sale due to interest rate changes. The change in fair value of
mortgage loans held for sale is included in the consolidated statements of
income.
The Company utilizes interest rate swaps to hedge the fair value of
brokered certificates of deposit ("CDs"). The interest rate swaps that
hedge brokered CDs 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 CDs to a floating rate and thus hedge the fair
value of the brokered CDs from changes in interest rates. At March 31,
2003 and September 30, 2002, the Company did not have any interest rate
swaps outstanding.
The Company measures the effectiveness of it's 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 and
forward loan sale commitments are considered derivatives 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.
(11) Current Accounting Developments
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
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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 did not materially affect the results of operations or financial
position of the Company.
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS
No. 148"). This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
requirements are required for fiscal years ending after December 15, 2002
and are included in the notes to these consolidated financial statements.
The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS No. 149"). This Statement
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. The amendments set forth in
SFAS No. 149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. SFAS No. 149 will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. SFAS No. 149 is to be applied prospectively and is effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003.
(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 segment's direct
contribution to Company net income. The segments do not include the
operations of the Company as a holding company, nor the operations of the
Bank's operating subsidiaries. Capital is not allocated to the segments
and thus net interest income related to the free funding associated with
capital is not included in the individual segments. The Company only
charges the segments with direct expenses. Costs associated with
administrative and centralized back-office support areas of the Bank are
not allocated to the segments. Income taxes are allocated to the segments
based on the Bank's effective tax rate prior to the consolidation with its
affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits, branch
and ATM networks, consumer lending operations, annuity and brokerage
services and call center. The segment includes a much higher level of
interest-bearing liabilities than interest-earning assets. The Company
views this segment as a significant funding vehicle for the other lending
segments. The Company's transfer pricing model has the effect of viewing
this segment as a comparison to the cost of wholesale funds.
The Commercial Banking segment consists of the Bank's commercial,
commercial real estate and multifamily lending operations. It also
includes the lending aspects of the Company's affordable housing
subsidiary.
The Mortgage Banking segment consists of the Bank's single-family mortgage
lending operation. Single-family lending consists of three primary
operations: portfolio lending, lending for sale in the secondary market
and loan servicing.
The Investment segment consists of the Company's portfolio of
mortgage-backed and related securities, its debt and equity securities and
other short-term investments. This segment also includes the Company's
wholesale sources of funding including FHLB advances, brokered
certificates of deposits, reverse repurchase agreements and federal funds
purchased.
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
------------------------------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
SIX MONTHS ENDED MARCH 31, 2003
Net interest income ................. $ 7,333 $ 13,979 $ 4,940 $ (3,767) $ 22,484
Provision for loan losses ........... 153 145 255 -- 553
Other operating income .............. 4,652 1,005 8,059 1,344 15,060
General and administrative expenses . 11,949 1,904 3,364 408 17,625
Income taxes (benefit) .............. (40) 4,430 3,299 (969) 6,720
------------ ------------ ------------ ------------ ------------
Segment profit (loss) ............... $ (77) $ 8,504 $ 6,080 $ (1,861) $ 12,647
============ ============ ============ ============ ============
Segment average assets .............. $ 379,029 $ 681,272 $ 244,464 $ 760,178 $ 2,064,943
============ ============ ============ ============ ============
SIX MONTHS ENDED MARCH 31, 2002
Net interest income ................. $ 7,372 $ 11,810 $ 4,798 $ (1,206) $ 22,774
Provision for loan losses ........... 756 984 80 -- 1,820
Other operating income .............. 4,236 618 5,227 733 10,815
General and administrative expenses . 11,238 1,718 2,739 413 16,108
Income taxes (benefit) .............. (134) 3,379 2,510 (308) 5,448
------------ ------------ ------------ ------------ ------------
Segment profit (loss) ............... $ (252) $ 6,347 $ 4,696 $ (578) $ 10,213
============ ============ ============ ============ ============
Segment average assets .............. $ 333,146 $ 651,925 $ 289,549 $ 768,587 $ 2,043,207
============ ============ ============ ============ ============
THREE MONTHS ENDED MARCH 31, 2003
Net interest income ................. $ 3,548 $ 6,712 $ 2,320 $ (1,938) $ 10,642
Provision for loan losses ........... -- -- 164 -- 164
Other operating income .............. 2,428 346 4,565 1,166 8,506
General and administrative expenses . 5,973 991 1,617 184 8,764
Income taxes (benefit) .............. 1 2,086 1,810 (330) 3,567
------------ ------------ ------------ ------------ ------------
Segment profit(loss) ................ $ 2 $ 3,982 $ 3,295 $ (626) $ 6,653
============ ============ ============ ============ ============
Segment average assets .............. $ 385,707 $ 669,005 $ 225,411 $ 757,873 $ 2,037,996
============ ============ ============ ============ ============
THREE MONTHS ENDED MARCH 31, 2002
Net interest income ................. $ 3,470 $ 6,314 $ 2,440 $ (925) $ 11,299
Provision for loan losses ........... 378 492 39 -- 909
Other operating income .............. 2,052 292 1,889 676 4,909
General and administrative expenses . 5,722 853 1,379 202 8,156
Income taxes (benefit) .............. (202) 1,800 987 (154) 2,431
------------ ------------ ------------ ------------ ------------
Segment profit(loss) ................ $ (376) $ 3,462 $ 1,923 $ (297) $ 4,712
============ ============ ============ ============ ============
Segment average assets .............. $ 335,386 $ 670,890 $ 269,138 $ 755,771 $ 2,031,185
============ ============ ============ ============ ============
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Six months ended March 31, Three months ended March 31,
2003 2002 2003 2002
----------- ----------- ------------ ------------
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments ........................... $ 37,544 $ 33,589 $ 19,148 $ 16,208
Unallocated transfer pricing credit
(primarily on capital) ....................... 2,842 5,403 1,281 2,320
Income from affordable housing subsidiary .... 1,789 1,549 917 771
Holding company interest expense ............. (170) (543) (73) (223)
Elimination of intercompany interest income .. (660) (538) (384) (262)
Other ........................................ 2,420 1,565 1,267 781
----------- ----------- ----------- -----------
Consolidated total revenue ................... $ 43,765 $ 41,025 $ 22,156 $ 19,595
=========== =========== =========== ===========
PROFIT
Total for segments ........................... $ 12,647 $ 10,213 $ 6,653 $ 4,712
Unallocated transfer pricing credit
(primarily on capital) ....................... 1,705 3,242 768 1,392
Unallocated administrative and centralized
support costs (a) ............................ (2,581) (2,865) (1,428) (1,364)
Holding company net loss ..................... (427) (581) (213) (288)
Elimination of intercompany interest income .. (396) (323) (230) (157)
Affordable housing tax credits ............... 1,537 1,304 757 652
Other ........................................ (115) (69) (15) (20)
----------- ----------- ----------- -----------
Consolidated net income ...................... $ 12,370 $ 10,921 $ 6,292 $ 4,927
=========== =========== =========== ===========
AVERAGE ASSETS
Total for segments ........................... $ 2,064,943 $ 2,043,207 $ 2,037,996 $ 2,031,185
Elimination of intercompany loans ............ (16,682) (13,946) (15,950) (14,521)
Other assets not allocated ................... 197,159 150,167 198,258 156,303
----------- ----------- ----------- -----------
Consolidated average assets .................. $ 2,245,420 $ 2,179,428 $ 2,220,304 $ 2,172,967
=========== =========== =========== ===========
-------------
(a) After-tax effect of $4.3 million and $4.8 million of general and
administrative expenses for the six-month periods ended March 31, 2003 and
2002, respectively.After-tax effect of $2.4 million and $2.3 million of
general and administrative expenses for the three-month periods ended
March 31, 2003 and 2002, respectively.
(13) Goodwill and Intangible Assets
Effective October 1, 2002, 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 $12.9 million at
October 1, 2002 and annual amortization of approximately $1.2 million that
resulted from business combinations prior to the adoption of SFAS No. 141.
The Company evaluates goodwill for impairment at least annually.
Impairment testing of goodwill was completed as of October 1, 2002 and
resulted in no impairment, therefore, goodwill has a net carrying value of
$12.9 million at March 31, 2003.
In addition to goodwill, the Company's other intangible assets consist of
mortgage servicing rights and other intangible assets from business
combinations 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 six-and three-month periods ended
March 31, 2003 include charges of $2.5 million and $1.1 million,
respectively, 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 March 31, 2003 and September 30, 2002
the valuation reserve totaled $5.6 million and $3.1 million, respectively.
The Company's other intangible assets from a business combination resulted
from the purchase of deposits.This acquisition did not meet the definition
of a business combination under SFAS No. 147, therefore, it is not
required to be accounted for in accordance with SFAS No. 141 and SFAS No.
142. Changes in the carrying value of capitalized mortgage servicing
rights are summarized as follows:
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
March 31, September 30,
2003 2002
------------- -------------
(In thousands)
Mortgage servicing rights, balance at beginning of period ............. $ 6,145 $ 6,287
Servicing rights capitalized ......................................... 4,417 4,926
Amortization of servicing rights ..................................... (1,260) (1,968)
Impairment of servicing rights ....................................... (2,525) (3,100)
------------- -------------
Mortgage servicing rights, balance at end of period ................... $ 6,777 $ 6,145
============= =============
Mortgage servicing rights, market value ............................... $ 6,835 $ 6,496
============= =============
Intangible assets from business combinations, carrying and market value $ 438 $ 460
============= =============
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. At March 31, 2003, the Company services $847.2 million
in mortgage loans for others, compared to $768.7 million at September 30,
2002.Intangible assets from business combinations are amortized on a
straight-line method.
Actual amortization expense is as follows:
Six months ended Three months ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
Amortization of mortgage servicing rights .................. $ 1,260 $ 939 $ 651 $ 450
Amortization of intangible assets from business combinations 22 -- 11 --
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 March 31, 2003. 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)
Six months ended September 30, 2003............................... $1,497
For the year ended September 30, 2004............................. 1,935
For the year ended September 30, 2005............................. 958
For the year ended September 30, 2006............................. 782
For the year ended September 30, 2007............................. 507
For the year ended September 30, 2008 and thereafter.............. 1,097
19
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operation
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") and its wholly owned subsidiary, St. Francis Bank
(the "Bank"). The Company cautions readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises 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 March 31, 2003 were $2.29 billion, a decrease of
$46 million from $2.34 billion at September 30, 2002. Loans receivable,
including mortgage loans held for sale, decreased $42.9 million from September
30, 2002 as declines in one- to four-family and commercial loans were partially
offset by increases in consumer loans. Total capital increased to $186.9 million
at March 31, 2003 compared with $179.1 million at September 30, 2002. The
Company's ratio of shareholders' equity to total assets was 8.15% at March 31,
2003, compared to 7.66% at September 30, 2002. The Company's book value per
share was $19.11 at March 31, 2003, compared to $18.31 at September 30, 2002.
The restructuring of the balance sheet continues to be one of the strategic
initiatives of the Company. During the past three years the Company has reduced
the size of its mortgage-backed securities and investment securities portfolios
as repayments, scheduled maturities and sales occur. Funds received from these
repayments, maturities and sales have been and are expected to be used to grow
and diversify the Company's loan portfolio, to reduce the Company's wholesale
debt and as an additional source of liquidity. This restructuring is part of a
long-range plan to make the Company's balance sheet composition more
representative of "community banks" with a greater percentage of assets in our
loan portfolio as opposed to investments. Management anticipates that this
restructuring should improve the Company's margins due to the generally higher
interest rates on loans, and depending on the growth in the loan portfolio, this
will continue to be an ongoing initiative of the Company in fiscal 2003.
Loans receivable, including mortgage loans held for sale, decreased $42.9
million to $1.28 billion at March 31, 2003 from $1.32 billion at September 30,
2002. During the six-month period ended March 31, 2003, one- to four-family
loans decreased $34.7 million, commercial loans decreased $25.6 million,
multi-family mortgage loans decreased $5.5 million and commercial real estate
loans decreased $1.3 million, offset by an increase of $24.0 million in consumer
and interim financing loans. The Company's one- to four-family mortgage loan
portfolio has a significant level of adjustable-rate loans and during periods of
declining or generally low interest rates, the customers generally convert
adjustable-rate loans to fixed-rate loans. However, fixed-rate loans are
generally sold in the secondary market and are not maintained on the Company's
balance sheet.
For the six-month period ended March 31, 2003, the Company originated
approximately $704.0 million in loans, as compared to $547.0 million for the
same period in the prior year. Of the $704.0 million in loans originated, $420.5
million were first mortgage loans, $119.1 million were home equity loans, $58.4
million were commercial real estate loans, $49.7 million were consumer and
interim financing loans, $34.9 million were multi-family loans and $21.4 million
were commercial loans. For the six-month period ended March 31, 2003, the
Company purchased $274.2 million one- to four-family loans, as compared to
$143.3 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 six-month period ended
March 31, 2003, the Company sold $669.2 million one- to four-family loans, as
compared to $394.2 million for the same period in the prior year. During periods
of declining or generally low interest rates, the Company originates more fixed
rate loans, which are generally sold in the secondary market.
Mortgage-backed and related securities, including securities available for sale,
decreased $16.9 million to $691.9 million at March 31, 2003 from $708.8 million
at September 30, 2002. The decreases were due to accelerated repayments,
scheduled maturities and sales during the period. The decrease in
mortgage-backed securities was partially offset by purchases of $602.1 million
during the six-month period ended March 31, 2003. Debt and equity securities
increased $26.2 million to $42.8 million at March 31, 2003 from $16.6 million at
September 30, 2002. The increase was due to purchases of $41.2 million,
partially offset by scheduled maturities of $15.0 million.The increase in the
debt and equity securities portfolio during the six month period ended March 31,
2003, was the result of the decline in the Company's loan portfolio. As noted
above, depending on the growth in the
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
loan portfolio, management anticipates balance sheet restructuring will continue
to be an ongoing initiative of the Company in fiscal 2003.
Deposits decreased $53.1 million to $1.36 billion at March 31, 2003 from $1.42
billion at September 30, 2002. The decrease in deposits was due primarily to
decreases of $54.3 million in certificates of deposit and $15.6 million in money
market demand account deposits. At March 31, 2003, the Company had approximately
$133.7 million in brokered certificates of deposit compared with $191.4 million
at September 30, 2002. The brokered deposits generally consist of terms from
three months to three years. As part of a continuing strategy, the Company
continues to offer deposit products that compete more effectively with money
market funds and other non-financial deposit products. Such accounts have
generally changed the Company's traditional mix of deposit accounts to one that
is more adjustable to current interest rates such as the money market demand
account. This has resulted in passbook and certificate of deposit accounts
representing a lower percentage of the Company's total deposit portfolio. The
level of deposit flows during any given period is heavily influenced by factors
such as the general level of interest rates as well as alternative yields that
investors may obtain on competing instruments, such as money market mutual
funds. The Company believes that the likelihood for retention of brokered
certificates of deposit is more a function of the rate paid on such accounts, as
compared to retail deposits which may be established due to branch location or
other undefined reasons.
Advances and other borrowings increased by $37.9 million to $680.0 million at
March 31, 2003 from $642.1 million at September 30, 2002. Short-term borrowings
increased $64.6 million to $669.8 million at March 31, 2003, compared to $605.2
million at September 30, 2002. At March 31, 2003, $445.0 million of the
short-term borrowings were callable Federal Home Loan Bank ("FHLB") advances
with maturities from three years to eight years and are callable by the FHLB
during the next fiscal year and quarterly thereafter. Long-term borrowings
decreased $26.6 million to $10.2 million at March 31, 2003, compared to $36.8
million at September 30, 2002. At March 31, 2003, the Company had additional
borrowing capacity of $292.9 million available from the FHLB.
RESULTS OF OPERATIONS
NET INCOME. Net income for the six-month period ended March 31, 2003 was $12.4
million compared with $10.9 million for the six-month period ended March 31,
2002. Net income for the three-month period ended March 31, 2003 was $6.3
million compared with $4.9 million for the three-month period ended March 31,
2002. Net income for the six-and three-month periods ended March 31, 2003
included charges of $2.5 million and $1.1 million, respectively, related to an
impairment write-down of the Company's mortgage servicing rights. (For further
information see footnote 13 in "Notes to Unaudited Consolidated Financial
Statements" on page 18 and discussion of "Other Operating Income" on page 25).
Net income for the six-and three-month periods ended March 31, 2003 increased
due to an increase in other operating income, due primarily to increases in
gains on sales of loans.
The following table shows the return on average assets and return on average
equity ratios for each period:
Six months ended Three months ended
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Return on average assets ... 1.10% 1.00% 1.15% 0.92%
Return on average equity ... 13.48% 13.17% 13.70% 11.91%
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $2.4 million or 8.7% to $24.9 million for the six-month period ended
March 31, 2003 compared to $27.3 million for the same period in the prior year.
Net interest income before provision for loan losses decreased $1.5 million or
11.9% to $11.7 million for the three-month period ended March 31, 2003 compared
to $13.2 million for the same period in the prior year. The decrease in net
interest income is a result of a decrease in the Company's net interest margin,
partially offset by an increase in average earning assets. The net interest
margin decreased to 2.36% and 2.26% for the six and three month periods ended
March 31, 2003, respectively, compared with 2.66% and 2.62% for the same periods
in the prior year.The low interest rate environment affects the Company's net
interest margin as the yield on earning assets declines to reflect new rates.
The cost of liabilities is no longer decreasing as rapidly as the decrease in
the yield on earning assets because deposit rates are near their lowest level.
The Company's interest rate sensitivity as measured by it's one-year interest
rate gap position is also positive, which implies an increase in net interest
income in a rising rate environment or a decrease in net interest income in a
falling rate environment.
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Total interest income decreased $8.6 million or 13.7% to $54.1 million and $4.3
million or 14.4% to $25.7 million, respectively, for the six-and three-month
periods ended March 31, 2003 compared to $62.7 million and $30.0 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
yield on loans to 6.18% from 7.04% for the six month period ended March 31, 2003
and 2002, respectively, partially offset by an increase in the average balance
of loans to $1.32 billion from $1.28 billion for the same period. The decrease
in interest income on loans was the result of a decrease in the average yield on
loans to 6.02% from 6.89% for the three-month period ended March 31, 2003 and
2002, respectively, partially offset by an increase in the average balance of
loans to $1.29 billion from $1.28 billion for the same period.
The decrease in interest income on mortgage-backed and related securities was
due to a decrease in the average balance of such securities to $676.9 million
from $682.8 million for the six-month periods ended March 31, 2003 and 2002,
respectively, and a decrease in the average yield on such securities to 3.12%
from 4.56% for the same periods. The decrease in interest income on
mortgage-backed and related securities for the three-month period ended March
31, 2003 compared to the three-month period ended March 31, 2002 was due to a
decrease in the average yield on such securities to 3.11% from 4.31%, partially
offset by an increase in the average balance of such securities to $672.0
million from $655.9 million 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 $17.8 million from $28.2 million for the six-month periods
ended March 31, 2003 and 2002, respectively, and a decrease in the average yield
on such securities to 3.23% from 4.49% for the same periods. The decrease in
interest income on debt and equity securities for the three-month period ended
March 31, 2003 compared to the three-month period ended March 31, 2002 was due
to a decrease in the average balance of such securities to $19.8 million from
$43.4 million, and a decrease in the average yield on such securities to 3.06%
from 4.04% for the same periods. See "Financial Condition" for a further
discussion of the Company's balance sheet restructuring activities.
Total interest expense decreased $6.2 million or 17.6% to $29.2 million for the
six-month period ended March 31, 2003, compared to $35.4 million for the
six-month period ended March 31, 2002. For the three-month period ended March
31, 2003, total interest expense decreased $2.7 million or 16.3% to $14.0
million compared to $16.7 million for the three-month period ended March 31,
2002. 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 of deposits. The average cost of deposits decreased to 2.15%
and 2.09% for the six-and three-month periods ended March 31, 2003,
respectively, from 3.00% and 2.80% for the same periods in the prior year. The
average balances of deposits decreased to $1.30 billion and $1.27 billion for
the six-and three-month periods ended March 31, 2003, respectively, as compared
to $1.35 billion and $1.33 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 increased to $648.1 million
and $650.8 million for the six-and three-month periods ended March 31, 2003,
respectively, as compared to $567.9 million and $582.3 million for the same
periods in the prior year. The average cost of advances and other borrowings
decreased to 4.70% and 4.64% for the six-and three-month periods ended March 31,
2003, respectively, from 5.38% and 5.27% for the same periods in the prior year.
The average balance of advances and other borrowings increased to $648.1 million
and $650.8 million for the six and three month periods ended March 31, 2003,
respectively, as compared to $567.9 million and $582.3 million 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 six and three month periods ended
March 31, 2003 and 2002, respectively. Tax-exempt investments are not material
and the tax-equivalent method of presentation is not included in the schedule.
22
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
SIX MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- -------- ----------- -------- --------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits. $ 2,731 $ 15 1.10% $ 3,708 $ 35 1.89%
Debt and equity securities ............... 17,776 286 3.23 28,207 631 4.49
Mortgage-backed and related securities ... 676,908 10,529 3.12 682,829 15,510 4.56
Loans:
First mortgage ......................... 813,330 26,500 6.53 795,051 29,151 7.35
Home equity ............................ 289,893 6,936 4.80 228,983 6,837 5.99
Consumer ............................... 88,944 3,572 8.05 103,968 4,343 8.38
Commercial and agricultural ............ 128,213 3,694 5.78 148,795 4,472 6.03
----------------------- -----------------------
Total loans .......................... 1,320,380 40,702 6.18 1,276,797 44,803 7.04
Federal Home Loan Bank stock ............. 98,789 2,543 5.16 63,698 1,708 5.38
----------------------- -----------------------
Total earning assets ................. 2,116,584 54,075 5.12 2,055,239 62,687 6.12
-------- --------
Valuation allowances ..................... (12,019) (10,009)
Cash and due from banks .................. 34,606 31,254
Other assets ............................. 106,249 102,944
----------- -----------
Total assets ......................... $ 2,245,420 $ 2,179,428
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ........................... $ 98,221 105 0.21 $ 87,188 144 0.33
Money market demand accounts ........... 385,945 1,323 0.69 441,929 3,399 1.54
Passbook ............................... 94,923 238 0.50 87,992 389 0.89
Certificates of deposit ................ 722,615 12,321 3.42 730,005 16,224 4.46
----------------------- -----------------------
Total interest-bearing deposits .......... 1,301,704 13,987 2.15 1,347,114 20,156 3.00
Advances and other borrowings ............ 648,092 15,174 4.70 567,901 15,243 5.38
Advances from borrowers for taxes and
insurance ................................ 5,653 4 0.14 5,954 6 0.20
----------------------- -----------------------
Total interest-bearing liabilities ... 1,955,449 29,165 2.99 1,920,969 35,405 3.70
Non interest-bearing deposits ............ 93,713 75,727
Other liabilities ........................ 12,260 16,451
Shareholders' equity ..................... 183,998 166,281
----------- -----------
Total liabilities and shareholders' equity $ 2,245,420 $ 2,179,428
=========== ===========
Net interest income ...................... $ 24,910 $ 27,282
======== ========
Net yield on interest-earning assets ..... 2.36 2.66
Interest rate spread ..................... 2.13 2.42
Ratio of earning assets to
interest-bearing liabilities ............. 108.24 106.99
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- -------- ----------- -------- --------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits. $ 2,184 $ 5 0.93% $ 2,812 $ 11 1.59%
Debt and equity securities ............... 19,772 149 3.06 43,363 432 4.04
Mortgage-backed and related securities ... 671,964 5,157 3.11 655,902 6,973 4.31
Loans:
First mortgage ......................... 787,311 12,385 6.38 789,444 14,209 7.30
Home equity ............................ 296,576 3,395 4.64 232,602 3,211 5.60
Consumer ............................... 88,762 1,733 7.92 102,590 2,102 8.31
Commercial and agricultural ............ 120,412 1,686 5.68 156,269 2,247 5.83
----------------------- -----------------------
Total loans .......................... 1,293,061 19,199 6.02 1,280,905 21,769 6.89
Federal Home Loan Bank stock ............. 105,889 1,156 4.43 64,142 791 5.00
----------------------- -----------------------
Total earning assets ................. 2,092,870 25,666 4.97 2,047,124 29,976 5.94
-------- --------
Valuation allowances ..................... (11,999) (11,067)
Cash and due from banks .................. 34,097 31,169
Other assets ............................. 105,336 105,741
----------- -----------
Total assets ......................... $ 2,220,304 $ 2,172,967
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ........................... $ 97,923 47 0.19 $ 87,878 63 0.29
Money market demand accounts ........... 373,322 527 0.57 422,506 1,220 1.17
Passbook ............................... 94,972 108 0.46 86,846 161 0.75
Certificates of deposit ................ 708,244 5,875 3.36 729,412 7,718 4.29
----------------------- -----------------------
Total interest-bearing deposits .......... 1,274,461 6,557 2.09 1,326,642 9,162 2.80
Advances and other borrowings ............ 650,763 7,443 4.64 582,338 7,571 5.27
Advances from borrowers for taxes and
insurance ................................ 2,887 1 0.14 2,894 1 0.14
----------------------- -----------------------
Total interest-bearing liabilities ... 1,928,111 14,001 2.94 1,911,874 16,734 3.55
Non interest-bearing deposits ............ 93,835 76,978
Other liabilities ........................ 12,130 16,362
Shareholders' equity ..................... 186,228 167,753
----------- -----------
Total liabilities and shareholders' equity $ 2,220,304 $ 2,172,967
=========== ===========
Net interest income ...................... $ 11,665 $ 13,242
======== ========
Net yield on interest-earning assets ..... 2.26 2.62
Interest rate spread ..................... 2.03 2.39
Ratio of earning assets to
interest-bearing liabilities ............. 108.55 107.07
23
ST. FRANCIS CAPITAL CORPORATION & 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:
Six months ended Three months ended
March 31, March 31,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in thousands)
Beginning balance ................... $ 14,212 $ 11,686 $ 14,413 $ 12,382
Provision for loan losses ........... 553 1,820 172 909
Recoveries .......................... 33 96 23 74
Charge-offs ......................... (533) (467) (343) (230)
-------- -------- -------- --------
Ending balance ...................... $ 14,265 $ 13,135 $ 14,265 $ 13,135
======== ======== ======== ========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period .................... 1.07% 0.99% 1.07% 0.99%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ................ 492.24% 149.33% 492.24% 149.33%
Ratio of net charge-offs to average
gross loans (annualized) ......... 0.08% 0.06% 0.10% 0.05%
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
fiscal year is a function of several factors, including but not limited to
changes in the loan portfolio, net charge-offs and non-performing loans. At
March 31, 2003, gross loans receivable were $1.34 billion compared to $1.32
billion at March 31, 2002. Net charge-offs for the six and three month periods
ended March 31, 2003 were $500,000 and $320,000, respectively, compared to
$371,000 and $156,000 for the six and three month periods ended March 31, 2002.
Non-performing loans increased to $2.9 million or 0.22% of gross loans at March
31, 2003 compared to $2.2 million or 0.16% of gross loans at September 30, 2002.
Although the Company's non-performing loan totals are consistent with the totals
at September 30, 2002, the total is down from $8.8 million at March 31, 2002. At
March 31, 2003, the increase in the ratio of allowance for loan losses to total
non-performing loans is due to the decrease in non-performing loans. (See "Asset
Quality"). The decrease in non-performing loans since March 31, 2002 is
primarily due to the restructuring of a commercial credit which was returned to
accrual status during fiscal 2002, a commercial real estate loan which was
transferred to foreclosed properties and due to several other individual loans
returning to accrual status. This decrease in non-performing loans is the
primary reason for the decline in the Company's provision for loan losses. For
the six and three month periods ended March 31, 2003, the provision for loan
losses was $553,000 and $172,000, respectively, compared to $1.8 million and
$909,000, respectively, for the same periods in the prior year.
Management believes that the allowance for loan losses at March 31, 2003 is
adequate to absorb probable losses inherent in the portfolio. Management
believes it uses the best information available to make such determinations. If
circumstances differ substantially from the assumptions used in making
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States of America,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting the borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary should the quality of any loans deteriorate as a result of
factors discussed herein.
24
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
OTHER OPERATING INCOME. Other operating income increased by $5.1 million to
$18.9 million and by $4.1 million to $10.5 million for the six and three month
periods ended March 31, 2003, 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:
Six months ended Three months ended
March 31, March 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(Dollars in thousands)
Other operating income ................. $ 18,855 $ 13,743 $ 10,491 $ 6,353
Percent of average assets (annualized) . 1.68% 1.26% 1.92% 1.19%
The results for the six-and three-month periods ended March 31, 2003 include
charges of $2.5 million and $1.1 million, respectively, related to an impairment
write-down of the Company's mortgage servicing rights, which is recorded as a
valuation reserve at March 31, 2003. The Company's mortgage servicing rights are
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. During the six-and three-month periods
ended March 31, 2003 the forecasted prepayment speeds have increased, primarily
within certain coupon rates in the 15-year and 30-year fixed-rate category of
the Company's loan servicing portfolio as compared to the previous period
(reflecting forecasts for continued low interest rates and a correspondingly
high level of mortgage repayments and refinancings) and resulted in the
impairment write-downs. The Company services $847 million in mortgage loans for
others, with those servicing rights valued, net of valuation allowances of $5.6
million, at $6.8 million as of March 31, 2003.
Other than the aforementioned impairment on mortgage servicing rights, the
increase for the six-and three-month periods endedMarch 31, 2003 was due
primarily to increases in gains on the sale of loans and increases in
loan-related fees. Gains on the sale of mortgage loans increased to $10.6
million and $5.6 million for the six-and three-month periods ended March 31,
2003, respectively, compared to gains of $5.3 million and $2.1 million for the
same periods in the prior year. The Company's volume of mortgage loan sales were
$669.2 million and $336.7 million for the six and three month periods ended
March 31, 2003, respectively, compared to $394.2 million and $172.8 million for
the same periods in the prior year.The level of loan sale activity is highly
dependent on the interest rate environment and on the types of mortgage loans
originated. In the recent low interest rate environment, customers are more
likely to select or refinance into fixed-rate mortgages, which the Company then
generally sells in the secondary market. Loan servicing and loan related fees
increased to $3.2 million and $1.6 million for the six-and three-month periods
ended March 31, 2003, respectively, compared to $5.3 million and $2.1 million
for the six-and three-month periods ended March 31, 2002, respectively. The
increase in other loan-related fees included higher levels of a variety of fees
including prepayment penalties, loan modification fees and other loan
origination fees, which were also attributable to increased loan activity in the
recent low interest rate environment.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $2.0 million or 8.4% to $25.9 million and increased $1.2 million or
9.9% to $13.2 million for the six and three month periods ended March 31, 2003,
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:
Six months ended Three months ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Dollars in thousands)
General and administrative expenses .. $ 25,911 $ 23,910 $ 13,152 $ 11,967
Percent of average assets (annualized) 2.31% 2.20% 2.40% 2.23%
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
25
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
fiscal year. Including commissions and salaries, mortgage loan related
compensation increased by approximately $1.1 million and $497,000 for the
six-and three-month periods ended March 31, 2003, respectively, compared to the
prior year.
INCOME TAX EXPENSE. Income tax expense increased to $4.9 million and $2.5
million for the six and three month periods ended March 31, 2003, compared to
$4.4 million and $1.8 million for the same periods in the prior year. The
effective tax rates for the six and three month periods ended March 31, 2003
were 28.50% and 28.76%, respectively, compared with 28.60% and 26.67% for the
six and three month periods ended March 31, 2002. The changes in the effective
tax rate is primarily due to the increased amount of income, partially offset by
increases in affordable housing credits during the six and three month periods
ended March 31, 2003. The income tax credits received on the Company's
affordable housing investments were $1.5 million and $757,000 for the six and
three month periods ended March 31, 2003, respectively, compared with $1.3
million and $652,000 for the same periods in the prior year. At March 31, 2003
the Company had investments in 14 affordable housing projects compared to
investments in 12 projects at March 31, 2002.
ASSET QUALITY
Total non-performing assets were $4.5 million, or 0.20% of total assets at March
31, 2003, compared with $4.1 million, or 0.18% of total assets at September 30,
2002. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure.
Non-performing assets are summarized as follows:
March 31, September 30,
2003 2002
------------- -------------
(Dollars in thousands)
Non-performing loans .................. $ 2,898 $ 2,209
Foreclosed properties ................. 1,642 1,908
------------- -------------
Non-performing assets ................. $ 4,540 $ 4,117
============= =============
Performing troubled debt restructurings $ 2,184 $ 2,440
Non-performing loans to gross loans ... 0.22% 0.16%
Non-performing assets to total assets . 0.20% 0.18%
Except as disclosed above, there are no material loans about which management is
aware that there exists serious doubts as to the ability of the borrower to
comply with the loan terms.
Impaired loans totaled $4.3 million at March 31, 2003 compared to $2.0 million
at September 30, 2002. These loans had associated impairment reserves of
$775,000 and $696,000 at March 31, 2003 and September 30, 2002, respectively.
For the six month period ended March 31, 2003, the average balance of impaired
loans was $2.9 million compared to $9.2 million for the six month period ended
March 31, 2002 and $6.3 million for the year ended September 30, 2002. Interest
income on impaired loans for the six month periods ended March 31, 2003 and 2002
was $87,000 and $120,000, 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.
At March 31, 2003, the Company's estimated cumulative one-year gap between
assets and liabilities was a positive 4.55% of total assets. The Company's
three-year cumulative gap as of March 31, 2003 was a positive 0.86% 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 change
in the Company's gap position is due to the decline in interest rates during
fiscal 2002 and 2003. As interest rates declined, the terms of the Company's
assets shortened as prepayments of the Company's mortgage-related assets
increased and the terms of the liabilities
26
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
lengthened as consumers invested in longer term certificates of deposit and the
Company issued longer term brokered certificates of deposit.
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 March 31, 2003, the Company expects that
its one-year positive gap would become negative due to the anticipated
shortening of the terms of the Company's fixed rate callable FHLB advances
becoming callable. In addition, prepayments of the Company's mortgage-related
assets will slow causing a lengthening in the terms of these assets.
27
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of March 31, 2003.
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 ........................ $ 41,913 $ 27,423 $ 32,882 $ 16,901 $ 40,537 $ 159,656
Commercial ......................... 142,040 169,492 199,797 69,843 91,300 672,472
Consumer ........................... 302,540 23,674 24,448 23,659 13,573 387,894
Mortgage-backed and related securities .. 10,287 21,455 41,294 23,241 8,514 104,791
Assets available for sale:
Mortgage loans ..................... 59,576 -- -- -- -- 59,576
Fixed rate mortgage related ........ 45,201 86,486 164,471 74,648 32,154 402,960
Variable rate mortgage related ..... 102,862 12,356 33,211 5,503 30,252 184,184
Investment securities .............. 12,848 30,000 -- -- -- 42,848
Other assets ............................ 112,492 -- -- -- -- 112,492
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. $ 829,579 $ 370,886 $ 496,103 $ 213,795 $ 216,330 $2,126,873
========== ========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts ....................... $ 8,372 $ 25,115 $ 37,468 $ 16,819 $ 13,699 $ 101,473
Passbook savings accounts .......... 3,403 10,208 20,008 14,078 51,816 99,513
Money market deposit accounts ...... 91,038 269,440 3,444 1,240 698 365,860
Certificates of deposit ............ 166,653 297,295 189,585 27,241 152 680,926
Borrowings (4) .......................... 170,116 54,680 330,211 125,000 -- 680,007
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. $ 439,582 $ 656,738 $ 580,716 $ 184,378 $ 66,365 $1,927,779
========== ========== ========== ========== ========== ==========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 390,177 $ (285,852) $ (84,613) $ 29,417 $ 149,965 $ 199,094
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities ..................... $ 390,177 $ 104,325 $ 19,712 $ 49,129 $ 199,094
========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets .................................. 17.01% 4.55% 0.86% 2.14% 8.68%
========== ========== ========== ========== ==========
(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 5% to 85%, based on the individual
loan coupon rate and characteristics, 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 $58.7 million at March 31,
2003.
(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%, 14% and 99%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher
than the Company's historical rates, but are considered by management to
be more indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $55,000 or 2.4% of total
assets.
(4) Fixed rate puttable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due.
Borrowings includes fixed rate callable FHLB advances of $320 million
maturing in one to three years and $125 million maturing in three to five
years.
28
ST. FRANCIS CAPITAL CORPORATION & 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
statements of financial condition. 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 consolidated statements of income.
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
29
ST. FRANCIS CAPITAL CORPORATION & 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 judgment in selecting any available alternative would not produce a
materially different result.
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 $45.0 million and
$45.8 million as of March 31, 2003 and September 30, 2002, 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 March 31, 2003, the Company had
additional borrowing capacity of $292.9 million available from the FHLB.
In fiscal 2002 the Company continued to reduce the size of its mortgage-backed
securities and investment securities portfolios as part of a strategy to
decrease the proportion of earnings from that segment of its balance sheet. The
reduction was primarily accomplished through the repayment of principal,
scheduled maturities and the sale of available-for-sale securities. Funds
generated from the repayment of principal, maturities and sales from the
mortgage-backed securities and investment securities portfolios were used to
grow and diversify the Company's loan portfolio, to reduce the Company's
wholesale debt and as an additional source of liquidity. Depending on the growth
in the loan portfolio, management anticipates that this form of "balance sheet
restructuring" will be an ongoing strategic initiative of the Company in fiscal
2003.
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 March 31, 2003, the Company had purchased 70,300 shares under
the current authorization at an average price of $20.78 per share. The Company
may purchase an additional 389,700 shares under the current authorization. The
Company's share repurchase program is funded through dividends received from the
Bank and the Company's line of credit. Due to the Company's access to liquidity,
shares repurchased have a minimal effect on the Company's liquidity.
At March 31, 2003, the Company had outstanding loan commitments including lines
of credit of $469.5 million compared to $451.1 million at September 30, 2002.
The Company had no commitments to purchase loans outstanding at either of these
dates. The Company anticipates it will have sufficient funds available to meet
its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit,
including brokered certificates, which are scheduled to mature in one year or
less at March 31, 2003 were $463.9 million compared to $414.1 million at
September 30, 2002. Management believes that a significant portion of such
deposits will remain with the Company.
Through the normal course of operations, the Company has entered into certain
contractual obligations and other commitments. Such obligations generally relate
to funding of operations through deposits or debt issuances, as well as leases
for premises and equipment. As a financial service provider the Company
routinely enters into commitments to extend credit. While contractual
obligations represent future cash requirements of the Company, a significant
portion of commitments to extend credit may expire without being drawn upon.
Such commitments are subject to the same credit policies and approval process
accorded to loans made by the Company.
30
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes significant contractual obligations and other
commitments at March 31, 2003.
Certificates Short and
of Long Term Operating
Years Ended March 31, Deposit Borrowings (1) Leases Total
--------------------- ------------ -------------- ------------ ------------
(In thousands)
2004 ....................... $ 463,948 $ 224,796 $ 1,454 $ 606,346
2005 ....................... 135,031 136,250 681 215,712
2006 ....................... 54,554 193,961 581 309,198
2007 ....................... 7,447 50,000 581 33,028
2008 ....................... 19,795 75,000 581 200,376
2009 and thereafter ........ 152 -- 8,896 9,048
------------ ------------ ------------ ------------
Total ...................... $ 680,927 $ 680,007 $ 12,774 $ 1,373,708
============ ============ ============ ============
------------
Commitments to extend credit $ 469,541
============
(1) Fixed-rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due. Short and
long term borrowings include fixed rate callable advances of $130 million
maturing in 2005, $190 million maturing in 2006, $50 million maturing in 2007
and $75 million maturing in 2008.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow Office of Thrift Supervision ("OTS") capital
regulations which require savings institutions to meet two capital standards:
(i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets
and (ii) "risk-based capital" of at least 8% of risk-weighted assets.
The following table summarizes the Bank's capital ratios at the dates indicated:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- ---------
(Dollars in thousands)
As of March 31, 2003:
Tangible capital.............. $ 178,831 7.84% =>$ 91,191 =>4.0% =>$113,989 => 5.0%
Core capital ................. 178,831 7.84% => 91,191 =>4.0% => 113,989 => 5.0%
Tier 1 risk-based capital..... 178,831 10.62% => 67,366 =>4.0% => 101,048 => 6.0%
Risk-based capital............ 192,620 11.44% => 134,731 =>8.0% => 168,414 =>10.0%
As of September 30, 2002:
Tangible capital.............. $ 175,889 7.57% =>$ 92,971 =>4.0% =>$116,214 => 5.0%
Core capital ................. 175,889 7.57% => 92,971 =>4.0% => 116,214 => 5.0%
Tier 1 risk-based capital..... 175,889 10.56% => 66,646 =>4.0% => 99,968 => 6.0%
Risk-based capital............ 189,793 11.39% => 133,291 =>8.0% => 166,614 =>10.0%
The capital of the Company and the Bank exceed all regulatory capital
requirements.
31
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
March 31, 2003.
More than More than More than
Within One Year Two Years Three Years
One Year to Two Year to Three Years To Four Years
-------------------- -------------------- -------------------- --------------------
Interest earning assets (Dollars in millions)
Loans:
Residential .............. $ 1.7 8.92% $ 1.0 7.50% $ 0.8 6.00% $ 0.4 7.85%
Commercial ............... 79.2 4.97% 37.2 6.07% 62.5 5.95% 57.1 5.28%
Consumer ................. 48.0 5.27% 40.2 4.93% 129.4 4.89% 128.5 4.91%
Mortgage-backed
securities:
Fixed rate ............... 163.5 3.58% 102.9 3.58% 102.9 3.58% 48.9 3.58%
Adjustable rate .......... 115.2 3.01% 16.6 3.01% 16.6 3.01% 2.8 3.01%
Debt and equity
securities ................ 42.8 2.40% -- -- -- -- -- --
Other ...................... 112.5 4.40% -- -- -- -- -- --
Total interest -------- -------- -------- --------
earning assets ............ $ 562.9 3.89% $ 197.9 4.29% $ 312.2 4.57% $ 237.7 4.71%
======== ======== ======== ========
Interest bearing liabilities
Deposits:
NOW accounts ............. $ 33.5 0.15% $ 18.8 0.15% $ 18.7 0.15% $ 8.4 0.15%
Passbooks ................ 13.6 0.25% 10.0 0.25% 10.0 0.25% 7.0 0.25%
Money market ............. 360.5 0.69% 1.7 0.69% 1.7 0.69% 0.6 0.69%
Certificates ............. 463.9 3.00% 135.0 3.56% 54.6 4.31% 7.5 4.14%
Borrowings
Fixed rate ............... 96.2 2.63% 162.4 5.28% 167.8 5.42% 50.0 4.93%
Adjustable rate .......... 128.6 1.03% -- -- -- -- -- --
Total interest -------- -------- -------- --------
bearing liabilities ....... $1,096.3 1.86% $ 327.9 4.10% $ 252.8 4.55% $ 73.5 3.82%
======== ======== ======== ========
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
-------------------- -------------------- -------------------- --------
Interest earning assets (Dollars in millions)
Loans:
Residential .............. $ 10.2 6.65% $ 205.1 6.15% $ 219.2 6.20% $ 227.6
Commercial ............... 194.3 6.41% 242.2 6.73% 672.5 6.20% 692.3
Consumer ................. 15.0 8.03% 26.8 8.47% 387.9 5.32% 392.4
Mortgage-backed
securities:
Fixed rate ............... 48.9 3.58% 40.7 3.58% 507.8 3.58% 509.7
Adjustable rate .......... 2.8 3.01% 30.2 3.01% 184.2 3.01% 183.5
Debt and equity
securities ................ -- -- -- -- 42.8 2.40% 43.0
Other ...................... -- -- -- -- 112.5 4.40% 112.5
Total interest -------- -------- -------- --------
earning assets ............ $ 271.2 5.96% $ 545.0 6.16% $2,126.9 4.97% $2,161.0
======== ======== ======== ========
Interest bearing liabilities
Deposits:
NOW accounts ............. $ 8.4 0.15% $ 13.7 0.15% $ 101.5 0.15% $ 98.6
Passbooks ................ 7.1 0.25% 51.8 0.25% 99.5 0.25% 95.1
Money market ............. 0.6 0.69% 0.7 0.69% 365.8 0.69% 365.3
Certificates ............. 19.8 4.37% 0.2 8.45% 681.0 3.27% 695.6
Borrowings
Fixed rate ............... 75.0 5.95% -- -- 551.4 4.92% 603.9
Adjustable rate .......... -- -- -- -- 128.6 1.03% 128.6
Total interest -------- -------- -------- --------
bearing liabilities ....... $ 110.9 4.84% $ 66.4 0.25% $1,927.8 2.78% $1,987.1
======== ======== ======== ========
32
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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) was
carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management within the 90-day period
preceding the filing date of this quarterly report. The Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company in
the reports it files or submits under the Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. In the quarter ended March 31,
2003, the Company did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that
could significantly affect these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management believes
are material to the financial condition and results of operations of the
Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on January 22, 2003. Only
shareholders of record at the close of business on November 29, 2002 (the
"Voting Record Date") were entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 9,367,695 shares of common stock
outstanding, and on the annual meeting date, 8,455,786 shares were present
at the meeting by the holders thereof in person or by proxy, which
constituted a quorum. The following is a summary of the matters voted upon
at the Annual Meeting.
NUMBER OF VOTES
----------------------------------------------------------
BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--- -------- ----------- ---------
NOMINEES FOR DIRECTOR FOR THREE-YEAR
TERM EXPIRING IN 2005:
Jeffrey A. Reigle 8,292,216 163,570 -- --
Edmund O. Templeton 8,288,710 167,076 -- --
RATIFICATION OF APPOINTMENT OF
KPMG LLP AS AUDITORS 8,336,201 108,136 11,449 --
33
ITEM 5. OTHER INFORMATION
On April 25, 2003, the Company announced the declaration of a dividend of
$0.20 per share on the Company's common stock for the quarter ended March
31, 2003. The dividend is payable on May 20, 2003 to shareholders of
record as of May 12, 2003. This will be the 31st 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 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, FSB Employment Agreement-Thomas R.
Perz (5)
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)
99.2 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) Form 8-K
On April 25, 2003, the Company filed a Current Report on Form 8-K to
announce its second quarter earnings and quarterly dividend.
34
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:May 15, 2003 By: /s/ Jon D. Sorenson
------------------------------------
Jon D. Sorenson
Chief Financial Officer
35
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas R. Perz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of St. Francis Capital
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 /s/ Thomas R. Perz
---------------------------------------
Thomas R. Perz, Chairman of the
Board, President and Chief
Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jon D. Sorenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of St. Francis Capital
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 /s/ Jon D. Sorenson
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Jon D. Sorenson, Chief Financial
Officer and Treasurer
Exhibit Index
Exhibit No. Description
99.2 Certification of Chief Executive Officer and Chief Financial
Officer under the Sarbanes-Oxley Act of 2002 (6)