1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
-------------------------------
(Exact name of Registrant as Specified in its Charter)
WISCONSIN 39-1747461
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
---------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(262) 787-8700
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
----- -----
(2) Yes x No
----- -----
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,385,421 at April 30, 2001.
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition ............................................. 3
Consolidated Statements of Income .......................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income ........ 5
Consolidated Statements of Cash Flows ...................................................... 6
Notes to Unaudited Consolidated Financial Statements ....................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ................................. 29
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings .......................................................................... 30
ITEM 2. Changes In Securities and Use of Proceeds .................................................. 30
ITEM 3. Defaults Upon Senior Securities ............................................................ 30
ITEM 4. Submission of Matters to a Vote of Security Holders ........................................ 30
ITEM 5. Other Information .......................................................................... 30
ITEM 6. Exhibits and Reports on Form 8-K ........................................................... 30
SIGNATURES .............................................................................................. 31
2
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
March 31, September 30,
2001 2000
----------- -------------
(In thousands, except share data)
ASSETS
Cash and due from banks ............................................. $ 37,723 $ 33,777
Federal funds sold and overnight deposits ........................... 8,090 970
----------- -----------
Cash and cash equivalents ........................................... 45,813 34,747
----------- -----------
Assets available for sale, at fair value:
Debt and equity securities ........................................ 115,906 213,848
Mortgage-backed and related securities ............................ 720,690 777,918
Mortgage loans held for sale, at lower of cost or market ............ 23,211 8,066
Securities held to maturity, at amortized cost:
Debt securities (fair value of $522 at September 30, 2000) ........ - 510
Mortgage-backed and related securities (fair values of $23,125
and $26,479, respectively) ........................................ 22,988 27,088
Loans receivable, net ............................................... 1,282,502 1,297,302
Federal Home Loan Bank stock, at cost ............................... 31,624 30,418
Accrued interest receivable ......................................... 12,923 14,171
Foreclosed properties ............................................... 84 241
Real estate held for investment ..................................... 26,517 27,145
Premises and equipment, net ......................................... 28,948 30,283
Other assets ........................................................ 38,641 31,346
----------- -----------
Total assets ........................................................ $ 2,349,847 $ 2,493,083
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ............................................................ $ 1,503,140 $ 1,471,881
Short term borrowings ............................................... 575,580 758,581
Long term borrowings ................................................ 95,974 106,095
Advances from borrowers for taxes and insurance ..................... 4,538 10,667
Accrued interest payable and other liabilities ...................... 16,967 14,936
----------- -----------
Total liabilities ................................................... 2,196,199 2,362,160
----------- -----------
Commitments and contingencies ....................................... - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued ....................................................... - -
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 9,402,121 and 9,437,197 shares, respectively ......... 146 146
Additional paid-in-capital .......................................... 88,799 88,799
Accumulated other comprehensive loss ................................ (2,873) (18,923)
Treasury stock at cost (5,177,119 and 5,142,043 shares, respectively) (69,985) (69,498)
Retained earnings, substantially restricted ......................... 137,561 130,399
----------- -----------
Total shareholders' equity .......................................... 153,648 130,923
----------- -----------
Total liabilities and shareholders' equity .......................... $ 2,349,847 $ 2,493,083
=========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements
3
4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
---------------- ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans ................................................................. $ 54,017 $ 48,606 $ 26,740 $ 24,963
Mortgage-backed and related securities ................................ 26,219 29,646 12,538 14,736
Debt and equity securities ............................................ 5,773 6,563 2,431 3,257
Federal funds sold and overnight deposits ............................. 72 29 34 12
Federal Home Loan Bank stock .......................................... 1,169 1,162 546 557
Trading account securities ............................................ 8 32 8 5
-------- -------- -------- --------
Total interest and dividend income ...................................... 87,258 86,038 42,297 43,530
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits .............................................................. 37,533 35,066 18,365 18,009
Advances and other borrowings ......................................... 24,330 22,874 10,995 11,586
-------- -------- -------- --------
Total interest expense .................................................. 61,863 57,940 29,360 29,595
-------- -------- -------- --------
Net interest income before provision for loan losses .................... 25,395 28,098 12,937 13,935
Provision for loan losses ............................................... 1,309 1,000 706 500
-------- -------- -------- --------
Net interest income ..................................................... 24,086 27,098 12,231 13,435
-------- -------- -------- --------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees .................................. 1,670 1,204 988 629
Depository fees and service charges ................................... 2,585 2,377 1,238 1,138
Securities gains ...................................................... 476 3 199 19
Gain on sales of loans ................................................ 2,100 358 1,487 230
Insurance, annuity and brokerage commissions .......................... 601 714 313 370
Gain (loss) on foreclosed properties .................................. (10) 14 1 7
Income from real estate held for investment ........................... 1,506 1,498 753 729
Other income .......................................................... 576 460 367 342
-------- -------- -------- --------
Total other operating income, net ....................................... 9,504 6,628 5,346 3,464
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits .............................. 10,389 17,476 5,448 7,248
Occupancy expenses, including depreciation ............................ 2,413 2,170 1,325 1,146
Furniture and equipment, including depreciation ....................... 2,150 2,122 1,080 1,048
Real estate held for investment expenses .............................. 1,529 1,565 770 779
Other general and administrative expenses ............................. 4,936 4,618 2,534 2,378
-------- -------- -------- --------
Total general and administrative expenses ............................... 21,417 27,951 11,157 12,635
-------- -------- -------- --------
Income before income tax expense and cumulative effect of
change in accounting principle ........................................ 12,173 5,775 6,420 4,264
Income tax expense ...................................................... 3,045 2,610 1,661 1,305
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle ............................................................. $ 9,128 $ 3,165 $ 4,759 $ 2,959
Cumulative effect of a change in accounting for derivative
instruments and hedging activities (net of income taxes of $55)........ (84) -- -- --
-------- -------- -------- --------
Net income .............................................................. $ 9,044 $ 3,165 $ 4,759 $ 2,959
======== ======== ======== ========
Basic earnings per share:
Before cumulative effect of change in accounting principle ............ $ 0.97 $ 0.32 $ 0.51 $ 0.30
Cumulative effect of change in accounting principle ................... (0.01) -- -- --
-------- -------- -------- --------
$ 0.96 $ 0.32 $ 0.51 $ 0.30
======== ======== ======== ========
Diluted earnings per share:
Before cumulative effect of change in accounting principle ............ $ 0.96 $ 0.31 $ 0.50 $ 0.29
Cumulative effect of change in accounting principle ................... (0.01) -- -- --
-------- -------- -------- --------
$ 0.95 $ 0.31 $ 0.50 $ 0.29
======== ======== ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements
4
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Shares of Other
Common Additional Unearned Comprehensive
Stock Common Paid-In ESOP Retained Income/ Treasury
Outstanding Stock Capital Compensation Earnings (Loss) Stock Total
-----------------------------------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding and per share data)
Six months ended March 31, 2000
Balance at September 30, 1999 .......... 10,156,770 $146 $82,426 $(2,260) $123,193 $(13,057) $(58,934) $131,514
Net income ............................. - - - - 3,165 - - 3,165
Change in unrealized loss on securities
available for sale ................... - - - - - (15,956) - (15,956)
Reclassification adjustment for gains
realized in net income ............. - - - - - (3) - (3)
Incomes taxes .......................... - - - - - 5,968 - 5,968
--------
Comprehensive loss ..................... (6,826)
Cash dividend - $0.18 per share ........ - - - - (1,824) - - (1,824)
Purchase of treasury stock ............. (191,488) - - - - - (2,950) (2,950)
Exercise of stock options, net ......... 32,387 - - - (192) - 429 237
Amortization of unearned compensation .. - - 5,567 1,894 - - - 7,461
--------- ---- ------- ------- -------- --------- ------------------
Balance at March 31, 2000 .............. 9,997,669 $146 $87,993 $ (366) $124,342 $(23,048) $(61,455) $127,612
========= ==== ======= ======= ======== ======== ======== ========
Six months ended March 31, 2001
Balance at September 30, 2000 .......... 9,437,197 $146 $88,799 $ - $130,399 $(18,923) $(69,498) $130,923
Net income ............................. - - - - 9,044 - - 9,044
Change in unrealized gain on securities
available for sale ................... - - - - - 26,650 - 26,650
Reclassification adjustment for gains
realized in net income ............. - - - - - (476) - (476)
Incomes taxes .......................... - - - - - (10,124) - (10,124)
--------
Comprehensive income ................... 25,094
Cash dividend - $0.20 per share ........ - - - - (1,882) - - (1,882)
Purchase of treasury stock ............. (35,076) - - - - - (487) (487)
--------- ---- ------- ------- -------- --------- ------------------
Balance at March 31, 2001 .............. 9,402,121 $146 $88,799 $ - $137,561 $ (2,873) $(69,985) $153,648
========= ==== ======= ======= ======== ======== ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements
5
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Six months ended
March 31,
------------------------
2001 2000
---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 9,044 $ 3,165
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ........................................................ 1,309 1,000
Depreciation, accretion and amortization ......................................... 3,746 3,279
Deferred income taxes ............................................................ (5,564) 3,194
Securities gains ................................................................. (476) (3)
Originations of loans held for sale .............................................. (169,332) (31,367)
Proceeds from sales of loans held for sale ....................................... 156,287 29,253
ESOP expense ..................................................................... 63 7,461
Gain on sale of loans ............................................................ (2,100) (358)
Other, net ....................................................................... (4,338) (2,270)
--------- ---------
Net cash provided by (used in) operating activities ................................ (11,361) 13,354
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity ..................... - 300
Principal repayments on mortgage-backed and related securities held to maturity .. 4,100 7,807
Proceeds from sales of mortgage-backed securities available for sale ............. 36,158 19,098
Principal repayments on mortgage-backed securities available for sale ............ 41,240 54,488
Purchase of debt and equity securities available for sale ........................ (128) -
Proceeds from sales of debt and equity securities available for sale ............. 5,676 1,768
Proceeds from maturities of debt and equity securities available for sale ........ 98,967 451
Purchases of Federal Home Loan Bank stock ........................................ (1,206) (1,495)
Redemption of Federal Home Loan Bank stock ....................................... - 3,000
Purchase of loans ................................................................ (69,715) (22,634)
(Increase) decrease in loans, net of loans held for sale ......................... 78,134 (108,186)
Increase in real estate held for investment ...................................... (48) (179)
Purchases of premises and equipment, net ......................................... (433) (166)
--------- ---------
Net cash provided by (used in) investing activities ................................ 192,745 (45,748)
--------- ---------
See accompanying Notes to Unaudited Consolidated Financial Statements
6
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
Six months ended
March 31,
------------------
2001 2000
---- ----
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ....................................................... 31,302 54,127
Proceeds from advances and other borrowings .................................... 481,131 826,621
Repayments on advances and other borrowings .................................... (541,864) (847,616)
Increase (decrease) in securities sold under agreements to repurchase .......... (132,389) 10,538
Decrease in advances from borrowers for taxes and insurance .................... (6,129) (4,661)
Dividends paid ................................................................. (1,882) (1,824)
Stock option transactions ...................................................... - 237
Purchase of treasury stock ..................................................... (487) (2,950)
--------- ---------
Net cash provided by (used in) financing activities ............................. (170,318) 34,472
--------- ---------
Increase in cash and cash equivalents ........................................... 11,066 2,078
Cash and cash equivalents:
Beginning of period ........................................................... 34,747 32,562
--------- ---------
End of period ................................................................. $ 45,813 $ 34,640
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 62,387 $ 56,291
Income taxes .................................................................. 14,601 2
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing activities:
Mortgage loans secured as mortgage-backed securities ............................ $ 1,432 $ 7,586
Transfer from loans to foreclosed properties .................................... 176 508
Transfer of mortgage loans to mortgage loans held for sale ...................... 41,852 7,976
See accompanying Notes to Unaudited Consolidated Financial Statements
7
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances
of St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting principles.
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, 2001 are not
necessarily indicative of the results which may be expected for the
entire year ending September 30, 2001. For further information refer to
the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended September
30, 2000.
Certain previously reported balances have been reclassified to conform
with the 2001 presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
The contractual or notional amounts of off-balance sheet financial
instruments are as follows:
Contractual or Notional Amount(s)
March 31, September 30,
2001 2000
--------- -------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans ............................... $ 23,629 $ 4,790
Variable-rate loans ............................ 12,932 42,293
Mortgage loans sold with recourse ................ 19,187 28,148
Guarantees under IRB issues ...................... 32,566 32,582
Interest rate swap agreements (notional amount)... 265,000 400,000
Unused and open-ended lines of credit:
Consumer ....................................... 210,014 199,515
Commercial ..................................... 63,518 60,408
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, 2001 have interest rates ranging from
6.50% to 9.125%. 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
8
9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained
consists primarily of one- to four-family residences and other
residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans
that are sold to secondary market agencies, primarily Federal National
Mortgage Association ("FNMA"), with the servicing of these loans being
retained by the Company. The Company's exposure on loans sold with
recourse is the same as if the loans remained in the Company's loan
portfolio. The Company receives a larger servicing spread on those
loans being serviced than it would if the loans had been sold without
recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party. Potential
loss on a guarantee is the notional amount of the guarantee less the
value of the real estate collateral. At March 31, 2001, appraised
values of the real estate collateral exceeded the amount of the
guarantees.
Interest rate swap agreements generally involve the exchange of fixed
and variable rate interest rate payments without the exchange of the
underlying notional amount on which the interest rate payments are
calculated. The notional amounts of these agreements represent the
amounts on which interest payments are exchanged between the
counterparties. The notional amounts do not represent direct credit
exposures. The Company is exposed to credit-related losses in the event
of nonperformance by the counterparties on interest rate payments, but
does not expect any counterparty to fail to meet their obligations. The
fixed pay-floating receive agreements were entered into as hedges on
the interest rates on debt securities. The fixed receive-floating pay
agreements were entered into as hedges of the interest rates on fixed
rate certificates of deposit. Interest receivable or payable on
interest rate swaps is recognized using the accrual method. The use of
interest rate swaps enables the Company to synthetically alter the
repricing characteristics of designated interest-bearing assets and
liabilities.
At March 31, 2001, the Company had a $10 million fixed pay-floating
receive agreement with a maturity date of June 2001. The agreement has
a fixed interest rate of 7.05% and a variable interest rate of 7.56%.
At March 31, 2001, the Company had $255 million in fixed
receive-floating pay agreements with maturity dates ranging from 2003
to 2009 and are all callable from April to September 2001. The
agreements have fixed interest rates ranging from 5.85% to 7.13% and
variable interest rates ranging from 4.71% to 6.23%.
The unused and open consumer lines of credit are conditional
commitments issued by the Company for extensions of credit such as home
equity, auto, credit card, or other similar consumer-type financing.
Furthermore, the unused and open commercial lines of credit are also
conditional commitments issued by the Company for extensions of credit
such as working capital, agricultural production, equipment or other
similar commercial type financing. The credit risk involved in
extending these lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for
these commitments may include, but may not be limited to, real estate,
investment securities, equipment, accounts receivable, inventory and
Company deposits.
9
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at March 31,
2001 were as follows:
SECURITIES AVAILABLE FOR SALE
---------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains (Losses) Value
-------- ---------- ---------- --------
(In thousands)
DEBT AND EQUITY SECURITIES:
U.S. Treasury obligations and obligations of
U.S. Government Agencies ..................... $115,809 $ 168 $ (277) $115,700
Marketable equity securities ................... 206 - - 206
-------- -------- -------- --------
TOTAL DEBT AND EQUITY SECURITIES ............... $116,015 $ 168 $ (277) $115,906
======== ======== ======== ========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC ........................................ $ 563 $ 3 $ - $ 566
FNMA ......................................... 28,966 - (2) 28,964
Private issue ................................ 19,534 - (628) 18,906
REMICs:
FHLMC ........................................ 122,100 456 (2,091) 120,465
FNMA ......................................... 21,705 54 (79) 21,680
Private issue ................................ 532,230 1,232 (3,389) 530,073
CMO residual ................................. 36 - - 36
-------- -------- -------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................... $725,134 $ 1,745 $ (6,189) $720,690
======== ======== ======== ========
SECURITIES HELD TO MATURITY
----------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains (Losses) Value
-------- ---------- ---------- ---------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
Private issue ................................ $22,988 $ 137 $ - $23,125
------- ------ ------ -------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................... $22,988 $ 137 $ - $23,125
======= ====== ====== =======
During the six month periods ended March 31, 2001 and 2000, gross proceeds from
the sale of securities available for sale totaled approximately $41.8 million
and $20.9 million, respectively. The gross realized gains on such sales totaled
approximately $367,000 and $41,000 for the six month periods ended March 31,
2001 and 2000, respectively. The gross realized losses on such sales totaled
approximately $49,000 and $53,000 for the six month periods ended March 31, 2001
and 2000, respectively.
During the three month periods ended March 31, 2001 and 2000, gross proceeds
from the sale of securities available for sale totaled approximately $33.8
million and $7.2 million, respectively. The gross realized gains on such sales
totaled approximately $133,000 and $11,000 for the three month periods ended
March 31, 2001 and 2000, respectively. The gross realized losses on such sales
totaled approximately $49,000 and zero for the three month periods ended March
31, 2001 and 2000, respectively.
At March 31, 2001, $455.6 million of mortgage-related securities were pledged as
collateral for Federal Home Loan Bank ("FHLB") advances.
10
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(5) Loans
Loans receivable are summarized as follows:
March 31, September 30,
2001 2000
- ---------------------------------------------------------------------------
(In thousands)
First mortgage - one- to four-family ....... $ 376,997 $ 404,505
First mortgage - residential construction... 58,818 62,260
First mortgage - multi-family .............. 118,223 130,002
Commercial real estate ..................... 340,007 306,778
Home equity ................................ 203,253 188,349
Commercial and agriculture ................. 153,624 152,526
Consumer secured by real estate ............ 76,862 80,881
Interim financing and consumer loans ....... 15,171 13,307
Indirect auto .............................. 23,043 30,722
Education .................................. 2,587 1,615
----------- -----------
Total gross loans ........................ 1,368,585 1,370,945
----------- -----------
Less:
Loans in process ......................... 50,614 54,679
Unearned insurance premiums .............. 167 194
Deferred loan and guarantee fees ......... 108 (359)
Purchased loan discount .................. 604 659
Allowance for loan losses ................ 11,379 10,404
----------- -----------
Total deductions ......................... 62,872 65,577
----------- -----------
Total loans receivable ..................... 1,305,713 1,305,368
Less: First mortgage loans held for sale ... 23,211 8,066
----------- -----------
Loans receivable, net ...................... $ 1,282,502 $ 1,297,302
=========== ===========
11
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Six months ended Three months ended
March 31, March 31,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In thousands)
Beginning Balance ........ $ 10,404 $ 9,356 $ 10,812 $ 9,764
Charge-offs:
Real estate - mortgage.. (27) (74) - (40)
Commercial loans ....... (124) - (31) -
Home equity loans ...... (70) (35)
Consumer ............... (135) (257) (85) (176)
-------- -------- -------- --------
Total charge-offs ........ (356) (331) (151) (216)
-------- -------- -------- --------
Recoveries:
Real estate - mortgage.. - 31 - 31
Commercial loans ....... 8 - 6 -
Home equity loans ...... - - -
Consumer ............... 14 46 6 23
-------- -------- -------- --------
Total recoveries ......... 22 77 12 54
-------- -------- -------- --------
Net charge-offs .......... (334) (254) (139) (162)
-------- -------- -------- --------
Provision ................ 1,309 1,000 706 500
-------- -------- -------- --------
Ending balance ........... $ 11,379 $ 10,102 $ 11,379 $ 10,102
======== ======== ======== ========
(7) Earnings Per Share
Basic earnings per share of common stock for the six and three month
periods ended March 31, 2001 and 2000, have been determined by dividing
net income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the six and three month periods ended March 31,
2001 and 2000, have been determined by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options. Book value per share of common stock at
March 31, 2001 and September 30, 2000, has been determined by dividing
total shareholders' equity by the number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options at the respective dates. Stock options are
regarded as potential common stock and are, therefore, considered in
per share calculations if not considered to be antidilutive. Total
shares outstanding for the six and three month periods ended March 31,
2000 for earnings per share calculation purposes have been reduced by
the Employee Stock Ownership Plan ("ESOP") shares that had not been
released. The Company incurred an additional expense in the six and
three month periods ended March 31, 2000 related to the voluntary
acceleration of loan principal owed to the Company's ESOP, which
accounted for a charge to diluted earnings per share of approximately
$0.57 and $0.14, respectively.
12
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
Six months ended Three months ended
March 31, March 31,
------------------------------ ----------------------------
2001 2000 2001 2000
------------ ------------- ------------- -------------
Income before cumulative effect of change in
accounting principle............................................ $ 9,128,000 $ 3,165,000 $ 4,759,000 $ 2,959,000
Cumulative effect of change in accounting principle............... (84,000) - - -
------------ ------------- ------------- -------------
Net income for the period......................................... $ 9,044,000 $ 3,165,000 $ 4,759,000 $ 2,959,000
============ ============= ============= =============
Common shares issued.............................................. 14,579,240 14,579,240 14,579,240 14,579,240
Weighted average treasury shares.................................. 5,171,494 4,452,908 5,177,119 4,488,374
Weighted average unallocated ESOP shares.......................... - 223,455 - 134,502
------------ ------------- ------------- -------------
Weighted average common shares
outstanding during the period................................... 9,407,746 9,902,877 9,402,121 9,956,364
Effect of dilutive stock options outstanding...................... 122,526 234,347 199,894 127,855
Diluted weighted average common shares ------------ ------------- ------------- -------------
Outstanding during the period..................................... 9,530,272 10,137,224 9,602,015 10,084,219
============ ============= ============= =============
Basic earnings per share:
Before cumulative effect of change in accounting principle...... $ 0.97 $ 0.32 $ 0.51 $ 0.30
Cumulative effect of change in accounting principle............. (0.01) - - -
------------ ------------- ------------- -------------
$ 0.96 $ 0.32 $ 0.51 $ 0.30
============ ============= ============= =============
Diluted earnings per share:
Before cumulative effect of change in accounting principle...... $ 0.96 $ 0.31 $ 0.50 $ 0.29
Cumulative effect of change in accounting principle............. (0.01) - - -
------------ ------------- ------------- -------------
$ 0.95 $ 0.31 $ 0.50 $ 0.29
============ ============= ============= =============
The computation of book value per common share is as follows:
March 31, September 30,
2001 2000
------------ ------------
Common shares outstanding at the end of the period .... 9,402,121 9,437,197
Incremental shares relating to dilutive stock
options outstanding at the end of the period ........ 268,261 136,313
------------ ------------
9,670,382 9,573,510
============ ============
Total shareholders' equity at the end of the period ... $153,648,000 $130,923,000
Book value per common share ........................... $ 15.89 $ 13.68
13
14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less
than the fair value of the underlying common stock as of the date of
the option grant, and the maximum term cannot exceed ten years. Stock
options awarded to directors may be exercised at any time or on a
cumulative basis over varying time periods, provided the optionee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At March 31, 2001, 39,650 shares were reserved for future grants.
Further information concerning the options is as follows:
Six months ended March 31,
-----------------------------------------------------------
2001 2000
-----------------------------------------------------------
Average Average
Exercise Exercise
Options Price Options Price
-----------------------------------------------------------
Outstanding at beginning of period ... 1,700,148 $ 15.78 1,565,682 $ 15.70
Granted .............................. - - 5,000 22.00
Canceled ............................. (34,850) 18.36 - -
Exercised ............................ - - (32,854) 7.48
--------- ------------- --------- -------------
Outstanding at end of period ......... 1,665,298 $ 15.73 1,537,828 $ 15.90
========= ============= ========= =============
Options exercisable .................. 883,494 $5.00 - 22.00 768,637 $5.00 - 21.31
========= ============= ========= =============
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
Six months ended Three months ended
March 31, March 31,
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Federal income tax expense at statutory rate of 35% .... $ 4,212 $ 2,021 $ 2,247 $ 1,492
State income taxes, net of Federal income tax benefit .. 64 10 62 (1)
Tax exempt interest .................................... (49) (62) (23) (31)
Non-deductible compensation ............................ -- 1,846 -- 442
Acquisition intangible amortization .................... 114 107 57 53
Affordable housing credits ............................. (1,304) (1,294) (652) (644)
Other, net ............................................. 8 (18) (30) (6)
------- ------- ------- -------
$ 3,045 $ 2,610 $ 1,661 $ 1,305
======= ======= ======= =======
14
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(10) Derivative and Hedging Activities
Effective October 1, 2000, the Company adopted Financial Accounting
Statement 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes new rules for the recognition and
measurement of derivatives and hedging activities. The Company
utilizes derivative hedging instruments in the course of its
asset/liability management. The hedging instruments primarily used by
the Company are interest rate swap agreements which are used to
convert fixed-rate payments or receipts to variable-rate payments or
receipts and thus hedge the Company's fair market value of the item
being hedged. The items being hedged generally expose the Company to
variability in fair value in rising or declining interest rate
environments. In converting the fixed payment or receipt to a variable
payment or receipt, the interest rate swaps effectively reduce the
variability of the fair market value of the items being hedged.
The Company utilizes interest rate swaps to hedge the fair value of
several financial instruments on the balance sheet including brokered
certificates of deposit ("CD's"), retail certificates of deposit and
investment securities. Hedges on brokered CD's account for the large
majority of the Company's hedging activity, with hedges on other items
being relatively nominal. The interest rate swaps that hedge brokered
CD's are matched with the CD as to final maturity, interest payment
dates and call features. The interest rate swaps are a floating
pay-fixed receive instrument and as such, they convert the fixed rate
payment on the brokered CD's to a floating rate and thus hedge the
fair value of the brokered CD's from changes in interest rates.
The Company measures the effectiveness of its' hedges on a periodic
basis. Any difference between the fair value change of the hedge
versus the fair value change of the hedged item is considered to be
the "ineffective" portion of the hedge. The ineffective portion of the
hedge is recorded as an increase or decrease in the related income
statement classification of the item being hedged. For example, the
ineffectiveness of a brokered CD hedge would be recorded as an
adjustment to interest expense on deposits. If the ineffectiveness of
a hedge exceeds certain levels as described in the accounting
standard, the derivative would no longer be eligible for hedge
treatment and future changes in fair value of the derivative would be
recorded on the income statement.
The Company's commitments to originate mortgage loans held-for-sale is
considered a derivative under the accounting standards. As such, the
change in fair value of such commitments, are recorded as an
adjustment to the gains on the sale of loans. Since most loan
commitments are sold forward by the Company, the change in fair value
on loan commitments is expected to be minimal.
As of the adoption date of Statement 133, the Company had two interest
rate swap agreements that were not considered hedges under the
accounting standard. Both agreements were terminated during the
quarter ended December 31, 2000. The fair value of the agreements as
of October 1, 2000 is included in the cumulative effect of an
accounting change and the change in fair value during the quarter is
included in securities gains (losses) in the income statement.
Under Statement 133, the Company was allowed a one-time opportunity to
reclassify investment assets from held to maturity to available for
sale. The Company reclassified all municipal securities held upon the
adoption of FAS 133 as available for sale. The amortized cost and fair
value of the securities transferred was $510,000 and $522,000. During
the quarter ended March 31, 2001, all municipal securities held by the
Company were sold.
Upon adoption of Statement 133, the Company recorded the cumulative
effect of an accounting change in an amount equal to the accounting
effects of the statement as of the beginning of the fiscal year. The
cumulative effect, net of taxes, was a decrease in net income of
$84,000.
15
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(11) Current Accounting Developments
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities"--a replacement
of FASB Statement No. 125. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. This Statement is to be applied
prospectively with certain exceptions. Therefore, earlier or
retroactive application of this Statement is not permitted. Adoption of
this standard is not expected to materially effect the results of
operations or financial position of the Company.
(12) Segment Information
The Company's operations include four strategic business segments:
Retail Banking, Commercial Banking, Mortgage Banking and Investments.
Financial performance is primarily based on the individual segments'
direct contribution to Company net income. The segments do not include
the operations of the Company as a holding company, nor the operations
of the Bank's operating subsidiaries. Capital is not allocated to the
segments and thus net interest income related to the free funding
associated with capital is not included in the individual segments. The
Company only charges the segments with direct expenses. Costs
associated with administrative and centralized back-office support
areas of the Bank are not allocated to the segments. Income taxes are
allocated to the segments based on the Bank's effective tax rate prior
to the consolidation with its affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits,
branch and ATM network, consumer lending operations, annuity and
brokerage services and call center. The segment includes a much higher
level of interest-bearing liabilities than earning assets. The Company
views this segment as a significant funding vehicle for the other
lending segments. The Company's transfer pricing model has the effect
of viewing this segment as a comparison to the cost of wholesale funds.
The Commercial Banking segment consists of the Bank's commercial,
commercial real estate and multifamily lending operations. It also
includes the lending aspects of the Company's affordable housing
subsidiary.
The Mortgage Banking segment consists of the Bank's single-family
mortgage lending operation. Single-family lending consists of three
primary operations: portfolio lending, lending for sale in the
secondary market and loan servicing.
The Investment segment consists of the Company's portfolio of
mortgage-backed and related securities, its debt and equity securities
and other short-term investments. This segment also includes the
Company's wholesale sources of funding including FHLB advances,
brokered certificates of deposits, reverse repurchase agreements and
federal funds purchased.
16
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
SIX MONTHS ENDED MARCH 31, 2001
Net interest income .................... $ 11,765 $ 6,970 $ 3,661 $ 1,669 $ 24,065
Provision for loan losses .............. 443 623 243 -- 1,309
Other operating income ................. 3,586 586 2,421 340 6,933
General and administrative expenses .... 10,679 1,411 1,814 493 14,398
Income taxes ........................... 1,149 1,501 1,096 412 4,159
---------------------------------------------------------------------------
Segment profit ......................... $ 3,079 $ 4,021 $ 2,928 $ 1,104 $ 11,133
===========================================================================
Segment average assets ................. $ 320,991 $ 594,584 $ 426,285 $ 1,023,982 $ 2,365,842
===========================================================================
SIX MONTHS ENDED MARCH 31, 2000
Net interest income .................... $ 11,978 $ 7,192 $ 3,563 $ 3,926 $ 26,659
Provision for loan losses .............. 395 473 132 -- 1,000
Other operating income ................. 3,473 375 806 (8) 4,646
General and administrative expenses .... 10,588 1,523 1,895 389 14,395
Income taxes ........................... 1,679 2,093 880 1,326 5,979
---------------------------------------------------------------------------
Segment profit ......................... $ 2,790 $ 3,477 $ 1,462 $ 2,202 $ 9,931
===========================================================================
Segment average assets ................. $ 311,875 $ 534,873 $ 382,182 $ 1,185,632 $ 2,414,562
===========================================================================
THREE MONTHS ENDED MARCH 31, 2001
Net interest income .................... $ 5,293 $ 3,600 $ 1,987 $ 1,141 $ 12,021
Provision for loan losses .............. 221 361 123 -- 706
Other operating income ................. 1,767 310 1,731 199 4,007
General and administrative expenses .... 5,452 762 975 264 7,453
Income taxes ........................... 518 893 784 314 2,509
---------------------------------------------------------------------------
Segment profit ......................... $ 868 $ 1,894 $ 1,837 $ 762 $ 5,360
===========================================================================
Segment average assets ................. $ 322,810 $ 605,717 $ 418,485 $ 977,054 $ 2,324,066
===========================================================================
THREE MONTHS ENDED MARCH 31, 2000
Net interest income .................... $ 6,150 $ 3,567 $ 1,789 $ 1,884 $ 13,390
Provision for loan losses .............. 198 236 66 -- 500
Other operating income ................. 1,718 200 411 12 2,341
General and administrative expenses .... 5,432 692 898 200 7,222
Income taxes ........................... 927 1,170 507 707 3,312
---------------------------------------------------------------------------
Segment profit ......................... $ 1,312 $ 1,668 $ 729 $ 988 $ 4,697
===========================================================================
Segment average assets ................. $ 313,897 $ 552,633 $ 395,484 $ 1,173,628 $ 2,435,642
===========================================================================
17
18
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,
2001 2000 2001 2000
------------------------------------------------------------
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments ............................................. $ 30,998 $ 31,305 $ 16,028 $ 15,731
Unallocated transfer pricing credit (primarily on capital) ..... 3,124 2,687 1,784 1,218
Income from affordable housing subsidiary ...................... 1,506 1,498 753 729
Holding company interest expense ............................... (1,351) (746) (626) (429)
Elimination of intercompany interest income .................... (551) (558) (273) (273)
Other .......................................................... 1,173 540 617 423
------------------------------------------------------------
Consolidated total revenue ..................................... $ 34,899 $ 34,726 $ 18,283 $ 17,399
============================================================
PROFIT
Total for segments ............................................. $ 11,133 $ 9,931 $ 5,360 $ 4,697
Unallocated transfer pricing credit (primarily on capital) ..... 1,875 1,612 1,071 731
Unallocated administrative and centralized support costs (a) ... (2,702) (3,028) (1,427) (1,581)
Holding company net loss ....................................... (1,111) (622) (568) (392)
Elimination of intercompany interest income .................... (331) (335) (164) (164)
Affordable housing tax credits ................................. 1,304 1,294 652 644
Additional ESOP expense not allocated to segments .............. -- (5,714) -- (1,329)
Other .......................................................... (1,124) 27 (165) 353
------------------------------------------------------------
Consolidated net income ........................................ $ 9,044 $ 3,165 $ 4,759 $ 2,959
============================================================
AVERAGE ASSETS
Total for segments ............................................. $ 2,365,842 $ 2,414,562 $ 2,324,066 $ 2,435,642
Elimination of intercompany loans .............................. (13,326) (13,388) (13,314) (13,350)
Other assets not allocated ..................................... 104,300 113,918 112,547 89,408
------------------------------------------------------------
Consolidated average assets .................................... $ 2,456,816 $ 2,515,092 $ 2,423,299 $ 2,511,700
============================================================
(a) After-tax effect of $4.5 million and $5.0 million of general and
administrative expenses for the six month periods ended March 31, 2001 and
2000, respectively. After-tax effect of $2.4 million and $2.6 million of
general and administrative expenses for the three month periods ended March
31, 2001 and 2000, respectively.
18
19
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operation and business of St. Francis Capital
Corporation (the "Company"). The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors could affect the
Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general economic
conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal
policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or
composition of the Company's loan and investment portfolios, (vi) demand for
loan products, (vii) deposit flows, (viii) competition, (ix) demand for
financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Company's total assets decreased $143 million to $2.35 billion at March 31,
2001 from $2.49 billion at September 30, 2000. The primary reason for the
decrease is the continuing restructuring of the balance sheet as the Company
continues to reduce the size of its mortgage-backed securities and investment
securities portfolios. Due to a combination of year-to-date earnings and
improvement in the Company's unrealized market value on its' available for sale
securities portfolio, total capital increased to $153.6 million at March 31,
2001 compared with $130.9 million at September 30, 2000. The Company's ratio of
shareholders' equity to total assets was 6.54% at March 31, 2001, compared to
5.25% at September 30, 2000. The Company's fully dilutive book value per share
was $15.89 at March 31, 2001, compared to $13.68 at September 30, 2000.
The restructuring of the balance sheet continues to be one of the strategic
initiatives of the Company. As has been the case over the past seven quarters,
the Company continues to reduce the size of its mortgage-backed securities and
investment securities portfolios as repayments and maturities occur. Funds
received from these repayments and maturities will be used to grow and diversify
the Company's loan portfolio, to reduce the Company's wholesale debt and as an
additional source of liquidity. This restructuring is part of a long-range plan
to make the Company's balance sheet composition more representative of
"community banks" with a greater percentage of assets in the loan portfolio vs.
investments. Management anticipates that this restructuring should improve
margins due to the generally higher interest rates on loan assets.
Loans receivable, including mortgage loans held for sale, increased $345,000 to
$1.306 billion at March 31, 2001 from $1.305 billion at September 30, 2000.
During the six month period ended March 31, 2001, one- to four-family mortgage
loans decreased $31.0 million and multi-family mortgage loans decreased $11.8
million, offset by an increase of $33.2 million in commercial real estate loans
and $14.9 million in home equity loans. The Company's one- to four-family
mortgage loan portfolio has a significant level of adjustable rate loans and
during periods of declining interest rates, the Company refinances many of its'
own mortgages. However, fixed rate loans are generally sold in the secondary
market and are not maintained on the Company's balance sheet.
The Company originated approximately $302.4 million in loans for the six month
period ended March 31, 2001, as compared to $296.5 million for the same period
in the prior year. Of the $302.4 million in loans originated, $30.3 million were
commercial loans, $95.3 million were consumer and interim financing loans, and
$176.8 million were first mortgage loans. For the six month period ended March
31, 2001, the Company purchased $69.7 million of one- to four-family loans, as
compared to $22.6 million for the same period in the prior year. The increase in
loans purchased during the current year is primarily due to the Company's
mortgage banking operation in Illinois. For the six month period ended March 31,
2001, the Company sold $154.2 million of one- to four-family loans, as compared
to $28.9 million for the same period in the prior year. During periods of
declining interest rates, the Company originates more fixed rate loans, which
are generally sold into the secondary market.
Mortgage-backed and related securities, including securities available for sale,
decreased $61.3 million to $743.7 million at March 31, 2001 from $805.0 million
at September 30, 2000. Debt and equity securities decreased $98.5 million to
$115.9 million at March 31, 2001 from $214.4 million at September 30, 2000. The
Company has not purchased mortgage-backed securities or investment securities
during the current fiscal year. These decreases are due to scheduled maturities,
accelerated repayments and sales during the current year. As noted above, in
connection with the balance sheet restructuring program, in fiscal 2000, the
Company began reducing the size of its mortgage-backed securities and investment
securities portfolios which management anticipates will continue to be an
ongoing strategic initiative of the Company in fiscal 2001. As part of this
effort, the Company has
19
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
reduced the size of the mortgage-backed securities and investment securities
portfolios and used the funds generated from the repayment of principal to grow
and diversify the Company's loan portfolio and to reduce the size of the
Company's wholesale debt.
Deposits increased $31.3 million to $1.503 billion at March 31, 2001 from $1.472
billion at September 30, 2000. The increase in deposits was due primarily to
increases of $24.8 million in money market demand account deposits and $8.9
million in certificates of deposit. However, slight decreases in other types of
deposit products have partially offset the increases. At March 31, 2001, the
Company had approximately $339.5 million in brokered certificates of deposit
compared with $341.3 million at September 30, 2000. The brokered deposits
generally consist of terms from three months to ten years and include
certificates that are callable at the option of the Company. As part of a
continuing strategy, the Company continues to offer deposit products that
compete more effectively with money market funds and other non-financial deposit
products. Such accounts have generally changed the Company's traditional mix of
deposit accounts to one that is more adjustable to current interest rates such
as the money market demand account. This has resulted in passbook and
certificate of deposit accounts representing a lower percentage of the Company's
total deposit portfolio. The level of deposit flows during any given period is
heavily influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing instruments,
such as money market mutual funds. The Company believes that the likelihood for
retention of brokered certificates of deposit is more a function of the rate
paid on such accounts, as compared to retail deposits which may be established
due to branch location or other undefined reasons.
Advances and other borrowings decreased by $193.1 million to $671.6 million at
March 31, 2001 from $864.7 million at September 30, 2000. Short term borrowings
decreased $183.0 million to $575.6 million at March 31, 2001, compared to $758.6
million at September 30, 2000. At March 31, 2001, $395.0 million of the short
term borrowings were callable FHLB advances with maturities from five to ten
years and are callable by the FHLB during the next fiscal year and quarterly
thereafter. Long term borrowings decreased $10.1 million to $96.0 million at
March 31, 2001, compared to $106.1 million at September 30, 2000. At March 31,
2001, the Company had an additional borrowing capacity of $188.1 million
available from the FHLB.
At March 31, 2001, the Company had $265.0 million in interest rate swaps
outstanding compared with $400.0 million at September 30, 2000. The swaps are
designed to offset the changing interest payments of some of the Company's
brokered certificates. Fixed receive-floating pay swaps totaled $255.0 million
at March 31, 2001 and were entered into to hedge interest rates on fixed rate
certificates of deposits. Fixed receive-floating pay swaps will provide for a
lower interest expense (or interest income) in a falling rate environment while
adding to interest expense in a rising rate environment. Fixed pay-floating
receive swaps totaled $10.0 million at March 31, 2001 and were entered into as
hedges on the interest rates on investment securities. Fixed pay-floating
receive swaps will provide for a lower interest expense (or interest income) in
a rising rate environment while adding to interest expense in a falling rate
environment. During the six month period ended March 31, 2001, the Company
recorded a net reduction of interest expense of $126,000 as a result of the
Company's interest rate swap agreements compared with a net reduction of $1.0
million for the six month period ended March 31, 2000.
RESULTS OF OPERATIONS
NET INCOME. Net income for the six month period ended March 31, 2001 increased
to $9.0 million compared with $3.2 million for the six month period ended March
31, 2000. Net income for the three month period ended March 31, 2001 increased
to $4.8 million compared with $3.0 million for the three month period ended
March 31, 2000. The results for the prior years' six and three month periods
included an after-tax effect of $5.7 million and $1.3 million, respectively, due
to the voluntary acceleration of loan principal repayment to the Company's
Employee Stock Ownership Plan ("ESOP"). The ESOP loan was repaid in full in the
prior fiscal year, and the ongoing expense was eliminated. The six month period
ended March 31, 2001 included a reduction in net income of $84,000 for the
cumulative effect of a change in accounting principle resulting from the
adoption of Financial Accounting Statement Number 133, "Accounting for
Derivative Instruments and Hedging Activities." Net income for the six and three
month periods ended March 31, 2001 increased primarily due to the ESOP expense
in the prior period and due to increases in other operating income offset by a
decrease in net interest income.
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,
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Return on average assets ............. 0.74% 0.25% 0.80% 0.47%
Return on average equity ............. 12.78% 4.88% 12.98% 9.36%
20
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $2.7 million or 9.6% and $1.0 million or 7.2% for the six and three
month periods ended March 31, 2001, respectively, compared to the same periods
in the prior year. The decrease in net interest income for the six and three
month periods ended March 31, 2001 was due to a decrease in the net interest
margin and to a decrease in average earning assets. The net interest margin
declined to 2.16% and 2.26%, respectively, for the six and three month periods
ended March 31, 2001 compared with 2.33% and 2.32%, respectively, in the prior
year. In addition, average earning assets decreased $48.5 million and $100.4
million, respectively, for the six and three month periods ended March 31, 2001.
The decrease in average earning assets is largely the result of the Company's
restructuring effort to reduce the amount of mortgage-backed and investment
securities. The decrease in the net interest margin is largely attributable to
the generally higher interest rate environment during most of calendar year 2000
compared with the prior year which has been partially mitigated by the decline
in market rates since January, 2001.
The recent decline in market interest rates is expected to positively impact the
Company's net interest margin over the course of the fiscal year. While
decreases in market rates have a delayed effect on the Company's net interest
margin (as it takes time for assets and liabilities to reprice), management
currently anticipates that the Company's net interest income will improve over
the remainder of the fiscal year.
Total interest income increased $1.2 million or 1.4% to $87.3 million for the
six month period ended March 31, 2001 compared to $86.0 million at March 31,
2000, and decreased $1.2 million or 2.8% to $42.3 million for the three month
period ended March 31, 2001, compared to $43.5 million for the three month
period ended March 31, 2000. The change in interest income was primarily the
result of increases in interest on loans partially offset by decreases in
interest on mortgage-backed and related securities and debt and equity
securities. The increase in interest income on loans was the result of an
increase in the average balance of loans to $1.33 billion from $1.22 billion for
the six month periods ended March 31, 2001 and 2000, respectively, in
conjunction with an increase in the average yield on loans to 8.12% from 8.00%
for the same periods. The increase in interest income on loans for the three
month period ended March 31, 2001 compared with the three month period ended
March 31, 2000 was the result of an increase in the average balance of loans to
$1.34 billion from $1.25 billion, in conjunction with an increase in the average
yield on loans to 8.08% from 8.04% for the same periods. The increase in the
average balance of loans is due primarily to the Company's recent efforts to
grow and diversify its loan portfolio, and in particular, emphasize commercial,
consumer and home equity lending.
The decrease in interest income on mortgage-backed and related securities was
due to a decrease in the average balance of such securities to $801.0 million
from $933.8 million for the six month periods ended March 31, 2001 and 2000,
respectively, partially offset by an increase in the average yield on such
securities to 6.56% from 6.35% for the same periods. The decrease in interest
income on mortgage-backed and related securities for the three month period
ended March 31, 2001 compared with the three month period ended March 31, 2000
was due to a decrease in the average balance of such securities to $782.1
million from $915.3 million, partially offset by an increase in the average
yield on such securities to 6.50% from 6.48% for the same periods. The decrease
in interest income on debt and equity securities was the result of a decrease in
the average balance of such securities to $189.3 million from $223.9 million for
the six month periods ended March 31, 2001 and 2000, respectively, partially
offset by an increase in the average yield on such securities to 6.12% from
5.86% for the same periods. The decrease in interest income on debt and equity
securities for the three month period ended March 31, 2001 compared with the
three month period ended March 31, 2000 was due to a decrease in the average
balance of such securities to $161.4 million from $223.1 million, partially
offset by an increase in the average yield on such securities to 6.11% from
5.87% for the same periods. See "Financial Condition" for a further discussion
of the Company's balance sheet restructuring activities.
Total interest expense increased $3.9 million or 6.8% to $61.8 million for the
six month period ended March 31, 2001, compared to $57.9 million for the six
month period ended March 31, 2000. For the three month period ended March 31,
2001, total interest expense decreased $235,000 or 0.80% to $29.4 million
compared to $29.6 million for the three month period ended March 31, 2000. The
change in interest expense was the result of increases in the cost of deposits
and advances and other borrowings partially offset by decreases in the average
balances. The average cost of deposits increased to 5.33% and 5.20% for the six
and three month periods ended March 31, 2001, respectively, from 4.82% and 4.94%
for the same periods in the prior year. The average balances of deposits
decreased to $1.41 billion and $1.43 billion for the six and three month periods
ended March 31, 2001, respectively, as compared to $1.45 billion and $1.47
billion for the same periods in the prior year. See "Financial Condition" for a
further discussion of the Company's deposit base. The average balances of
advances and other borrowings decreased to $804.4 million and $749.9 million for
the six and three month periods ended March 31, 2001, respectively, as compared
to $838.8 million and $835.9 million for the same periods in the prior year. The
average cost of advances and other borrowings increased to 6.06% and 5.95% for
the six and three month periods ended March 31, 2001, respectively, from 5.45%
and 5.57% 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.
21
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
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, 2001 and 2000, respectively. Tax-exempt investments are not material
and the tax-equivalent method of presentation is not included in the schedule.
22
23
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
SIX MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits ................ $ 2,493 $ 72 5.79% $ 1,204 $ 29 4.82%
Trading account securities ............................... 196 8 8.19 691 32 9.26
Debt and equity securities ............................... 189,320 5,773 6.12 223,851 6,563 5.86
Mortgage-backed and related securities ................... 801,046 26,219 6.56 933,833 29,646 6.35
Loans:
First mortgage ......................................... 859,577 33,797 7.89 779,239 30,166 7.74
Home equity ............................................ 197,904 8,861 8.98 165,641 7,129 8.61
Consumer ............................................... 122,538 5,303 8.68 146,220 6,106 8.35
Commercial and agricultural ............................ 154,405 6,056 7.87 124,547 5,205 8.36
----------------------- ----------------------
Total loans ............................................ 1,334,424 54,017 8.12 1,215,647 48,606 8.00
Federal Home Loan Bank stock ............................. 31,289 1,169 7.49 32,003 1,162 7.26
----------------------- ----------------------
Total earning assets ................................... 2,358,768 87,258 7.42 2,407,229 86,038 7.15
---------- --------
Valuation allowances ..................................... (28,973) (37,526)
Cash and due from banks .................................. 27,722 35,532
Other assets ............................................. 99,299 109,857
---------- ----------
Total assets ........................................... $2,456,816 $2,515,092
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ........................................... $ 78,207 238 0.61 $ 76,394 259 0.68
Money market demand accounts ........................... 378,164 9,411 4.99 361,648 8,052 4.45
Passbook ............................................... 87,418 842 1.93 108,329 1,189 2.20
Certificates of deposit ................................ 868,488 27,042 6.24 907,276 25,566 5.64
----------------------- ----------------------
Total interest-bearing deposits .......................... 1,412,277 37,533 5.33 1,453,647 35,066 4.82
Advances and other borrowings ............................ 804,422 24,323 6.06 838,827 22,866 5.45
Advances from borrowers for taxes and insurance........... 6,147 7 0.23 5,341 8 0.30
----------------------- ----------------------
Total interest-bearing liabilities ..................... 2,222,846 61,863 5.58 2,297,815 57,940 5.04
Non interest-bearing deposits ............................ 73,994 73,569
Other liabilities ........................................ 18,102 13,971
Shareholders' equity ..................................... 141,874 129,737
---------- ----------
Total liabilities and shareholders' equity ............... $2,456,816 $2,515,092
========== ==========
Net interest income ...................................... $ 25,395 $ 28,098
========== ==========
Net yield on interest-earning assets ..................... 2.16 2.33
Interest rate spread ..................................... 1.84 2.11
Ratio of earning assets to interest-bearing liabilities .. 106.11 104.76
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-----------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits ................. $ 2,601 $ 34 5.30% $ 926 $ 12 5.21%
Trading account securities ................................ 392 8 8.28 185 5 10.87
Debt and equity securities ................................ 161,383 2,431 6.11 223,054 3,257 5.87
Mortgage-backed and related securities .................... 782,129 12,538 6.50 915,296 14,736 6.48
Loans:
First mortgage .......................................... 863,252 16,838 7.91 810,433 15,684 7.78
Home equity ............................................. 201,646 4,372 8.79 169,729 3,679 8.72
Consumer ................................................ 120,637 2,597 8.73 144,356 2,987 8.32
Commercial and agricultural ............................. 156,282 2,933 7.61 124,390 2,613 8.45
----------------------- ------------------------
Total loans ....................................... 1,341,817 26,740 8.08 1,248,908 24,963 8.04
Federal Home Loan Bank stock .............................. 31,597 546 7.01 31,993 557 7.00
----------------------- ------------------------
Total earning assets .............................. 2,319,919 42,297 7.39 2,420,362 43,530 7.23
---------- --------
Valuation allowances ...................................... (20,850) (43,288)
Cash and due from banks ................................... 27,860 33,461
Other assets .............................................. 96,370 101,165
---------- ----------
Total assets .............................................. $2,423,299 $2,511,700
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................................ $ 78,011 118 0.61 $ 76,400 124 0.65
Money market demand accounts ............................ 381,651 4,467 4.75 360,575 4,072 4.54
Passbook ................................................ 85,147 400 1.91 103,513 558 2.17
Certificates of deposit ................................. 887,932 13,380 6.11 924,782 13,255 5.76
----------------------- ------------------------
Total interest-bearing deposits ........................... 1,432,741 18,365 5.20 1,465,270 18,009 4.94
Advances and other borrowings ............................. 749,929 10,994 5.95 835,903 11,584 5.57
Advances from borrowers for taxes and insurance............ 2,989 1 0.14 2,691 2 0.30
----------------------- ------------------------
Total interest-bearing liabilities ...................... 2,185,659 29,360 5.45 2,303,864 29,595 5.17
Non interest-bearing deposits ............................. 69,832 68,604
Other liabilities ......................................... 19,083 12,149
Shareholders' equity ...................................... 148,725 127,083
---------- ----------
Total liabilities and shareholders' equity ................ $2,423,299 $2,511,700
========== ==========
Net interest income ....................................... $ 12,937 $ 13,935
========== ==========
Net yield on interest-earning assets ...................... 2.26 2.32
Interest rate spread ...................................... 1.95 2.07
Ratio of earning assets to interest-bearing liabilities.... 106.14 105.06
23
24
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,
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Beginning balance ...................... $ 10,404 $ 9,356 $ 10,812 $ 9,764
Provision for loan losses .............. 1,309 1,000 706 500
Recoveries ............................. 22 77 12 54
Charge-offs ............................ (356) (331) (151) (216)
-------- -------- -------- --------
Ending balance ......................... $ 11,379 $ 10,102 $ 11,379 $ 10,102
======== ======== ======== ========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period ........................ 0.83% 0.75% 0.83% 0.75%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ...................... 78.30% 300.48% 78.30% 300.48%
Ratio of net charge-offs to average
gross loans (annualized) ............. 0.05% 0.04% 0.04% 0.05%
Management believes that the allowance for loan losses is adequate to provide
for probable losses as of March 31, 2001, based upon its current evaluation of
loan delinquencies, non-performing loans, charge-off trends, loan portfolio
composition, economic conditions and other factors. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers, among other matters, the estimated net realizable
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
accurate provision for loan losses. For the six and three month periods ended
March 31, 2001, the provision for loan losses was $1.3 million and $706,000,
respectively, compared to $1.0 million and $500,000 for the same periods in the
prior year. The Company's loan portfolio is becoming increasingly more
diversified than in previous years. The Company has and continues to expect to
increase its commercial, consumer and commercial real estate loan portfolios
which are generally presumed to have more risk than single-family mortgage
loans. Charge-offs for the six and three month periods ended March 31, 2001 were
$356,000 and $151,000, respectively, compared to $331,000 and $216,000 for the
six and three month periods ended March 31, 2000. At March 31, 2001, the
decrease in the ratio of the allowance for loan losses to total non-performing
loans is due to the increase in non-performing loans. (See "Asset Quality")
OTHER OPERATING INCOME. Other operating income increased by $2.9 million to $9.5
million and $1.9 million to $5.4 million for the six and three month periods
ended March 31, 2001, respectively, compared to the same periods in the prior
year. The following table shows the percentage of other operating income to
average assets for each period:
Six months ended Three months ended
March 31, March 31,
---------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Other operating income ................... $9,504 $6,628 $5,346 $3,464
Percent of average assets (annualized) ... 0.78% 0.53% 0.89% 0.55%
The increase for the six and three month periods ended March 31, 2001 was due
primarily to increases in gains on the sale of loans, securities gains and
increases in other fees. Gains on the sale of mortgage loans increased to $2.1
million and $1.5 million for the six and three month periods ended March 31,
2001, respectively, compared to gains of $358,000 and $230,000 for the same
periods in the prior year. The Company's volume of mortgage loan sales were
$154.2 million and $107.7 million for the six and three
24
25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
month periods ended March 31, 2001, respectively, compared to $27.8 million and
$12.9 million for the same periods in the prior year. The Company sells a
significant amount of its residential mortgage loans to secondary marketing
agencies. Depending on factors such as interest rates, levels of borrower
refinancing and competitive factors in the Company's primary market area, the
amount of mortgage loans ultimately sold can vary significantly. See "Financial
Condition" for a further discussion of the sale of fixed rate loans.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $6.5 million or 23.4% to $21.4 million and $1.5 million or 11.7% to
$11.2 million for the six and three month periods ended March 31, 2001,
respectively, compared to the same periods in the prior year. The following
table shows the percentage of general and administrative expenses to average
assets for each period:
Six months ended Three months ended
March 31, March 31,
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
General and administrative expenses ....... $21,417 $27,951 $11,157 $12,635
Percent of average assets (annualized) .... 1.75% 2.22% 1.87% 2.02%
The decrease in general and administrative expenses is primarily due to
additional ESOP expense of $6.4 million and $1.5 million for the six and three
month periods ended March 31, 2000, respectively, due to accelerated payments
made to retire the Company's ESOP debt. Excluding the effect of the additional
ESOP expense, the Company experienced a decline of $146,000 and an increase of
$54,000 in general and administrative expenses for the six and three month
periods ended March 31, 2001, respectively, compared to the same periods in the
prior year.
INCOME TAX EXPENSE. Income tax expense increased to $3.0 million and $1.7
million for the six and three month periods ended March 31, 2001, compared to
$2.6 million and $1.3 million for the same periods in the prior year. The
effective tax rate for the six and three month periods ended March 31, 2001 was
25.01% and 25.87%, respectively, compared with 45.19% and 30.61% for the six and
three month periods ended March 31, 2000. The decrease in the effective tax rate
is due primarily to the fact that the majority of the ESOP expense incurred in
the prior year was non-deductible for tax purposes.
ASSET QUALITY
Total non-performing assets were $14.6 million, or 0.62% of total assets at
March 31, 2001, compared with $13.2 million, or 0.53% of total assets at
September 30, 2000. Non-performing assets include loans which have been placed
on nonaccrual status and property upon which a judgment of foreclosure has been
entered but prior to the foreclosure sale, as well as property acquired as a
result of foreclosure. The Company had no troubled debt restructurings at either
date.
Non-performing assets are summarized as follows:
March 31, September 30,
2001 2000
---------- -------------
(Dollars in thousands)
Non-performing loans .......................... $ 14,533 $ 12,977
Foreclosed properties ......................... 84 241
--------- ---------
Non-performing assets ......................... $ 14,617 $ 13,218
========= =========
Non-performing loans to gross loans ........... 1.06% 0.95%
Non-performing assets to total assets ......... 0.62% 0.53%
Except as disclosed above, there are no material loans about which management is
aware that there exists serious doubts as to the ability of the borrower to
comply with the loan terms. Non-performing assets includes a single $9.9 million
commercial loan credit to a company in the food industry that was added to
non-accrual status during the quarter ended September 30, 2000. The Company
25
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
participates in that credit with other financial institutions. Management
currently anticipates that the participating bank group and the borrower will
enter into an extension to the previous forbearance agreement. Interest payments
received are recorded as principal reductions due to the non-accrual status of
the loan. Management has taken the current known status about this credit into
account in establishing its allowance for loan losses and in the level of
provision taken during the six and three month periods ended March 31, 2001.
Impaired loans totaled $11.8 million at March 31, 2001 compared to $12.1 million
at September 30, 2000. These loans had associated impairment reserves of $2.6
million and $1.6 million at March 31, 2001 and September 30, 2000, respectively.
For the six month period ended March 31, 2001, the average balance of impaired
loans was $11.9 million compared to $6.4 million for the year ended September
30, 2000. Interest income on impaired loans for the six month period ended March
31, 2001 and 2000 was $95,000 and zero, respectively.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter interest
rate characteristics. Although management believes that its asset/liability
management strategies have reduced the potential effects of changes in interest
rates on its operations, increases in interest rates may adversely affect the
Company's results of operations because interest-bearing liabilities will
reprice more quickly than interest-earning assets.
At March 31, 2001, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 12.58% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest earning assets. The Company's three-year
cumulative gap as of March 31, 2001 was a negative 11.46% of total assets. With
a negative gap position, during periods of rising interest rates it is expected
that the cost of the Company's interest-bearing liabilities will rise more
quickly than the yield on its interest-earning assets, which will have a
negative effect on its net interest income. Although the opposite effect on net
interest income would occur in periods of falling interest rates, the Company
could experience substantial prepayments of its fixed-rate mortgage loans and
mortgage-backed and related securities in periods of falling interest rates,
which would result in the reinvestment of such proceeds at market rates which
are lower than current rates.
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
actual withdrawals and repayments of assets and liabilities may vary
substantially. Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and liabilities
may have similar maturities to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on other types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag 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.
26
27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of March 31, 2001.
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
-------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Residential .................................. $ 32,994 $ 72,695 $ 155,936 $ 66,381 $ 44,830 $ 372,836
Commercial ................................... 92,699 94,114 189,005 126,367 87,074 589,259
Consumer ..................................... 122,642 21,027 42,586 101,886 32,266 320,407
Mortgage-backed and related securities ......... 2,905 6,993 9,164 3,926 - 22,988
Assets available for sale:
Mortgage loans ............................... 23,211 - - - - 23,211
Fixed rate mortgage related .................. 32,333 106,661 179,176 85,868 22,748 426,786
Variable rate mortgage related ............... 293,904 - - - - 293,904
Investment securities......................... 69,669 3,001 43,235 - - 115,906
Trading account securities ..................... - - - - - -
Other assets ................................... 39,714 - - - - 39,714
Impact of interest rate swaps .................. - - - - - -
-------------------------------------------------------------------------------
Total ........................................ $ 710,071 $ 304,492 $ 619,102 $ 384,428 $ 186,918 $2,205,011
===============================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts ................................. $ 6,846 $ 20,537 $ 29,444 $ 13,754 $ 11,203 $ 81,784
Passbook savings accounts .................... 3,315 9,945 18,721 12,587 43,734 88,302
Money market deposit accounts ................ 98,293 294,878 2,693 969 545 397,378
Certificates of deposit ...................... 152,333 288,469 165,888 80,327 167,085 854,102
Borrowings (4) ................................. 180,605 - 390,949 100,000 - 671,554
Impact of interest rate swaps .................. 255,000 - (15,000) (80,000) (160,000) -
-------------------------------------------------------------------------------
Total ........................................ $ 696,392 $ 613,829 $ 592,695 $ 127,637 $ 62,567 $2,093,120
===============================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ....... $ 13,679 $ (309,337) $ 26,407 $ 256,791 $ 124,351 $ 111,891
===============================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities ............................ $ 13,679 $ (295,658) $ (269,251) $ (12,460) $ 111,891
================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
Assets ......................................... 0.58% (12.58%) (11.46%) (0.53%) 4.76%
================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing the
Company's historical prepayment statistics, modified for forecasted
statistics using the Public Securities Association model of prepayments. For
fixed rate mortgage loans and mortgage-backed and related securities, annual
prepayment rates ranging from 8% to 30%, based on the loan coupon rate, were
used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned insurance
premiums, deferred loan fees, purchased loan discounts and allowances for
loan losses, which aggregated $62.9 million at March 31, 2001.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates of
33%, 10% and 98%, respectively, of the declining balance of such accounts
during the period shown. The withdrawal rates used are higher than the
Company's historical rates, but are considered by management to be more
indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $429.3 million or 18.3% 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.
27
28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $45.8 million and
$34.7 million as of March 31, 2001 and September 30, 2000, respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At March 31, 2001, the Company had
additional borrowing capacity of $188.1 million available from the FHLB.
The Company is in the midst of a share repurchase program whereby it may
purchase up to 485,000, or approximately five percent, of its common stock in
the open market. As of March 31, 2001, the Company had purchased 299,500 shares
under the authorization at an average price of $14.78 per share. The Company may
purchase an additional 185,500 shares under the current authorization. The
Company's share repurchase program is funded through dividends received from the
Bank and a line of credit with a third party lending institution.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow Office of Thrift Supervision ("OTS") capital
regulations which require savings institutions to meet two capital standards:
(i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets
and (ii) "risk-based capital" of at least 8% of risk-weighted assets.
The following table summarizes the Bank's capital ratios at the dates indicated:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- ----------- ------ ----------- --------
(Dollars in thousands)
As of March 31, 2001:
Tangible capital ................ $ 176,061 7.53% > $ 93,547 >4.0% > $ 116,934 > 5.0%
- - - -
Core capital .................... 176,061 7.53% > 93,547 >4.0% > 116,934 > 5.0%
- - - -
Tier 1 risk-based capital ....... 176,061 11.22% > 62,763 >4.0% > 94,144 > 6.0%
- - - -
Risk-based capital .............. 186,806 11.91% > 125,525 >8.0% > 156,907 > 10.0%
- - - -
As of September 30, 2000:
Tangible capital ................ $ 169,261 6.78% > $ 99,893 >4.0% > $ 124,866 > 5.0%
- - - -
Core capital .................... 169,261 6.78% > 99,893 >4.0% > 124,866 > 5.0%
- - - -
Tier 1 risk-based capital ....... 169,261 10.92% > 61,995 >4.0% > 92,993 > 6.0%
- - - -
Risk-based capital .............. 179,330 11.57% > 123,991 >8.0% > 154,989 > 10.0%
- - - -
Management believes, as of March 31, 2001, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
28
29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
March 31, 2001.
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years to Four Years
-------------------------------------------------------------------
Interest earning assets (Dollars in millions)
Loans:
Residential ........... $ 1.5 9.40% $ 1.7 8.20% $ 3.0 7.97% $ 2.8 7.32%
Commercial ............ 103.6 7.04% 25.3 8.62% 42.8 8.24% 35.2 8.19%
Consumer .............. 23.1 7.89% 38.9 8.28% 109.5 8.06% 89.2 7.94%
Mortgage-backed
securities:
Fixed rate ............ 139.0 6.35% 89.7 6.35% 89.6 6.35% 42.9 6.35%
Adjustable rate ....... 52.9 5.93% 41.1 5.93% 38.2 5.93% 35.3 5.93%
Debt and equity
securities ............ 72.7 6.20% 21.6 6.25% 21.6 6.25% - -
Other ................. 39.7 6.50% - - - - - -
Total interest -------- ------ ------ ------
earning assets ........ $ 432.5 6.55% $218.3 6.88% $304.7 7.19% $205.4 7.30%
======== ====== ====== ======
Interest bearing
liabilities
Deposits:
NOW accounts .......... $ 27.4 0.50% $15.3 0.50% $15.3 0.50% $6.9 0.50%
Passbooks ............. 13.3 0.75% 9.4 0.75% 9.3 0.75% 6.3 0.75%
Money market .......... 393.2 5.22% 1.3 5.22% 1.3 5.22% 0.5 5.22%
Certificates .......... 440.8 5.73% 131.6 6.20% 34.3 5.70% 36.9 5.93%
Borrowings
Fixed rate ............ - - 75.0 4.70% 315.0 5.76% 50.0 5.28%
Adjustable rate ....... 181.6 5.16% - - - - - -
Total interest -------- ------ ------ ------
bearing liabilities.... $1,056.3 5.24% $232.6 5.12% $375.2 5.41% $100.6 4.91%
======== ====== ====== ======
Fair
Over Market
Five Years Total Value
----------------------------------------------
Interest earning assets (Dollars in millions)
Loans:
Residential ........... $ 367.6 7.61% $ 396.1 7.61% $ 398.0
Commercial ............ 305.6 7.95% 589.2 7.89% 591.3
Consumer .............. 32.3 9.66% 320.5 8.28% 323.6
Mortgage-backed
securities:
Fixed rate ............ 45.7 6.35% 449.8 6.35% 450.5
Adjustable rate ....... 94.0 5.93% 293.8 5.93% 289.3
Debt and equity
securities .............. - - 115.9 6.22% 115.8
Other ................... - - 39.7 6.50% 39.7
Total interest -------- -------- --------
earning assets ........ $ 845.2 7.56% $2,205.0 7.21% $2,208.2
======== ======== ========
Interest bearing
liabilities
Deposits:
NOW accounts .......... $ 10.0 0.50%$ 81.8 0.50% $ 73.6
Passbooks ............. 43.7 0.75% 88.3 0.75% 66.2
Money market .......... 0.6 5.22% 397.4 5.22% 397.4
Certificates .......... 167.1 6.55% 854.1 6.00% 858.9
Borrowings
Fixed rate ............ - - 490.0 5.59% 471.5
Adjustable rate ....... - - 181.6 5.16% 181.6
Total interest -------- -------- --------
bearing liabilities ..... $ $221.4 5.13% $2,093.2 5.25% $2,049.2
======== ======== ========
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30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein pursuant to Item 305 of Regulation S-K
is contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 20, 2001, the Company announced the declaration of a dividend
of $0.10 per share on the Company's common stock for the quarter ended
March 31, 2001. The dividend is payable on May 18, 2001 to shareholders
of record as of May 10, 2001. This will be the 23rd consecutive cash
dividend payment since the Company became publicly-held in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share (See
Footnote 7 in "Notes to Unaudited Consolidated Financial
Statements")
(b) No reports on Form 8-K were filed during the quarter for which this
report was filed.
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31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: May 15, 2001 By: /s/ Jon D. Sorenson
-------------------- ------------------------------------
Jon D. Sorenson
Chief Financial Officer
31