UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
-------------------------------
(Exact name of Registrant as Specified in its Charter)
WISCONSIN 39-1747461
- ----------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
---------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(262) 787-8700
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
--------- ----------
(2) Yes x No
--------- ----------
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,391,703 at January 31, 2003.
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Unaudited Consolidated Financial Statements................................................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 32
ITEM 4. Controls and Procedures............................................................................. 32
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 32
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 32
ITEM 3. Defaults Upon Senior Securities..................................................................... 32
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 32
ITEM 5. Other Information................................................................................... 33
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 33
SIGNATURES................................................................................................... 34
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
2002 2002
------------ ------------
(In thousands, except share data)
ASSETS
Cash and due from banks ................................................................ $ 40,783 $ 43,515
Federal funds sold and overnight deposits .............................................. 1,804 2,320
----------- -----------
Cash and cash equivalents .............................................................. 42,587 45,835
----------- -----------
Assets available for sale, at fair value:
Debt and equity securities .......................................................... 13,483 16,596
Mortgage-backed and related securities .............................................. 582,983 618,580
Mortgage loans held for sale, at lower of cost or market ............................... 77,094 65,006
Securities held to maturity, at amortized cost:
Mortgage-backed and related securities (fair value of $98,880
and $91,318, respectively) .......................................................... 97,635 90,246
Loans receivable, net .................................................................. 1,222,725 1,257,466
Federal Home Loan Bank stock, at cost .................................................. 91,699 90,784
Accrued interest receivable ............................................................ 9,894 9,398
Foreclosed properties .................................................................. 887 1,908
Real estate held for investment ........................................................ 32,458 32,803
Premises and equipment, net ............................................................ 30,708 29,824
Goodwill ............................................................................... 12,891 12,891
Other assets ........................................................................... 21,974 67,780
----------- -----------
Total assets ........................................................................... $ 2,237,018 $ 2,339,117
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ............................................................................... $ 1,395,820 $ 1,416,979
Short term borrowings .................................................................. 608,130 605,236
Long term borrowings ................................................................... 35,235 36,827
Advances from borrowers for taxes and insurance ........................................ 1,475 9,886
Accrued interest payable and other liabilities ......................................... 12,914 91,108
----------- -----------
Total liabilities ...................................................................... 2,053,574 2,160,036
----------- -----------
Commitments and contingencies .......................................................... -- --
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued ......................................................................... -- --
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 9,374,881 and 9,350,873 shares, respectively ........................... 146 146
Additional paid-in-capital ............................................................. 89,273 89,324
Accumulated other comprehensive income ................................................. 1,514 1,632
Treasury stock at cost (5,204,359 and 5,228,367 shares, respectively) .................. (72,182) (72,515)
Retained earnings, substantially restricted ............................................ 164,693 160,494
----------- -----------
Total shareholders' equity ............................................................. 183,444 179,081
----------- -----------
Total liabilities and shareholders' equity ............................................. $ 2,237,018 $ 2,339,117
=========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------------
2002 2001
-------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans ........................................................................... $ 21,503 $ 23,034
Mortgage-backed and related securities .......................................... 5,372 8,537
Debt and equity securities ...................................................... 137 199
Federal funds sold and overnight deposits ....................................... 10 24
Federal Home Loan Bank stock .................................................... 1,387 917
-------- --------
Total interest and dividend income .............................................. 28,409 32,711
-------- --------
INTEREST EXPENSE:
Deposits ........................................................................ 7,430 10,994
Advances and other borrowings ................................................... 7,734 7,677
-------- --------
Total interest expense ............................................................. 15,164 18,671
-------- --------
Net interest income before provision for loan losses ............................... 13,245 14,040
Provision for loan losses .......................................................... 381 911
-------- --------
Net interest income ................................................................ 12,864 13,129
-------- --------
OTHER OPERATING INCOME, NET:
Loan servicing and loan related fees ............................................ 1,670 1,244
Mortgage servicing impairment ................................................... (1,450) --
Depository fees and service charges ............................................. 1,560 1,540
Securities gains ................................................................ 178 57
Gain on sales of loans .......................................................... 4,942 3,203
Insurance annuity and brokerage commissions ..................................... 370 377
Gain (loss) on foreclosed properties ............................................ 59 (1)
Income from real estate held for investment ..................................... 872 778
Other income .................................................................... 163 192
-------- --------
Total other operating income, net .................................................. 8,364 7,390
-------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits ........................................ 7,648 6,970
Occupancy expenses, including depreciation ...................................... 1,194 1,170
Furniture and equipment, including depreciation ................................. 1,017 990
Real estate held for investment expenses ........................................ 904 773
Telephone and postage ........................................................... 446 410
Data processing ................................................................. 268 422
Other general and administrative expenses ....................................... 1,282 1,208
-------- --------
Total general and administrative expenses .......................................... 12,759 11,943
-------- --------
Income before income tax expense ................................................... 8,469 8,576
Income tax expense ................................................................. 2,391 2,582
-------- --------
Net income ......................................................................... $ 6,078 $ 5,994
======== ========
Basic earnings per share ........................................................... $ 0.65 $ 0.65
======== ========
Diluted earnings per share ......................................................... $ 0.62 $ 0.62
======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements
4
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Shares of Other
Common Additional Comprehensive
Stock Common Paid-In Retained Income/ Treasury
Outstanding Stock Capital Earnings (Loss) Stock Total
----------- ------ ---------- -------- ------------- -------- ---------
(In thousands, except Shares of Common Stock Outstanding and per share data)
Three months ended December 31, 2001
Balance at September 30, 2001 .................. 9,208,244 $ 146 $ 88,826 $ 144,630 $ 1,137 $(74,264) $ 160,475
Net income ..................................... -- -- -- 5,994 -- -- 5,994
Change in unrealized gain on securities
available for sale .......................... -- -- -- -- (985) -- (985)
Reclassification adjustment for gains
realized in net income ...................... -- -- -- -- (57) -- (57)
Income taxes ................................... -- -- -- -- 473 -- 473
---------
Comprehensive income ........................... 5,425
Cash dividend - $0.15 per share ................ -- -- -- (1,376) -- -- (1,376)
Purchase of treasury stock ..................... (32,500) -- -- -- -- (679) (679)
Exercise of stock options, net ................. 7,702 -- 19 12 -- 106 137
---------- ----- -------- --------- ------- -------- ---------
Balance at December 31, 2001 ................... 9,183,446 $ 146 $ 88,845 $ 149,260 $ 568 $(74,837) $ 163,982
========== ===== ======== ========= ======= ======== =========
Three months ended December 31, 2002
Balance at September 30, 2002 .................. 9,350,873 $ 146 $ 89,324 $ 160,494 $ 1,632 $(72,515) $ 179,081
Net income ..................................... -- -- -- 6,078 -- -- 6,078
Change in unrealized gain on securities
available for sale .......................... -- -- -- -- (10) -- (10)
Reclassification adjustment for gains
realized in net income ...................... -- -- -- -- (178) -- (178)
Income taxes ................................... -- -- -- -- 70 -- 70
---------
Comprehensive income ........................... 5,960
Cash dividend - $0.20 per share ................ -- -- -- (1,874) -- -- (1,874)
Exercise of stock options, net ................. 24,008 -- (51) (5) -- 333 277
---------- ----- -------- --------- ------- -------- ---------
Balance at December 31, 2002 ................... 9,374,881 $ 146 $ 89,273 $ 164,693 $ 1,514 $(72,182) $ 183,444
========== ===== ======== ========= ======= ======== =========
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------
2002 2001
--------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................................... $ 6,078 $ 5,994
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses ................................................................ 381 911
Depreciation, accretion and amortization ................................................. 3,707 2,058
Deferred income taxes .................................................................... 1,045 341
Securities gains ......................................................................... (178) (57)
Impairment write-down on mortgage servicing rights ....................................... 1,450 --
Originations of loans held for sale ...................................................... (344,616) (259,987)
Proceeds from sales of loans held for sale ............................................... 337,470 224,570
Gain on sale of loans .................................................................... (4,942) (3,203)
Stock dividends received on Federal Home Loan Bank stock ................................. (915) (575)
Other, net ............................................................................... (15,107) (1,737)
--------- ---------
Net cash used in operating activities .......................................................... (15,627) (31,685)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed and related securities held to maturity ..................... (20,000) (5,431)
Principal repayments on mortgage-backed and related securities held to maturity .......... 12,611 15,015
Purchases of mortgage-backed and related securities available for sale ................... (240,180) (55,851)
Proceeds from sales of mortgage-backed securities available for sale ..................... 81,846 3,666
Principal repayments on mortgage-backed securities available for sale .................... 170,331 77,423
Purchases of debt and equity securities available for sale ............................... (1,931) (7,264)
Proceeds from maturities of debt and equity securities available for sale ................ 5,001 25,003
Purchase of loans ........................................................................ (123,128) (82,441)
Decrease in loans, net of loans held for sale ............................................ 157,869 84,361
Increase in real estate held for investment .............................................. (15) (2,977)
Proceeds from sale of foreclosed properties .............................................. 1,350 --
Purchases of premises and equipment, net ................................................. (1,510) (1,299)
--------- ---------
Net cash provided by investing activities ...................................................... 42,244 50,205
--------- ---------
See accompanying Notes to Unaudited Consolidated Financial Statements
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
-------------------------
2002 2001
-------- --------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ..................................................................... (21,159) (19,386)
Proceeds from advances and other borrowings .................................................. 87,297 60,518
Repayments on advances and other borrowings .................................................. (90,143) (51,332)
Increase in securities sold under agreements to repurchase ................................... 4,148 5,457
Decrease in advances from borrowers for taxes and insurance .................................. (8,411) (9,060)
Dividends paid ............................................................................... (1,874) (1,376)
Stock option transactions .................................................................... 277 137
Purchase of treasury stock ................................................................... -- (679)
-------- --------
Net cash used in financing activities .......................................................... (29,865) (15,721)
-------- --------
Increase (decrease) in cash and cash equivalents ............................................... (3,248) 2,799
Cash and cash equivalents:
Beginning of period .......................................................................... 45,835 38,100
-------- --------
End of period ................................................................................ $ 42,587 $ 40,899
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ..................................................................................... $ 14,854 $ 19,028
Income taxes ................................................................................. 606 3,357
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Transfer from loans to foreclosed properties .................................................. $ 204 $ 187
Transfer of mortgage loans to mortgage loans held for sale ................................... 18,730 33,747
See accompanying Notes to Unaudited Consolidated Financial Statements
7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances
of St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with accounting principles generally accepted
in the United States of America. However, in the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the consolidated financial statements have been
included. Operating results for the three-month period ended December
31, 2002 are not necessarily indicative of the results which may be
expected for the entire year ending September 30, 2003. For further
information refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended September 30, 2002.
Certain previously reported balances have been reclassified to conform
with current year presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
The contractual or notional amounts of off-balance sheet financial
instruments are as follows:
Contractual or Notional Amount(s)
December 31, September 30,
2002 2002
------------ -------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans..................................... $ 37,626 $ 69,156
Variable-rate loans.................................. 31,799 41,824
Mortgage loans sold with recourse........................ 11,090 12,334
Guarantees under IRB issues.............................. 36,294 36,581
Unused and open-ended lines of credit:
Consumer.............................................. 284,569 273,704
Commercial............................................. 79,320 66,411
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates of 45 days
or less or other termination clauses and may require a fee. Fixed rate
loan commitments as of December 31, 2002 have interest rates ranging
from 4.875% to 8.375%. Because some commitments expire without being
drawn upon, the total commitment amounts do not necessarily represent
cash requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained
consists primarily of one- to four-family residences and other
residential and commercial real estate and commercial business assets.
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
Loans sold with recourse represent one- to four-family mortgage loans
that are sold to secondary market agencies, primarily Federal National
Mortgage Association ("FNMA"), with the servicing of these loans being
retained by the Company. The Company's exposure on loans sold with
recourse is the same as if the loans remained in the Company's loan
portfolio. The Company receives a larger servicing spread on those
loans being serviced than it would if the loans had been sold without
recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party. Potential
loss on a guarantee is the notional amount of the guarantee less the
value of the real estate collateral. At December 31, 2002, appraised
values of the real estate collateral exceeded the amount of the
guarantees.
The unused and open consumer lines of credit are conditional
commitments issued by the Company for extensions of credit such as home
equity, auto, credit card, or other similar consumer-type financing.
Furthermore, the unused and open commercial lines of credit are also
conditional commitments issued by the Company for extensions of credit
such as working capital, equipment or other similar commercial type
financing. The credit risk involved in extending these lines of credit
is essentially the same as that involved in extending loan facilities
to customers. Collateral held for these commitments may include, but
may not be limited to, real estate, investment securities, equipment,
accounts receivable, inventory and Company deposits.
9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at
December 31, 2002 were as follows:
SECURITIES AVAILABLE FOR SALE
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- ----------
(In thousands)
DEBT AND EQUITY SECURITIES:
U.S. Treasury obligations and obligations of
U.S. Government Agencies ................................... $ 10,000 $ 19 $ -- $ 10,019
Marketable equity securities .................................. 3,464 -- -- 3,464
---------- ---------- ---------- ----------
TOTAL DEBT AND EQUITY SECURITIES .............................. $ 13,464 $ 19 $ -- $ 13,483
========== ========== ========== ==========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FNMA ....................................................... $ 35,379 $ 266 $ -- $ 35,645
Private issue .............................................. 12,354 -- (362) 11,992
REMICs:
GNMA ....................................................... 19,006 212 (8) 19,210
FHLMC ...................................................... 120,978 1,612 (240) 122,350
FNMA ....................................................... 32,444 266 -- 32,710
Private issue .............................................. 360,380 1,594 (934) 361,040
CMO residual .................................................. 36 -- -- 36
---------- ---------- ---------- ----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................................. $ 580,577 $ 3,950 $ (1,544) $ 582,983
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- ----------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
GNMA ................................................ $ 6,199 $ 314 $ -- $ 6,513
REMICs:
FHLMC ............................................... 5,012 98 -- 5,110
FNMA ................................................ 27,999 573 -- 28,572
Private issue ....................................... 58,425 260 -- 58,685
---------- ---------- ---------- ----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ............................................. $ 97,635 $ 1,245 $ -- $ 98,880
========== ========== ========== ==========
During the three month periods ended December 31, 2002 and 2001, gross
proceeds from the sale of securities available for sale totaled
approximately $81.8 million and $3.7 million, respectively. The gross
realized gains on such sales totaled approximately $43,000 and $57,000
for the three month periods ended December 31, 2002 and 2001,
respectively. The gross realized losses on such sales totaled
approximately $30,000 and zero for the three month periods ended
December 31, 2002 and 2001.
At December 31, 2002, $451.4 million of mortgage-related securities
were pledged as collateral for Federal Home Loan Bank ("FHLB")
advances.
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(5) Loans
Loans receivable are summarized as follows:
December 31, September 30,
2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
First mortgage - one- to four-family ....................................... $ 246,780 $ 251,702
First mortgage - residential construction .................................. 53,844 62,973
First mortgage - multi-family .............................................. 152,801 158,320
Commercial real estate ..................................................... 400,470 395,473
Home equity ................................................................ 291,008 276,437
Commercial ................................................................. 122,095 148,716
Consumer secured by real estate ............................................ 54,067 56,231
Interim financing and consumer loans ....................................... 31,110 25,055
Indirect auto .............................................................. 4,138 5,598
Education .................................................................. 1,094 917
------------ ------------
Total gross loans ....................................................... 1,357,407 1,381,422
------------ ------------
Less:
Loans in process ........................................................ 42,214 43,644
Unearned insurance premiums ............................................. 78 86
Deferred loan and guarantee fees ........................................ 521 607
Purchased loan discount ................................................. 362 401
Allowance for loan losses ............................................... 14,413 14,212
------------ ------------
Total deductions ........................................................ 57,588 58,950
------------ ------------
Total loans receivable ..................................................... 1,299,819 1,322,472
Less: First mortgage loans held for sale ................................... 77,094 65,006
------------ ------------
Loans receivable, net ...................................................... $ 1,222,725 $ 1,257,466
============ ============
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Three months ended
December 31,
--------------------------------------
2002 2001
-------- --------
(In thousands)
Beginning balance ...................................................... $ 14,212 $ 11,686
Charge-offs:
Real estate - mortgage .............................................. -- (23)
Commercial loans .................................................... (104) --
Home equity loans ................................................... -- --
Consumer ............................................................ (86) (214)
-------- --------
Total charge-offs ...................................................... (190) (237)
-------- --------
Recoveries:
Real estate - mortgage .............................................. -- 18
Commercial loans .................................................... -- --
Home equity loans ................................................... -- --
Consumer ............................................................ 10 4
-------- --------
Total recoveries ....................................................... 10 22
-------- --------
Net charge-offs ........................................................ (180) (215)
-------- --------
Provision .............................................................. 381 911
-------- --------
Ending balance ......................................................... $ 14,413 $ 12,382
======== ========
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(7) Earnings Per Share
Basic earnings per share of common stock for the three month periods
ended December 31, 2002 and 2001, have been determined by dividing net
income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the three month periods ended December 31, 2002 and
2001, have been determined by dividing net income for the period by the
weighted average number of shares of common stock outstanding during
the period adjusted for the dilutive effect of outstanding stock
options. Book value per share of common stock at December 31, 2002 and
September 30, 2002, have been determined by dividing total
shareholders' equity by the number of shares of common stock
outstanding at period end adjusted for the dilutive effect of
outstanding stock options at the respective dates. Stock options are
regarded as potential common stock and are, therefore, considered in
per share calculations if not considered to be antidilutive.
The computation of earnings per common share is as follows:
Three months ended
December 31,
--------------------------------------
2002 2001
----------- -----------
Net income for the period .................................................... $ 6,078,000 $ 5,994,000
=========== ===========
Common shares issued ......................................................... 14,579,240 14,579,240
Weighted average treasury shares ............................................. 5,217,874 5,399,966
Weighted average common shares
outstanding during the period ............................................. 9,361,366 9,179,274
Effect of dilutive stock options outstanding ................................. 427,328 441,823
----------- -----------
Diluted weighted average common shares
outstanding during the period ............................................. 9,788,694 9,621,097
=========== ===========
Basic earnings per share ..................................................... $ 0.65 $ 0.65
=========== ===========
Diluted earnings per share ................................................... $ 0.62 $ 0.62
=========== ===========
The computation of book value per common share is as follows:
December 31, September 30,
2002 2002
------------ -------------
Common shares outstanding at the end of the period ............................. 9,374,881 9,350,873
Incremental shares relating to dilutive stock
options outstanding at the end of the period ................................... 426,387 427,745
------------ ------------
9,801,268 9,778,618
============ ============
Total shareholders' equity at the end of the period ............................ $183,444,000 $179,081,000
Book value per common share .................................................... $ 18.72 $ 18.31
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less
than the fair value of the underlying common stock as of the date of
the option grant, and the maximum term cannot exceed ten years. Stock
options awarded to directors may be exercised at any time or on a
cumulative basis over varying time periods, provided the optionee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At December 31, 2002, 60,650 shares were reserved for future grants.
Further information concerning the options is as follows:
Three months ended December 31,
-----------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
-----------------------------------------------------------------------------------
Outstanding at beginning of period ...... 1,428,508 $ 16.12 1,614,898 $ 15.74
Granted ................................. -- -- -- --
Canceled ................................ -- -- -- --
Exercised ............................... (24,008) 5.00 (7,702) 15.43
-------------- -------------- -------------- --------------
Outstanding at end of period ............ 1,404,500 $ 16.31 1,607,196 $ 15.74
============== ============== ============== ==============
Options exercisable ..................... 1,087,994 $ 5.00 - 22.00 1,041,701 $ 5.00 - 22.00
============== ============== ============== ==============
For purposes of providing the pro forma disclosures required under
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123," ("SFAS No.
148") the fair value of stock options granted was estimated using the
Black-Scholes option pricing model. There were no options granted
during the three months ended December 31, 2002 and 2001.
Had compensation cost for the Company's stock-based plans been
determined in accordance with SFAS No. 148, net income and earnings
per share would have been reduced to the pro forma amounts indicated
below. This pro forma net income reflects only options granted in the
fiscal years 1997 through December 31, 2002. Therefore, the full
impact of calculating compensation cost under SFAS No. 148 is not
reflected in the pro-forma net income and earnings per share amounts.
Three months ended December 31,
2002 2001
------------- -------------
Net Income As reported ................................. $ 6,078,000 $ 5,994,000
Pro forma ................................... $ 5,974,000 $ 5,826,000
Basic earnings per share As reported ................................. $ 0.65 $ 0.65
Pro forma ................................... $ 0.64 $ 0.63
Diluted earnings per share As reported ................................. $ 0.62 $ 0.62
Pro forma ................................... $ 0.61 $ 0.60
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
Three months ended
December 31,
------------------------------
2002 2001
------- -------
(In thousands)
Federal income tax expense at statutory rate of 35% .................................. $ 2,964 $ 3,001
State income taxes, net of Federal income tax benefit ................................ 316 262
Tax exempt interest .................................................................. (13) (17)
ESOP dividend deduction .............................................................. (94) --
Affordable housing credits ........................................................... (780) (652)
Other, net ........................................................................... (2) (12)
------- -------
$ 2,391 $ 2,582
======= =======
(10) Derivative and Hedging Activities
The Company utilizes derivative hedging instruments in the course of
its asset/liability management. The hedging instruments primarily used
by the Company are interest rate swap agreements which are used to
convert fixed-rate payments or receipts to variable-rate payments or
receipts and thus hedge the Company's fair market value of the item
being hedged. The items being hedged generally expose the Company to
variability in fair value in rising or declining interest rate
environments. In converting the fixed payment or receipt to a variable
payment or receipt, the interest rate swaps effectively reduce the
variability of the fair market value of the items being hedged.
The Company's mortgage banking activities include the issuance of
commitments to extend residential mortgage loans. When the loan is
originated or purchased, it may be recorded as a mortgage loan held for
sale. The loans held for sale are hedged with forward contracts and a
fair value hedge is designated. The Company is in a short position with
forward contracts, whereby the Company agrees to sell mortgage loans
held for sale at a pre-established price at some future date, and in a
long position with the mortgage loans held for sale. The hedging
relationship is highly effective and hedges changes in the fair value
of the mortgage loans held for sale due to interest rate changes. The
change in fair value of mortgage loans held for sale is included in the
consolidated statements of income.
The Company utilizes interest rate swaps to hedge the fair value of
brokered certificates of deposit ("CD's"). 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. At December 31, 2002 and September 30, 2002, the Company did not
have any interest rate swaps outstanding.
The Company measures the effectiveness of its' hedges on a periodic
basis. Any difference between the fair value change of the hedge versus
the fair value change of the hedged item is considered to be the
"ineffective" portion of the hedge. The ineffective portion of the
hedge is recorded as an increase or decrease in the related income
statement classification of the item being hedged. If the
ineffectiveness of a hedge exceeds certain levels, the derivative would
no longer be eligible for hedge treatment and future changes in fair
value of the derivative would be recorded on the income statement.
The Company's commitments to originate mortgage loans held-for-sale and
forward loan sale commitments are considered derivatives under the
accounting standards. As such, the change in fair value of such
commitments, are recorded as an adjustment to the gains on the sale of
loans.
(11) Current Accounting Developments
The FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
how and when to measure impairment of long-lived assets and how to
account for
14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
long-lived assets that an entity plans to dispose of either through
sale, abandonment, exchange, or distribution to owners. SFAS No. 144
supersedes FASB Statement No. 121, which addressed asset impairment,
and certain provisions of APB Opinion No. 30 related to reporting the
effects of the disposal of a business segment, and requires expected
future operating losses from discontinued operations to be recorded in
the period in which the losses are incurred rather than the measurement
date. Under SFAS No. 144, more dispositions may qualify for
discontinued operations treatment in the income statement. This
Statement is effective for fiscal years beginning after December 15,
2001, with early application encouraged. The provisions of this
Statement generally are to be applied prospectively. Adoption of this
standard did not materially affect the results of operations or
financial position of the Company.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No.
146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Adoption of this standard did not
materially affect the results of operations or financial position of
the Company.
The FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions" ("SFAS No. 147"). SFAS No. 147 amends SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift
Institutions," to remove the acquisition of financial institutions from
the scope of that statement and provides guidance on the accounting for
the impairment or disposal of acquired long-term customer-relationship
intangible assets. Except for transactions between two or more mutual
enterprises, SFAS No. 147 requires acquisitions of financial
institutions that meet the definition of a business combination to be
accounted for in accordance with SFAS No. 141 and SFAS No. 142. The
provisions of SFAS No. 147 are effective on October 1, 2002, with
earlier application permitted. Adoption of this standard did not
materially affect the results of operations or financial position of
the Company.
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure - an amendment of FASB Statement No. 123"
("SFAS No. 148"). This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure requirements are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
(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.
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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.
- ------------------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
THREE MONTHS ENDED DECEMBER 31, 2002
Net interest income (expense) .................... $ 3,785 $ 7,266 $ 2,620 $ (1,829) $ 11,842
Provision for loan losses ........................ 153 145 91 -- 389
Other operating income ........................... 2,224 659 3,494 178 6,554
General and administrative expenses .............. 5,975 914 1,747 224 8,860
Income tax expense (benefit) ..................... (41) 2,344 1,490 (640) 3,153
---------- ---------- ---------- ---------- ----------
Segment profit (loss) ............................ $ (79) $ 4,523 $ 2,785 $ (1,235) $ 5,994
========== ========== ========== ========== ==========
Goodwill ......................................... $ 12,891 -- -- -- $ 12,891
========== ========== ========== ========== ==========
Segment average assets ........................... $ 372,351 $ 693,539 $ 263,517 $ 762,483 $2,091,890
========== ========== ========== ========== ==========
THREE MONTHS ENDED DECEMBER 31, 2001
Net interest income (expense) .................... $ 3,902 $ 5,496 $ 2,358 $ (281) $ 11,475
Provision for loan losses ........................ 378 492 41 -- 911
Other operating income ........................... 2,184 326 3,338 57 5,906
General and administrative expenses .............. 5,516 865 1,360 211 7,951
Income tax expense (benefit) ..................... 68 1,580 1,524 (154) 3,017
---------- ---------- ---------- ---------- ----------
Segment profit (loss) ............................ $ 124 $ 2,886 $ 2,772 $ (281) $ 5,501
========== ========== ========== ========== ==========
Goodwill ......................................... $ 12,891 -- -- -- $ 12,891
========== ========== ========== ========== ==========
Segment average assets ........................... $ 330,906 $ 632,960 $ 309,960 $ 781,403 $2,055,229
========== ========== ========== ========== ==========
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Three months ended December 31,
2002 2001
----------- -----------
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments ................................................................. $ 18,396 $ 17,381
Unallocated transfer pricing credit (primarily on capital) ......................... 1,561 3,083
Income from affordable housing subsidiary .......................................... 872 778
Holding company interest expense ................................................... (97) (320)
Elimination of intercompany interest income ........................................ (276) (276)
Other .............................................................................. 1,153 784
----------- -----------
Consolidated total revenue ......................................................... $ 21,609 $ 21,430
=========== ===========
PROFIT
Total for segments ................................................................. $ 5,994 $ 5,501
Unallocated transfer pricing credit (primarily on capital) ......................... 937 1,850
Unallocated administrative and centralized support costs (a) ....................... (1,153) (1,501)
Holding company net loss ........................................................... (214) (293)
Elimination of intercompany interest income ........................................ (166) (166)
Affordable housing tax credits ..................................................... 780 652
Other .............................................................................. (101) (49)
----------- -----------
Consolidated net income ............................................................ $ 6,078 $ 5,994
=========== ===========
AVERAGE ASSETS
Total for segments ................................................................. $ 2,091,890 $ 2,055,229
Elimination of intercompany loans .................................................. (17,414) (13,371)
Other assets not allocated ......................................................... 196,060 144,031
----------- -----------
Consolidated average assets ........................................................ $ 2,270,536 $ 2,185,889
=========== ===========
- ----------------------
(a) After-tax effect of $1.9 million and $2.5 million of general and
administrative expenses for the three month periods ended December 31, 2002
and 2001, respectively.
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(13) Goodwill and Intangible Assets
Effective October 1, 2001, the Company adopted Financial Accounting
Statement 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
SFAS No. 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite
lives will not be amortized, but will rather be tested at least
annually for impairment. As required under SFAS No. 142, the Company
discontinued the amortization of goodwill with a net carrying value of
$12.9 million at October 1, 2001 and annual amortization of
approximately $1.2 million that resulted from business combinations
prior to the adoption of SFAS No. 141. The Company evaluates goodwill
for impairment at least annually. Impairment testing of goodwill was
completed as of October 1, 2002 and resulted in no impairment,
therefore, goodwill has a net carrying value of $12.9 million at
December 31, 2002.
In addition to goodwill, the Company's other intangible assets consist
of mortgage servicing rights and other intangible assets from business
combinations which are included in other assets on the consolidated
balance sheet. Mortgage servicing rights are not subject to SFAS No.
142 but rather, are amortized over their expected life and subject to
periodic impairment testing. The results for the three-month period
ended December 31, 2002 include a $1.45 million charge related to an
impairment write-down of the Company's mortgage servicing rights. The
write-down was the result of an increase in forecasted prepayment
speeds, which resulted primarily from the current lower interest rate
environment. At December 31, 2002 and September 30, 2002 the valuation
reserve totaled $4.6 million and $3.1 million, respectively. The
Company's other intangible assets from business combinations resulted
from the purchase of deposits. This acquisition did not meet the
definition of a business combination under SFAS No. 147, therefore, it
is not required to be accounted for in accordance with SFAS No. 141 and
SFAS No. 142. The Company's other intangible assets had total carrying
and aggregate market values as follows:
December 31, September 30,
2002 2002
----------- -------------
(In thousands)
Mortgage servicing rights, carrying value .................................................. $ 6,422 $ 6,145
========== ==========
Mortgage servicing rights, market value .................................................... $ 6,683 $ 6,496
========== ==========
Intangible assets from business combinations, carrying and market value .................... $ 449 $ 460
========== ==========
Amortization expense for the mortgage servicing rights asset are based
on assumptions made during each reporting period. Such assumptions
include, but are not limited to, the current level of interest rates
and the forecast prepayment speeds as estimated by major mortgage
dealers. Actual amortization expense is also affected by the amount of
loans sold with servicing retained. At December 31, 2002, the Company
services $798.8 million in mortgage loans for others, compared to
$768.7 million at September 30, 2002. Intangible assets from business
combinations are amortized on a straight-line method.
Actual amortization expense is as follows:
Three months ended
December 31,
---------------------------------
2002 2001
---------- ----------
(In thousands)
Amortization of mortgage servicing rights ............................................ $ 609 $ 489
Amortization of intangible assets from business combinations ......................... 11 --
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The following table shows the future estimated amortization expense for
originated mortgage servicing rights based on existing balances and the
interest rate environment as of December 31, 2002. The Company's actual
amortization expense in any given period may be significantly different
from the estimated amounts displayed depending on changes in mortgage
interest rates, estimated prepayment speeds and market conditions.
Estimated future amortization expense: Amount
- -----------------------------------------------------------------------------------------------------
(In thousands)
Nine months ended September 30, 2003 ...................................... $1,928
For the year ended September 30, 2004 ..................................... 1,443
For the year ended September 30, 2005 ..................................... 844
For the year ended September 30, 2006 ..................................... 556
For the year ended September 30, 2007 ..................................... 365
For the year ended September 30, 2008 and thereafter ...................... 1,287
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operation and business of St. Francis Capital
Corporation (the "Company"). The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and advises readers that various factors could affect the Company's
financial performance and could cause actual results for future periods to
differ materially from those anticipated or projected. Such factors include, but
are not limited to: (i) general market rates, (ii) general economic conditions,
(iii) legislative/regulatory changes, (iv) monetary and fiscal policies of the
U.S. Treasury and Federal Reserve, (v) changes in the quality or composition of
the Company's loan and investment portfolios, (vi) demand for loan products,
(vii) deposit flows, (viii) competition, (ix) demand for financial services in
the Company's markets, and (x) changes in accounting principles, policies or
guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Company's total assets at December 31, 2002 were $2.24 billion, a decrease
of $102 million from $2.34 billion at September 30, 2002. Loans receivable,
including mortgage loans held for sale, decreased $22.7 million from September
30, 2002 as declines in one- to four-family and commercial loans were partially
offset by increases in consumer and commercial real estate loans.
Mortgage-backed and related securities and investment securities decreased $31.3
million from September 30, 2002 as the Company continues to restructure its
balance sheet. The remainder of the decrease in total assets is primarily due to
settlement of a forward sale of securities carried on the balance sheet as a
receivable at September 30, 2002. Total capital increased to $183.4 million at
December 31, 2002 compared with $179.1 million at September 30, 2002. The
Company's ratio of shareholders' equity to total assets was 8.20% at December
31, 2002, compared to 7.66% at September 30, 2002. The Company's fully dilutive
book value per share was $18.72 at December 31, 2002, compared to $18.31 at
September 30, 2002.
The restructuring of the balance sheet continues to be one of the strategic
initiatives of the Company. During the past three years the Company has reduced
the size of its mortgage-backed securities and investment securities portfolios
as repayments, scheduled maturities and sales occur. Funds received from these
repayments, maturities and sales have been and are expected to be used to grow
and diversify the Company's loan portfolio, to reduce the Company's wholesale
debt and as an additional source of liquidity. This restructuring is part of a
long-range plan to make the Company's balance sheet composition more
representative of "community banks" with a greater percentage of assets in our
loan portfolio as opposed to investments. Management anticipates that this
restructuring should improve the Company's margins due to the generally higher
interest rates on loans, and depending on the growth in the loan portfolio, this
will continue to be an ongoing initiative of the Company in fiscal 2003.
Loans receivable, including mortgage loans held for sale, decreased $22.7
million to $1.30 billion at December 31, 2002 from $1.32 billion at September
30, 2002. During the three-month period ended December 31, 2002, consumer and
interim financing loans increased $17.2 million and commercial real estate loans
increased $5.0 million, offset by a decrease of $5.5 million in multi-family
mortgage loans, a decrease of $26.6 million in commercial loans and a decrease
of $14.1 million in one- to four-family loans. The Company's one- to four-family
mortgage loan portfolio has a significant level of adjustable rate loans and
during periods of declining or generally low interest rates, the customers
generally convert adjustable rate loans to fixed rate loans. However, fixed rate
loans are generally sold in the secondary market and are not maintained on the
Company's balance sheet.
For the three-month period ended December 31, 2002, the Company originated
approximately $390.6 million in loans, as compared to $326.8 million for the
same period in the prior year. Of the $390.6 million in loans originated, $231.6
million were first mortgage loans, $64.6 were home equity loans, $32.7 million
were commercial real estate loans, $27.4 million were consumer and interim
financing loans, $21.3 million were multi-family loans and $13.0 million were
commercial loans. For the three-month period ended December 31, 2002, the
Company purchased $123.1 million one- to four-family loans, as compared to $82.4
million for the same period in the prior year. The increase in loans purchased
during the current year is primarily due to increased activity in the Company's
mortgage banking operation in Illinois. For the three-month period ended
December 31, 2002, the Company sold $332.5 million one- to four-family loans, as
compared to $221.4 million for the same period in the prior year. During periods
of declining or generally low interest rates, the Company originates more fixed
rate loans, which are generally sold in the secondary market.
Mortgage-backed and related securities, including securities available for sale,
decreased $28.2 million to $680.6 million at December 31, 2002 from $708.8
million at September 30, 2002. The decreases were due to accelerated repayments,
scheduled maturities and sales during the current quarter. The decrease in
mortgage-backed securities was partially offset by purchases of $260.2 million
during the three-month period ended December 31, 2002. Debt and equity
securities decreased $3.1 million to
19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
$13.5 million at December 31, 2002 from $16.6 million at September 30, 2002. The
decrease was due to scheduled maturities of $5.0 million, partially offset by
purchases of $1.9 million. As noted above, in connection with the balance sheet
restructuring program, the Company has reduced the size of its mortgage-backed
securities and debt and equity securities portfolios which management
anticipates will continue to be an ongoing strategic initiative of the Company
in fiscal 2003.
Deposits decreased $21.2 million to $1.40 billion at December 31, 2002 from
$1.42 billion at September 30, 2002. The decrease in deposits was due primarily
to decreases of $10.5 million in money market demand account deposits and $8.7
million in checking accounts. At December 31, 2002, the Company had
approximately $188.7 million in brokered certificates of deposit compared with
$191.4 million at September 30, 2002. The brokered deposits generally consist of
terms from three months to three years. As part of a continuing strategy, the
Company continues to offer deposit products that compete more effectively with
money market funds and other non-financial deposit products. Such accounts have
generally changed the Company's traditional mix of deposit accounts to one that
is more adjustable to current interest rates such as the money market demand
account. This has resulted in passbook and certificate of deposit accounts
representing a lower percentage of the Company's total deposit portfolio. The
level of deposit flows during any given period is heavily influenced by factors
such as the general level of interest rates as well as alternative yields that
investors may obtain on competing instruments, such as money market mutual
funds. The Company believes that the likelihood for retention of brokered
certificates of deposit is more a function of the rate paid on such accounts, as
compared to retail deposits which may be established due to branch location or
other undefined reasons.
Advances and other borrowings increased by $1.3 million to $643.4 million at
December 31, 2002 from $642.1 million at September 30, 2002. Short-term
borrowings increased $2.9 million to $608.1 million at December 31, 2002,
compared to $605.2 million at September 30, 2002. At December 31, 2002, $445.0
million of the short-term borrowings were callable Federal Home Loan Bank
("FHLB") advances with maturities from three to eight years and are callable by
the FHLB during the next fiscal year and quarterly thereafter. Long-term
borrowings decreased $1.6 million to $35.2 million at December 31, 2002,
compared to $36.8 million at September 30, 2002. At December 31, 2002, the
Company had an additional borrowing capacity of $246.4 million available from
the FHLB.
RESULTS OF OPERATIONS
NET INCOME. Net income for the three-month period ended December 31, 2002 was
$6.1 million compared with $6.0 million for the three-month period ended
December 31, 2001. Net income for the three-month period ended December 31, 2002
included a $1.45 million charge related to an impairment write-down of the
Company's mortgage servicing rights. (For further information see footnote 13 in
"Notes to Unaudited Consolidated Financial Statements" on page 17 and discussion
of "Other Operating Income" on page 24). Net income for the three-month period
ended December 31, 2002 increased due to an increase in other operating income,
due primarily to increases in gains on sales of loans.
The following table shows the return on average assets and return on average
equity ratios for each period:
Three months ended
December 31,
---------------------------------------
2002 2001
------------------ -----------------
Return on average assets........................................... 1.06% 1.09%
Return on average equity........................................... 13.27% 14.43%
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $795,000 or 5.7% to $13.2 million for the three-month period ended
December 31, 2002 compared to $14.0 million for the same period in the prior
year. The decrease in net interest income for the three-month period ended
December 31, 2002 was primarily due to a decrease in the net interest margin to
2.46% from 2.70% in the prior year. The low interest rate environment affects
the Company's net interest margin as the yield on earning assets declines to
reflect new rates. The cost of liabilities is no longer decreasing as rapidly as
the decrease in the yield on earning assets because deposit rates are near their
lowest level. The Company's interest rate sensitivity as measured by it's
one-year interest rate gap position is also positive, which implies an increase
in net interest income in a rising rate environment or a decrease in net
interest income in a falling rate environment.
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Total interest income decreased $4.3 million or 13.2% to $28.4 million for the
three-month period ended December 31, 2002 compared to $32.7 million at December
31, 2001. The decrease in interest income was primarily the result of decreases
in interest on loans, mortgage-backed and related securities and debt and equity
securities. The decrease in interest income on loans was the result of a
decrease in the average yield on loans to 6.33% from 7.18% for the three month
periods ended December 31, 2002 and 2001, respectively, partially offset by an
increase in the average balance of loans to $1.35 billion from $1.27 billion for
the same periods. The decrease in interest income on mortgage-backed and related
securities was due to a decrease in the average balance of such securities to
$681.9 million from $709.8 million for the three-month period ended December 31,
2002 and 2001, respectively, and a decrease in the average yield on such
securities to 3.13% from 4.77% for the same periods.
Total interest expense decreased $3.5 million or 18.8% to $15.2 million for the
three-month period ended December 31, 2002, compared to $18.7 million for the
three-month period ended December 31, 2001. The decrease in interest expense was
the result of decreases in the cost of deposits and advances and other
borrowings, as well as a decrease in the average balance of deposits. The
average cost of deposits decreased to 2.22% from 3.19% for the three month
periods ended December 31, 2002 and 2001, respectively. The average balances of
deposits decreased to $1.33 billion for the three-month period ended December
31, 2002, as compared to $1.37 billion for the same period in the prior year.
See "Financial Condition" for a further discussion of the Company's deposit
base. The average balance of advances and other borrowings increased to $645.4
million for the three-month period ended December 31, 2002, as compared to
$553.5 million for the same period in the prior year. The average cost of
advances and other borrowings decreased to 4.75% for the three-month period
ended December 31, 2002 from 5.50% for the same period in the prior year. The
borrowings are primarily adjustable-rate FHLB advances, reverse repurchase
agreements and Federal Funds purchased which have repriced to reflect the
changes in rate levels associated with the respective borrowing rate indexes
from the same period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the three-month period ended December
31, 2002 and 2001, respectively. Tax-exempt investments are not material and the
tax-equivalent method of presentation is not included in the schedule.
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------- -----------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits $ 3,278 $ 10 1.21% $ 4,604 $ 24 2.07%
Debt and equity securities............... 15,780 137 3.44 13,051 199 6.05
Mortgage-backed and related securities... 681,852 5,372 3.13 709,756 8,537 4.77
Loans:
First mortgage......................... 839,349 14,115 6.67 800,658 14,942 7.40
Home equity............................ 283,210 3,541 4.96 225,364 3,626 6.38
Consumer .............................. 89,126 1,839 8.19 105,346 2,241 8.44
Commercial and agricultural............ 136,014 2,008 5.86 141,321 2,225 6.25
----------- -------- ----------- --------
Total loans....................... 1,347,699 21,503 6.33 1,272,689 23,034 7.18
Federal Home Loan Bank stock............. 91,689 1,387 6.00 63,254 917 5.75
------------------------ ------------------------
Total earning assets.............. 2,140,298 28,409 5.27 2,063,354 32,711 6.29
----------- -------- ----------- --------
Valuation allowances..................... (12,039) (8,951)
Cash and due from banks.................. 35,115 31,339
Other assets............................. 107,162 100,147
----------- -----------
Total assets...................... $ 2,270,536 $ 2,185,889
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ......................... $ 98,519 58 0.23 $ 86,498 81 0.37
Money market demand accounts.......... 398,568 796 0.79 461,352 2,179 1.87
Passbook.............................. 94,874 130 0.54 89,138 228 1.01
Certificates of deposit.............. 736,986 6,446 3.47 730,598 8,506 4.62
----------- -------- ----------- --------
Total interest-bearing deposits.......... 1,328,947 7,430 2.22 1,367,586 10,994 3.19
Advances and other borrowings............ 645,421 7,731 4.75 553,464 7,672 5.50
Advances from borrowers for taxes and 8,419 3 0.14 9,014 5 0.22
insurance................................
----------- -------- ----------- --------
Total interest-bearing liabilities 1,982,787 15,164 3.03 1,930,064 18,671 3.84
-------- --------
Non interest-bearing deposits............ 93,591 74,476
Other liabilities........................ 12,390 16,540
Shareholders' equity..................... 181,768 164,809
----------- -----------
Total liabilities and shareholders' equity $ 2,270,536 $ 2,185,889
=========== ===========
Net interest income...................... $ 13,245 $ 14,040
======== ========
Net yield on interest-earning assets..... 2.46% 2.70%
Interest rate spread..................... 2.23 2.45
Ratio of earning assets to interest-bearing
liabilities........................... 107.94 106.91
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
Three months ended
December 31,
2002 2001
-------- --------
(Dollars in thousands)
Beginning balance ................................................................ $ 14,212 $ 11,686
Provision for loan losses ........................................................ 381 911
Charge-offs ...................................................................... (190) (237)
Recoveries ....................................................................... 10 22
-------- --------
Ending balance ................................................................... $ 14,413 $ 12,382
======== ========
Ratio of allowance for loan losses to gross loans
receivable at the end of the period ............................................ 1.06% 0.91%
Ratio of allowance for loan losses to total non-
performing loans at the end of the period ...................................... 402.04% 124.82%
Ratio of net charge-offs to average gross loans
(annualized) ................................................................... 0.05% 0.07%
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through a
provision for loan losses. The allowance is based upon past loan loss experience
and other factors, which in management's judgement, deserve current recognition
in estimating loan losses. The evaluation includes a review of all loans on
which full collectibility may not be reasonably assured. Other factors
considered by management include the size and character of the loan portfolio,
concentrations of loans to specific borrowers or industries, existing economic
conditions and historical losses on each portfolio category. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties which collateralize loans.
With respect to loans that are deemed impaired, the calculation of allowance for
loan losses is based upon the discounted present value of expected cash flows
received from the debtor or other measures of market prices or collateral
values.
In general, the level of the allowance for loan losses and changes during each
fiscal year is a function of several factors, including but not limited to
changes in the loan portfolio, net charge-offs and non-performing loans. At
December 31, 2002, gross loans receivable were $1.36 billion compared to $1.37
billion at December 31, 2001. Net charge-offs for the three-month period ended
December 31, 2002 were $180,000 compared to $215,000 for the three-month period
ended December 31, 2001. Non-performing loans increased to $3.6 million or 0.26%
of gross loans at December 31, 2002 compared to $2.2 million or 0.16% of gross
loans at September 30, 2002. Although the Company's non-performing loan totals
are consistent with the totals at September 30, 2002, the total is down from
$9.9 million at December 31, 2001. At December 31, 2002, the increase in the
ratio of allowance for loan losses to total non-performing loans is due to the
decrease in non-performing loans. (See "Asset Quality"). The decrease in
non-performing loans since December 31, 2001 is due to the restructuring of a
commercial credit which was returned to accrual status during fiscal 2002, a
commercial real estate loan which was transferred to foreclosed properties and
due to several other individual loans returning to accrual status. This decrease
in non-performing loans is the primary reason for the decline in the Company's
quarterly provision for loan losses. For the three-month period ended December
31, 2002, the provision for loan losses was $381,000 compared to $911,000 for
the same period in the prior year.
Management believes that the allowance for loan losses at December 31, 2002 is
adequate to absorb probable losses inherent in the portfolio. Management
believes it uses the best information available to make such determinations. If
circumstances differ substantially from the assumptions used in making
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States of America,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting the borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary should the quality of any loans deteriorate as a result of
factors discussed herein.
23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
OTHER OPERATING INCOME. Other operating income increased by $974,000 to $8.4
million for the three-month period ended December 31, 2002, compared to the same
period in the prior year. The following table shows the percentage of other
operating income to average assets for each period:
Three months ended
December 31,
2002 2001
--------- ---------
(Dollars in thousands)
Other operating income................................... $ 8,364 $ 7,390
Percent of average assets (annualized)................... 1.46% 1.34%
The results for the three-month period ended December 31, 2002 include a $1.45
million charge related to an impairment write-down of the Company's mortgage
servicing rights, which is recorded as part of a valuation reserve at December
31, 2002. The Company's mortgage servicing rights are accounted for at the lower
of book or market value. As part of the calculation of the market value of
mortgage servicing rights, the Company calculates the present value of the
future stream of servicing fee income expected to be received from its mortgage
loan servicing portfolio, relying in part on median loan prepayment speeds as
forecast by the major mortgage dealers. These mortgage dealer forecasts utilize
a number of assumptions, including an assumption as to the future direction of
interest rates. The forecasted prepayment speeds increased primarily in the
30-year fixed-rate category of the Company's loan servicing portfolio as
compared to the previous period (reflecting forecasts for continued low interest
rates and a correspondingly high level of mortgage repayments and refinancings)
and resulted in the impairment write-down. The Company services $799 million in
mortgage loans for others, with those servicing rights valued, net of valuation
allowances, at $6.4 million as of December 31, 2002.
Other than the aforementioned impairment on mortgage servicing rights, the
increase for the three-month period ended December 31, 2002 was due primarily to
increases in gains on the sale of loans and increases in loan-related fees.
Gains on the sale of mortgage loans increased to $4.9 million for the
three-month period ended December 31, 2002 compared to gains of $3.2 million for
the same period in the prior year. The Company's volume of mortgage loan sales
were $332.5 million for the three-month period ended December 31, 2002, compared
to $221.4 million for the same period in the prior year. The level of loan sale
activity is highly dependent on the interest rate environment and on the types
of mortgage loans originated. In the recent low interest rate environment,
customers are more likely to select or refinance into fixed-rate mortgages,
which the Company then generally sells in the secondary market. Loan servicing
and loan related fees increased to $1.7 million from $1.2 million for the three
month periods ended December 31, 2002 and 2001, respectively. The increase in
other loan-related fees included higher levels of a variety of fees including
prepayment penalties, loan modification fees and other loan origination fees,
which were also attributable to increased loan activity in the recent low
interest rate environment.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $816,000 or 6.8% to $12.8 million for the three-month period ended
December 31, 2002, compared to the same period in the prior year. The following
table shows the percentage of general and administrative expenses to average
assets for each period:
Three months ended
December 31,
2002 2001
---------- ----------
(Dollars in thousands)
General and administrative expenses...................... $ 12,759 $ 11,943
Percent of average assets (annualized)................... 2.23% 2.17%
The increase is primarily due to additional levels of compensation, including
increased commissions and incentive pay related to the Company's increased loan
origination activity, higher benefit costs and normal merit pay increases at the
start of the Company's fiscal year. Including commissions and salaries, mortgage
loan related compensation increased by approximately $560,000 during the quarter
compared to the prior year.
INCOME TAX EXPENSE. Income tax expense decreased to $2.4 million for the
three-month period ended December 31, 2002, compared to $2.6 million for the
same period in the prior year. The effective tax rate for the three-month period
ended
24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
December 31, 2002 was 28.23% compared with 30.11% for the three-month period
ended December 31, 2001. The decrease in the effective tax rate is primarily due
to an increase in affordable housing credits during the three-month period ended
December 31, 2002. The income tax credits received on the Company's affordable
housing investments were $780,000 and $652,000 for the three month periods ended
December 31, 2002 and 2001, respectively.
ASSET QUALITY
Total non-performing assets were $4.5 million, or 0.20% of total assets at
December 31, 2002, compared with $4.1 million, or 0.18% of total assets at
September 30, 2002. Non-performing assets include loans which have been placed
on nonaccrual status and property upon which a judgment of foreclosure has been
entered but prior to the foreclosure sale, as well as property acquired as a
result of foreclosure.
Non-performing assets are summarized as follows:
December 31, September 30,
2002 2002
---------- ----------
(Dollars in thousands)
Non-performing loans ....................................................... $ 3,585 $ 2,209
Foreclosed properties ...................................................... 887 1,908
---------- ----------
Non-performing assets ...................................................... $ 4,472 $ 4,117
========== ==========
Performing troubled debt restructurings .................................... $ 2,224 $ 2,440
Non-performing loans to gross loans ........................................ 0.26% 0.16%
Non-performing assets to total assets ...................................... 0.20% 0.18%
Except as disclosed above, there are no material loans about which management is
aware that there exists serious doubts as to the ability of the borrower to
comply with the loan terms.
Impaired loans totaled $2.1 million at December 31, 2002 compared to $2.0
million at September 30, 2002. These loans had associated impairment reserves of
$207,000 and $696,000 at December 31, 2002 and September 30, 2002, respectively.
For the three-month period ended December 31, 2002, the average balance of
impaired loans was $2.0 million compared to $9.0 million for the three-month
period ended December 31, 2001 and $6.3 million for the year ended September 30,
2002. Interest income on impaired loans for the three month periods ended
December 31, 2002 and 2001 was $23,000 and $25,000, respectively.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management attempts to control this risk through pricing of assets and
liabilities and maintaining specific levels of maturities. Generally, the
Company is subject to decreases in the net interest margin in rising rate
environments and increases in the net interest margin in falling interest rate
environments.
At December 31, 2002, the Company's estimated cumulative one-year gap between
assets and liabilities was a positive 6.39% of total assets. A positive gap
occurs when a greater dollar amount of interest-earning assets are repricing or
maturing than interest-bearing liabilities. The Company's three-year cumulative
gap as of December 31, 2002 was a negative 0.59% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest-earning assets. The change in the Company's
gap position is due to the decline in interest rates during fiscal 2002 and
2003. As interest rates declined, the terms of the Company's assets shortened as
prepayments of the Company's mortgage-related assets increased and the terms of
the liabilities lengthened as consumers invested in longer term certificates of
deposit and the Company issued longer term brokered certificates of deposit.
With a positive gap position, during periods of rising interest rates it is
expected that the yield of the Company's interest-earning assets will rise more
quickly than the cost on its interest-bearing liabilities, which will have a
positive effect on its net interest income. Although the opposite effect on net
interest income would occur in periods of falling interest rates, the Company
could
25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
experience substantial prepayments of its fixed-rate mortgage loans and
mortgage-backed and related securities in periods of falling interest rates,
which would result in the reinvestment of such proceeds at market rates which
are lower than current rates.
The Company's interest rate risk position, as defined by gap, is dynamic as
interest rates change. While static gap analysis may be a useful measure of
determining short-term risk to future net income under certain circumstances, it
does not measure the sensitivity of the market value of assets and liabilities
to changes in interest rates. For example, gap analysis is limited in its
ability to predict trends in future earnings and makes no assumptions about
changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the market
interest rate environment. In the event market interest rates increase
significantly from the current rates at December 31, 2002, the Company expects
that its one-year positive gap would become negative due to the anticipated
shortening of the terms of the Company's fixed rate callable FHLB advances
becoming callable. In addition, prepayments of the Company's mortgage-related
assets will slow causing a lengthening in the terms of these assets.
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of December 31,
2002. ..
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Residential ............................... $ 20,211 $ 53,766 $ 32,882 $ 16,901 $ 48,333 $ 172,093
Commercial ................................ 219,694 86,090 206,341 42,438 115,049 669,612
Consumer .................................. 287,345 24,799 26,844 27,104 14,928 381,020
Mortgage-backed and related securities ....... 16,888 22,225 30,664 16,248 11,610 97,635
Assets available for sale:
Mortgage loans ............................ 77,094 -- -- -- -- 77,094
Fixed rate mortgage related ............... 54,057 104,863 162,825 77,642 28,606 427,993
Variable rate mortgage related ............ 154,990 -- -- -- -- 154,990
Investment securities ..................... 8,478 2,000 3,005 -- -- 13,483
Other assets .............................. 93,503 -- -- -- -- 93,503
---------- ---------- ---------- ---------- ---------- ----------
Total ..................................... $ 932,260 $ 293,743 $ 462,561 $ 180,333 $ 218,526 $2,087,423
========== ========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts .............................. $ 8,373 $ 25,119 $ 37,473 $ 16,822 $ 13,702 $ 101,489
Passbook savings accounts ................. 3,225 9,676 18,785 13,080 47,516 92,282
Money market deposit accounts ............. 92,068 276,205 671 1,186 668 370,798
Certificates of deposit ................... 167,036 313,207 231,519 22,366 145 734,273
Borrowings (4) ............................ 133,439 54,680 330,246 125,000 -- 643,365
---------- ---------- ---------- ---------- ---------- ----------
Total ..................................... $ 404,141 $ 678,887 $ 618,694 $ 178,454 $ 62,031 $1,942,207
========== ========== ========== ========== ========== ==========
Excess (deficiency) of interest-earning
Assets over interest-bearing liabilities .... $ 528,119 $ (385,144) $ (156,133) $ 1,879 $ 156,495 $ 145,216
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities ........................ $ 528,119 $ 142,975 $ (13,158) $ (11,279) $ 145,216
========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets ................................ 23.61% 6.39% (0.59%) (0.50%) 6.49%
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------
(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 50%, 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 $57.6 million at December 31,
2002.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
OF 33%, 14% and 99%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher than
the Company's historical rates, but are considered by management to be more
indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $7.0 million or 0.3% 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.
Borrowings includes fixed rate callable FHLB advances of $320 million
maturing in one to three years and $125 million maturing in three to five
years.
27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
actual withdrawals and repayments of assets and liabilities may vary
substantially. Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and liabilities
may have similar maturities to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on other types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans and
mortgage-backed and related securities, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of an actual change in interest rates, actual prepayment
and early withdrawal levels could deviate significantly from those assumed in
calculating the data in the table.
CRITICAL ACCOUNTING POLICES
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ significantly from those estimates under different assumptions and
conditions. The Company believes the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results and
require management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is a material estimate
that is particularly susceptible to significant changes in the near term and is
established through a provision for loan losses. The allowance is based upon
past loan loss experience and other factors which, in management's judgement,
deserve current recognition in estimating loan losses. The evaluation includes a
review of all loans on which full collectibility may not be reasonably assured.
Other factors considered by management include the size and character of the
loan portfolio, concentrations of loans to specific borrowers or industries,
existing economic conditions and historical losses on each portfolio category.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties which
collateralize loans. With respect to loans that are deemed impaired, the
calculation of allowance for loan losses is based upon the discounted present
value of expected cash flows received from the debtor or other measures of
market prices or collateral values.
Management believes it uses the best information available to make such
determinations. If circumstances differ substantially from the assumptions used
in making determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States of America,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting the borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary if loan quality deteriorates.
ACCOUNTING FOR INCOME TAXES - As part of the process of preparing the
consolidated financial statements the Company is required to estimate income
taxes for federal and state purposes. This process involves estimating the
Company's actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the Company's consolidated
statements of financial condition. Management must then assess the likelihood
that the deferred tax assets will be recovered from future taxable income and to
the extent management believes that recovery is not likely, a valuation
allowance must be established. To the extent the Company establishes a valuation
allowance or increases this allowance in a period, the Company would include an
expense within the tax provision in the consolidated statements of income.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. A valuation allowance is based on
management's estimates of taxable income in the jurisdictions in which the
Company operates and the period over which deferred tax assets will be
recoverable. In the event actual results differ from these estimates, or if
management adjusts these estimates in future periods the Company may need to
establish an additional valuation allowance which could materially impact the
financial position and results of operations.
MORTGAGE SERVICING RIGHTS - The Company recognizes as a separate asset the
rights to service mortgage loans for others. The value of mortgage servicing
rights is amortized in relation to the servicing revenue expected to be earned.
Estimating the fair value of the mortgage servicing rights involves judgment,
particularly of estimated prepayment speeds of the underlying mortgages
28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
serviced. Net income could be affected if management's estimate of the
prepayment speeds or other factors differ materially from actual prepayments.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need for
management's judgement in their application. There are also areas in which
management's judgement in selecting any available alternative would not produce
a materially different result.
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 $42.6 million and
$45.8 million as of December 31, 2002 and September 30, 2002, respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At December 31, 2002, the Company had
additional borrowing capacity of $246.4 million available from the FHLB.
In fiscal 2002 the Company continued to reduce the size of its mortgage-backed
securities and investment securities portfolios as part of a strategy to
decrease the proportion of earnings from that segment of its balance sheet. The
reduction was primarily accomplished through the repayment of principal,
scheduled maturities and the sale of available-for-sale securities. Funds
generated from the repayment of principal, maturities and sales from the
mortgage-backed securities and investment securities portfolios were used to
grow and diversify the Company's loan portfolio, to reduce the Company's
wholesale debt and as an additional source of liquidity. Management anticipates
that this form of "balance sheet restructuring" will be an ongoing strategic
initiative of the Company in fiscal 2003.
The Company is in the midst of a share repurchase program where it may purchase
up to 460,000 shares, or approximately five percent, of its common stock in the
open market. As of December 31, 2002, the Company had purchased 70,300 shares
under the current authorization at an average price of $20.78 per share. The
Company may purchase an additional 389,700 shares under the current
authorization. The Company's share repurchase program is funded through
dividends received from the Bank and the Company's line of credit. Due to the
Company's access to liquidity, shares repurchased have a minimal effect on the
Company's liquidity.
At December 31, 2002, the Company had outstanding loan commitments including
lines of credit of $433.3 million compared to $451.1 million at September 30,
2002. The Company had no commitments to purchase loans outstanding at either of
these dates. The Company anticipates it will have sufficient funds available to
meet its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit,
including brokered certificates, which are scheduled to mature in one year or
less at December 31, 2002 were $480.1 million compared to $414.1 million at
September 30, 2002. Management believes that a significant portion of such
deposits will remain with the Company.
Through the normal course of operations, the Company has entered into certain
contractual obligations and other commitments. Such obligations generally relate
to funding of operations through deposits or debt issuances, as well as leases
for premises and equipment. As a financial service provider the Company
routinely enters into commitments to extend credit. While contractual
obligations represent future cash requirements of the Company, a significant
portion of commitments to extend credit may expire without being drawn upon.
Such commitments are subject to the same credit policies and approval process
accorded to loans made by the Company.
29
The following table summarizes significant contractual obligations and other
commitments at December 31, 2002.
Short and
Certificates of Long Term Operating
Years Ended December 31, Deposit Borrowings (1) Leases Total
--------------- -------------- ---------- ----------
(In thousands)
2003 ........................................... $ 480,057 $ 182,740 $ 1,460 $ 664,257
2004 ........................................... 176,942 80,000 883 257,825
2005 ........................................... 54,578 255,625 590 310,793
2006 ........................................... 9,299 25,000 581 34,880
2007 ........................................... 13,067 100,000 581 113,648
2008 and thereafter ............................ 146 -- 9,041 9,187
---------- ---------- ---------- ----------
Total .......................................... $ 734,089 $ 643,365 $ 13,136 $1,390,590
========== ========== ========== ==========
----------
Commitments to extend credit ................... $ 433,314
==========
(1) Fixed rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due. Short and
long term borrowings include fixed rate callable advances of $80 million
maturing in 2004, $240 million maturing in 2005, $25 million maturing in 2006
and $100 million maturing in 2007.
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 December 31, 2002:
Tangible capital ................... $177,350 7.98% >$ 88,892 > 4.0% > $111,115 > 5.0%
- - - -
Core capital ....................... 177,350 7.98% > 88,892 > 4.0% > 111,115 > 5.0%
- - - -
Tier 1 risk-based capital .......... 177,350 11.15% > 63,638 > 4.0% > 95,458 > 6.0%
- - - -
Risk-based capital ................. 191,433 12.03% > 127,277 > 8.0% > 159,096 > 10.0%
- - - -
As of September 30, 2002:
Tangible capital ................... $175,889 7.57% >$ 92,971 > 4.0% > $116,214 > 5.0%
- - - -
Core capital ....................... 175,889 7.57% > 92,971 > 4.0% > 116,214 > 5.0%
- - - -
Tier 1 risk-based capital .......... 175,889 10.56% > 66,646 > 4.0% > 99,968 > 6.0%
- - - -
Risk-based capital ................. 189,793 11.39% > 133,291 > 8.0% > 166,614 > 10.0%
- - - -
The capital of the Company and the Bank exceed all regulatory capital
requirements.
30
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2002.
More than More than More than More than
Within One Year Two Years Three Years Four Years
One Year to Two Years to Three Years To Four Years to Five Years
--------------- ------------- -------------- ------------- ---------------
Interest earning assets (Dollars in millions)
Loans:
Residential............... $ 1.2 10.88% $ 0.3 8.06% $ 1.6 6.45% $ 0.5 7.85% $ 12.1 6.64%
Commercial................ 117.6 5.28% 40.7 7.26% 60.4 6.57% 4.9 7.36% 109.1 7.57%
Consumer.................. 46.3 5.67% 40.5 5.09% 119.7 4.93% 131.0 4.93% 14.7 8.32%
Mortgage-backed
securities:
Fixed rate................ 198.0 4.27% 96.7 4.27% 96.7 4.27% 47.0 4.27% 47.0 4.27%
Adjustable rate .......... 105.7 1.85% 19.1 1.85% 11.1 1.85% 4.0 1.85% 1.2 1.85%
Debt and equity
securities.................. 10.5 3.00% 3.0 3.69% -- -- -- -- -- --
Other......................... 93.5 6.00% -- -- -- -- -- -- -- --
------ ------ ------ ------- -------
Total interest
earning assets.............. $ 572.8 4.42% $200.3 4.81% $289.5 4.94% $ 187.4 4.77% $ 184.1 6.69%
========= ====== ====== ======= =======
Interest bearing liabilities
Deposits:
NOW accounts.............. $ 33.5 0.15% $ 18.7 0.15% $ 18.8 0.15% $ 8.4 0.15% $ 8.4 0.15%
Passbooks................. 12.9 0.25% 9.4 0.25% 9.4 0.25% 6.6 0.25% 6.5 0.25%
Money market.............. 368.3 0.69% 0.3 0.69% 0.3 0.69% 0.6 0.69% 0.6 0.69%
Certificates.............. 480.2 3.03% 177.0 3.74% 54.6 4.48% 9.3 4.42% 13.1 4.61%
Borrowings
Fixed rate................ 75.0 3.07% 80.0 6.05% 255.6 5.57% 25.0 5.02% 100.0 5.68%
Adjustable rate........... 107.7 2.91% - - - - - - - -
--------- ------ ------ ------- -------
Total interest
bearing liabilities.......... $ 1,077.6 2.10% $285.4 4.03% $338.7 4.94% $ 49.9 3.41% $ 128.6 4.91%
========= ====== ====== ======= =======
Fair
Over Market
Five Years Total Value
---------------- ---------------- -------
Interest earning assets
Loans:
Residential................ $ 233.5 6.33% $ 249.2 6.37% $ 256.3
Commercial................. 336.9 7.41% 669.6 6.98% 690.4
Consumer................... 28.8 8.65% 381.0 5.45% 384.1
Mortgage-backed
securities:
Fixed rate................. 40.2 4.27% 525.6 4.27% 528.1
Adjustable rate............ 13.9 1.85% 155.0 1.85% 155.0
Debt and equity
securities................... -- -- 13.5 3.15% 13.5
Other.......................... -- -- 93.5 6.00% 93.1
------- --------- --------
Total interest
earning assets............... $ 653.3 6.77% $ 2,087.4 5.50% $2,120.5
======= ========= ========
Interest bearing liabilities
Deposits:
NOW accounts............... $ 13.7 0.15% $ 101.5 0.15% $ 98.4
Passbooks.................. 47.5 0.25% 92.3 0.25% 88.0
Money market............... 0.7 0.69% 370.8 0.69% 370.1
Certificates............... 0.1 8.00% 734.3 3.36% 747.9
Borrowings
Fixed rate................. -- -- 535.6 5.28% 588.7
Adjustable rate............ -- -- 107.7 2.91% 107.7
------- -------- --------
Total interest
bearing liabilities.......... 62.0 0.25% $1,942.2 3.04% $2,000.8
======== ======== ========
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein pursuant to Item 305 of Regulation
S-K is contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the Company's disclosure controls and procedures
(as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief
Financial Officer and several other members of the Company's
senior management within the 90-day period preceding the filing
date of this quarterly report. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods
specified in the SEC's rules and forms. In the quarter ended
December 31, 2002, the Company did not make any significant
changes in, nor take any corrective actions regarding, its
internal controls or other factors that could significantly affect
these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on January 22, 2003.
Only shareholders of record at the close of business on November
29, 2002 (the "Voting Record Date") were entitled to vote at the
Annual Meeting. On the Voting Record Date, there were 9,367,695
shares of common stock outstanding, and on the annual meeting
date, 8,455,786 shares were present at the meeting by the holders
thereof in person or by proxy, which constituted a quorum. The
following is a summary of the matters voted upon at the Annual
Meeting.
NUMBER OF VOTES
----------------------------------------------------------------
BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
-------- ------- -----------
NOMINEES FOR DIRECTOR FOR THREE-YEAR
TERM EXPIRING IN 2005:
Jeffrey A. Reigle 8,292,216 163,570 -- --
Edmund O. Templeton 8,288,710 167,076 -- --
RATIFICATION OF APPOINTMENT OF
KPMG LLP AS AUDITORS 8,336,201 108,136 11,449 --
32
ITEM 5. OTHER INFORMATION
On January 21, 2003, the Company announced the declaration of a
dividend of $0.20 per share on the Company's common stock for the
quarter ended December 31, 2002. The dividend is payable on
February 20, 2003 to shareholders of record as of February 10,
2003. This will be the 30th consecutive cash dividend payment
since the Company became publicly-held in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of St. Francis Bank, F.S.B. (1)
3.4 By-laws of St. Francis Bank, F.S.B. (1)
3.5 Articles of Amendment to the Articles of
Incorporation of Registrant (3)
4.0 Shareholders' Rights Agreement dated as of September
25, 1997 between Registrant and Firstar Trust Company
(4)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan
(1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership
Plan (1)
10.4 Credit Agreement by and between St. Francis Bank,
F.S.B. Employee Stock Ownership Trust and Registrant
(1)
10.5 St. Francis Bank, F.S.B. Management Recognition and
Retention Plan and Trust (1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock
Option Plan (1)
10.7 St. Francis Capital Corporation 1993 Stock Option
Plan for Outside Directors (1)
10.8 1986 Deferred Compensation Agreement as
Amended-Thomas R. Perz (4)
10.9 1987 Deferred Compensation Agreement-Thomas R. Perz
(1)
10.10 1988 Deferred Compensation Agreement-Edward W.
Mentzer (1)
10.11 2000 St. Francis Bank, FSB Employment
Agreement-Thomas R. Perz (5)
10.12 2000 St. Francis Capital Corporation Employment
Agreement-Thomas R. Perz (5)
10.13 1996 Amended Employment Agreement-James C. Hazzard
(5)
10.14 1997 Amended Employment Agreement-Bradley J. Smith
(5)
10.15 1998 Amended Employment Agreement-Jon D. Sorenson (5)
10.16 1998 Amended Employment Agreement-James S. Eckel (5)
10.17 St. Francis Capital Corporation 1997 Stock Option
Plan (3)
10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz
(3)
11.1 Statement Regarding Computation of Earnings Per Share
(See footnote 7 in "Notes to Unaudited Consolidated
Financial Statements") (6)
99.2 Certification of Chief Executive Officer and Chief
Financial Officer under the Sarbanes-Oxley Act of
2002 (6)
(1) Incorporated by reference to exhibits filed with the
Registrant's Form S-1 Registration Statement declared
effective on April 22, 1993. (Registration Number
33-58680).
(2) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1995.
(3) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997.
(4) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1999.
(5) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 2000.
(6) Filed herewith.
(b) No reports on Form 8-K were filed during the quarter for which this report
was filed.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: February 13, 2003 By: /s/ Jon D. Sorenson
------------------- ------------------------------
Jon D. Sorenson
Chief Financial Officer
34
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas R. Perz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of St. Francis
Capital Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003 /s/ Thomas R. Perz
-------------------------------
Thomas R. Perz, Chairman of the
Board, President and Chief
Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jon D. Sorenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of St. Francis
Capital Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003 /s/ Jon D. Sorenson
--------------------------------
Jon D. Sorenson, Chief Financial
Officer and Treasurer