1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
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.)
3545 SOUTH KINNICKINNIC AVENUE
MILWAUKEE, WISCONSIN 53235-3700
- - ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(414) 744-8600
----------------------------------------
(Registrant's telephone number)
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 5,801,699 at April 30, 1996.
Page 1 of 25 pages
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ST. FRANCIS CAPITAL CORPORATION
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis 14
PART II - OTHER INFORMATION
ITEM 1.Legal Proceedings 24
ITEM 2.Changes In Securities 24
ITEM 3.Defaults Upon Senior Securities 24
ITEM 4.Submission of Matters to a Vote of Security Holders 24
ITEM 5.Other Information 24
ITEM 6.Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, September 30,
1996 1995
------------ -------------
(In thousands)
ASSETS
Cash and cash equivalents $ 32,148 $ 20,780
Trading account securities, at market - 3,000
Assets available for sale, at market value:
Investment securities 47,113 4,142
Mortgage-backed and related securities 516,415 360,077
Mortgage loans held for sale, at lower of cost or market 6,977 1,138
Investment securities held to maturity (estimated market values
of $3,224 and $49,574, respectively) 3,156 49,928
Mortgage-backed and related securities held to maturity (estimated
market values of $69,671 and $155,896, respectively) 71,695 157,495
Federal Home Loan Bank stock, at cost 17,268 17,440
Loans receivable, net 539,073 513,308
Accrued interest receivable 7,572 7,012
Foreclosed properties, net - 5,833
Real estate held for investment 27,811 24,264
Premises and equipment, net 12,863 10,892
Other assets 13,489 13,906
------------ ------------
Total assets $ 1,295,580 $ 1,189,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 806,398 $ 688,348
Advances and other borrowings 342,017 345,681
Advances from borrowers for taxes and insurance 3,663 10,879
Accrued interest payable and other liabilities 8,340 9,079
------------ ------------
Total liabilities 1,160,418 1,053,987
------------ ------------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued or outstanding - -
Common stock $.01 par value: Authorized 12,000,000 shares;
Issued, 7,289,620 shares;
Outstanding, 5,856,699 and 6,078,799 shares, respectively 73 73
Additional paid-in-capital 72,081 71,819
Unrealized loss on securities available for sale (95) 2,332
Unearned ESOP compensation (3,680) (3,996)
Unearned restricted stock (234) (701)
Treasury stock at cost (1,432,921 and 1,210,821 shares, respectively) (25,636) (20,142)
Retained earnings, substantially restricted 92,653 85,843
------------ ------------
Total shareholders' equity 135,162 135,228
------------ ------------
Total liabilities and shareholders' equity $ 1,295,580 $ 1,189,215
============ ============
See accompanying Notes to Consolidated Financial Statements
3
4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended Three Months Ended
March 31, March 31,
--------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans $ 22,840 $ 19,816 $ 11,523 $ 10,409
Mortgage-backed and related securities 19,035 17,913 10,028 9,399
Investment securities 1,567 1,059 744 640
Federal funds sold and overnight deposits 564 407 283 308
Federal Home Loan Bank stock 618 547 321 279
Trading account securities 3 389 - 198
--------- --------- --------- ---------
Total interest and dividend income 44,627 40,131 22,899 21,233
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 17,777 13,965 9,376 7,617
Advances and other borrowings 9,309 9,665 4,523 5,242
--------- --------- --------- ---------
Total interest expense 27,086 23,630 13,899 12,859
--------- --------- --------- ---------
Net interest income before provision for loan losses 17,541 16,501 9,000 8,374
Provision for loan losses 144 120 78 60
--------- --------- --------- ---------
Net interest income 17,397 16,381 8,922 8,314
--------- --------- --------- ---------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees 623 593 223 282
Depository fees and service charges 685 630 330 314
Trading securities gains and commitment fees, net 109 88 (19) 259
Gain (loss) on investments and mortgage-backed
and related securities, net 3,277 187 1,678 265
Gain on mortgage loans held for sale, net 658 119 437 49
Insurance and annuity commissions 165 144 102 40
Gain (loss) on foreclosed properties 872 (2) 740 -
Income from affordable housing 919 602 486 381
Other income 320 256 192 196
--------- --------- --------- ---------
Total other operating income, net 7,628 2,617 4,169 1,786
--------- --------- --------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits 6,353 5,527 3,349 2,762
Office building, including depreciation 1,005 847 526 466
Furniture and equipment, including depreciation 853 709 453 357
Federal deposit insurance premiums 689 804 358 481
Affordable housing expenses 1,080 545 580 290
Other general and administrative expenses 3,109 2,586 1,726 1,227
--------- --------- --------- ---------
Total general and administrative expenses 13,089 11,018 6,992 5,583
--------- --------- --------- ---------
Income before income tax expense 11,936 7,980 6,099 4,517
Income tax expense 3,585 2,719 1,823 1,541
--------- --------- --------- ---------
Net income $ 8,351 $ 5,261 $ 4,276 $ 2,976
========= ========= ========= =========
Earnings per share $ 1.41 $ 0.87 $ 0.73 $ 0.49
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements
4
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders'Equity
Unrealized
Losses on
Shares of Additional Securities Unearned
Common Common Paid-In Available ESOP
Stock Stock Capital For Sale Compensation
------------------------------------------------------------------------------
(Dollars in thousands)
Six months ended March 31, 1995
- - -------------------------------
Balance at September 30, 1994 6,435,277 $ 73 $ 71,425 $ (2,733) $ (4,366)
Net income - - - - -
Purchase of treasury stock (182,448) - - - -
Exercise of stock options 7,124 - - - -
Amortization of unearned compensation - 246 - 178
Unrealized gain on securities available
for sale, net of tax - - - 1,050 -
----------- ------ -------- ---------- ----------
Balance at March 31, 1995 6,259,953 $ 73 $ 71,671 (1,683) $ (4,188)
=========== ====== ======== ========== ==========
Six months ended March 31, 1996
- - -------------------------------
Balance at September 30, 1995 6,078,799 $ 73 $ 71,819 $ 2,332 $ (3,996)
Net income - - - - -
Cash dividend - $0.20 per share - - - - -
Purchase of treasury stock (222,100) - - - -
Stock option payment - - - - -
Amortization of unearned compensation - - 262 - 316
Unrealized loss on securities available
for sale, net of tax - - - (2,427) -
----------- ------ -------- ---------- ----------
Balance at March 31, 1996 5,856,699 $ 73 $ 72,081 $ (95) $ (3,680)
=========== ====== ======== ========== ==========
Unearned
Restricted Treasury Retained
Stock Stock Earnings Total
----------------------------------------------------------
(Dollars in thousands)
Six months ended March 31, 1995
- - -------------------------------
Balance at September 30, 1994 $ (1,636) $(13,333) $ 73,271 $ 122,701
Net income - - 5,261 5,261
Purchase of treasury stock - (3,224) - (3,224)
Exercise of stock options - 114 (71) 43
Amortization of unearned compensation 468 - - 892
Unrealized gain on securities available
for sale, net of tax - - - 1,050
---------- --------- --------- ---------
Balance at March 31, 1995 $ (1,168) $(16,443) $ 78,461 $ 126,723
========== ========= ========= =========
Six months ended March 31, 1996
- - -------------------------------
Balance at September 30, 1995 $ (701) $(20,142) $ 85,843 $ 135,228
Net income - - 8,351 8,351
Cash dividend - $0.20 per share - - (1,123) (1,123)
Purchase of treasury stock - (5,494) - (5,494)
Stock option payment - - (418) (418)
Amortization of unearned compensation 467 - - 1,045
Unrealized loss on securities available
for sale, net of tax - - - (2,427)
---------- --------- --------- ---------
Balance at March 31, 1996 $ (234) $(25,636) $ 92,653 $ 135,162
========== ========= ========= =========
See accompanying Notes to Consolidated Financial Statements
5
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Six Months Ended
March 31,
--------------------------
1996 1995
---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,351 $ 5,261
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses 144 120
Depreciation, accretion and amortization 625 814
Deferred income taxes (595) (887)
Gain on investments, mortgage-backed
and related securities and trading
account securities, net (3,387) (275)
Gains on the sales of mortgage loans held for sale, net (658) (119)
Stock-based compensation expense 1,045 892
(Increase) decrease in loans held for sale 3,798 (3,898)
Decrease in trading account securities, net 3,000 1,913
Other, net 9,539 (2,374)
--------- ---------
Total adjustments 13,511 (3,814)
--------- ---------
Net cash provided by operating activities 21,862 1,447
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities 25,527 9,000
Purchases of securities (18,535) (25,086)
Purchases of mortgage-backed and related securities (1,000) (8,796)
Principal repayments on mortgage-backed
and related securities 5,310 5,021
Purchases of mortgage-backed and related
securities available for sale (215,109) (55,046)
Proceeds from sales of mortgage-backed and related securities
available for sale 106,195 17,637
Principal repayments on mortgage-backed and related securities
available for sale 31,591 8,838
Purchase of securities available for sale (22,424) -
Proceeds from sales of securities available for sale 18,969 397
Purchases of Federal Home Loan Bank stock (264) (1,000)
Redemption of Federal Home Loan Bank stock 436 -
Purchase of loans (29,086) (28,434)
Increase in loans, net of loans held for sale (6,830) (56,316)
Increase in real estate held for investment (3,547) (3,312)
Purchases of premises and equipment, net (2,703) (2,283)
-------- ---------
Net cash used in investing activities (111,470) (139,380)
======== =========
See accompanying Notes to Consolidated Financial Statements
6
7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow, cont.
Six Months Ended
March 31,
----------------
1996 1995
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 118,050 127,560
Proceeds from advances and other borrowings 10,869 116,294
Repayments on advances and other borrowings (14,533) (80,829)
Decrease in advances from borrowers for taxes and insurance (7,216) (6,220)
Dividends paid (1,123) -
Stock option transactions 423 43
Purchase of treasury stock (5,494) (3,224)
-------- -------
Net cash provided by financing activities 100,976 153,624
-------- -------
Increase in cash and cash equivalents 11,368 15,691
Cash and cash equivalents:
Beginning of period 20,780 15,951
-------- -------
End of period $ 32,148 $31,642
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 27,078 $21,783
Income taxes 3,089 3,666
Supplemental schedule of noncash investing and financing activities -
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities - $ 7,048
Reclassification of mortgage-backed and related securities
to assets available for sale $121,720 -
Transfer of mortgage loans to mortgage loans held
for sale 10,295 -
See accompanying Notes to Consolidated Financial Statements
7
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 1996
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances of
St. Francis Capital Corporation (the "Company"), St. Francis Bank, F.S.B.
(the "Bank"), Bank Wisconsin and the Bank's wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations or cash flows
in accordance with generally accepted accounting principles. However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three-month and
six-month periods ended March 31, 1996 are not necessarily indicative of
the results which may be expected for the entire year ending September 30,
1996. The September 30, 1995 Consolidated Statement of Financial
Condition presented with the interim financial statements was audited and
the auditors' report thereon was unqualified.
Certain previously reported balances have been reclassified to conform
with the 1996 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 contract amounts of these 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.
8
9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
Financial instruments whose contract amounts represent credit risk are as
follows:
Contractual or Notional Amount(s)
March 31, September 30,
1996 1995
------------ ------------
(In thousands)
Commitments to extend credit $6,926 $4,474
Guarantees under IRB issues 4,200 4,200
Interest rate swap agreements 65,000 65,000
Commitments to:
Purchase mortgage-backed securities 15,831 13,700
Sell mortgage-backed securities 24,512 -
Unused and open-ended lines of credit:
Consumer 97,573 89,061
Commercial 11,623 6,711
Open option contracts written:
Short-put options - 13,000
Short-call options - 16,000
Commitments to fund equity investments 11,373 14,283
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. 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 real estate and other consumer or
commercial assets.
The Company has entered into agreements whereby, for an initial and annual
fee, it will guarantee payment for an industrial revenue bond issue
("IRB"). The IRB is issued by a municipality 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. Appraised
values of the real estate collateral exceed the amount of the guarantee.
Interest rate swap agreements generally involve the exchange of fixed and
variable rate interest rate payments without the exchange of the
underlying notional amount on which the interest rate payments are
calculated. While interest rate swaps on their own have market risk,
these agreements were entered into as hedges of the interest rates on the
Federal Home Loan Bank (the "FHLB") advances used to fund fixed rate
securities purchases. Interest receivable or payable on interest rate
swaps is recognized using the accrual method. The agreements at March 31,
1996 consist of the following:
9
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- - -------------------------------------------------------------------------------
$10,000 Fixed Pay-Floating Receive 1996 4.43% 5.31%
10,000 Fixed Pay-Floating Receive 1998 4.93 5.61
10,000 Fixed Pay-Floating Receive 1998 5.04 5.68
15,000 Fixed Pay-Floating Receive 1998 5.25 5.31
10,000 Fixed Pay-Floating Receive 1998 5.23 5.25
10,000 Fixed Pay-Floating Receive 1998 5.43 5.25
The fair value of interest rate swaps, which is based on the present value
of the swap using dealer quotes, represent the estimated amount the
Company would receive or pay to terminate the agreements taking into
account current interest rates and market volatility. At March 31, 1996,
the fair value of the interest rate swaps was approximately $623,000.
Commitments to purchase and sell mortgage-backed securities are contracts
which represent notional amounts to purchase and sell mortgage-backed
securities at a future date and specified price. Such commitments
generally have fixed settlement dates.
The unused and open consumer lines of credit are conditional commitments
issued by the Company for extensions of credit such as home equity, auto,
credit card, or other similar consumer type financing. Furthermore, the
unused and open commercial lines of credit are also conditional
commitments issued by the Company for extensions of credit such as working
capital, agricultural production, equipment or other similar commercial
type financing. The credit risk involved in extending lines of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held for these commitments may include, but may not
be limited to, real estate, investment securities, equipment, accounts
receivable, inventory, and Company deposits.
The open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage-backed
securities at a future date and specified price. The Company receives a
premium/fee for option contracts written which gives the purchaser the
right, but not the obligation to buy or sell mortgage-backed securities
within a specified time period for a contracted price. The Company has
been primarily utilizing these items to manage the interest rate and
market value risk relating to mortgage-backed securities that result from
the MBS loan swap program and mortgage loan pipeline.
The commitments to fund equity investments represent amounts St. Francis
Equity Properties ("SFEP"), a subsidiary of the Bank, is committed to
invest in low-income housing projects, which would qualify for tax credits
under the Internal Revenue Code (the "Code"). The Code provides a per
state volume cap on the amounts of low-income housing tax credits that may
be taken with respect to low-income housing projects in each state. SFEP
is currently a limited partner in 18 projects and has committed to equity
investments in an additional four projects within the state of Wisconsin.
Additionally, the Bank has provided financing or committed to provide
financing to eleven of the projects. However, the primary benefit to the
Company on these projects is in the form of tax credits. At March 31,
1996, the Bank had loans outstanding to such projects of $16.6 million.
10
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at March
31, 1996 were as follows:
SECURITIES AVAILABLE FOR SALE
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- ---------- ----------
(In thousands)
U.S. Treasury securities $ 4,970 $ 48 3 $ 5,015
Other debt securities 30,256 124 105 30,275
State and municipal obligations 11,234 3 211 11,026
Marketable equity securities 796 10 9 797
---------- ---------- ---------- ----------
Investment securities available for sale 47,256 185 328 47,113
Mortgage-backed and related securities 516,460 3,174 3,219 516,415
---------- ---------- ---------- ----------
Total securities available for sale $563,716 $ 3,359 $ 3,547 $563,528
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- ---------- ----------
(In thousands)
Other debt securities $ 1,967 $ 34 - $ 2,001
State and municipal obligations 1,189 34 - 1,223
---------- ---------- ---------- ----------
Investment securities held to maturity 3,156 68 - 3,224
Mortgage-backed and related securities 71,695 249 2,273 69,671
---------- ---------- ---------- ----------
Total securities held to maturity $ 74,851 $ 317 $ 2,273 $ 72,895
========== ========== ========== ==========
Gross proceeds from the sale of securities available for sale during the
six months ended March 31, 1996 totaled approximately $125.3 million.
Gross realized gains and losses on the sale of securities available for
sale during the six months ended March 31, 1996 totaled approximately $3.3
million and $24,000, respectively.
As of December 31, 1995, the Company reclassified approximately $88.4
million of mortgage backed and related securities and $28.9 million of
debt securities to available for sale from held to maturity. The
reclassification had no effect on the income statement, while the effect
on the statement of financial condition was to increase equity by
approximately $470,000. The reclassification of securities was allowed by
the Financial Accounting Standards Board as part of the Company's one-time
reassessment of the appropriateness of its previous classification of such
securities under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
reclassification will not call into question the intent of the Company to
hold other debt securities to maturity in the future.
11
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
(5) Per Share Data
Earnings per share of common stock for the three-month and six-month
periods ended March 31, 1996, have been determined by dividing net income
for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Book value
per share of common stock at March 31, 1996 and September 30, 1995 have
been determined by dividing total shareholders' equity by the number of
shares of common stock and common stock equivalents considered outstanding
at the respective dates. Stock options are regarded as common stock
equivalents and are, therefore, considered in per share calculations.
Common stock equivalents are computed using the treasury stock method.
Common shares outstanding have been reduced by the ESOP shares that have
not been committed to be released.
The computation of earnings per common share is as follows:
Six months ended Three months ended
March 31, March 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
Weighted average common shares
outstanding during the period 5,637,010 5,853,439 5,580,652 5,849,846
Incremental shares relating to dilutive stock
options outstanding during the period 289,834 195,126 297,910 205,303
---------- ---------- --------- ---------
5,926,844 6,048,565 5,878,562 6,055,149
========== ========== ========= ==========
Net income for the period $8,351,000 $5,261,000 $4,276,000 $2,976,000
Net income per common share $1.41 $0.87 $0.73 $0.49
The computation of book value per common share is as follows:
March 31, September 30,
1996 1995
------------- -------------
Common shares outstanding at the end
of the period 5,488,772 5,688,876
Incremental shares relating to dilutive stock
options outstanding at the end of the period 300,555 277,889
------------- -------------
5,789,327 5,966,765
============= =============
Total shareholders' equity at the end of
the period $ 135,162,000 $ 135,228,000
Book value per common share $ 23.35 $ 22.66
12
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
(6) Acquisitions
In November 1994, the Company completed the acquisition of the stock of
Valley Bank East Central in Kewaskum, Wisconsin as well as the deposits
and certain assets of the Hartford, Wisconsin branch of Valley Bank
Milwaukee. The acquired bank offices are now operating as a commercial
bank named Bank Wisconsin, and the acquisition was accounted for as a
purchase. The related accounts and results of operations are included in
the Company's consolidated financial statements from the date of
acquisition.
The excess of cost over the fair value of tangible assets acquired is
accounted for as goodwill and will be amortized over the estimated useful
life of fifteen years using the straight-line method. Goodwill, net of
accumulated amortization, totaled $6.1 million at March 31, 1996.
(7) Changes in Accounting Policy
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65" (SFAS No. 122). Accordingly, the
Company recognizes as separate assets (capitalized) the rights to service
mortgage loans for others whether the servicing rights are acquired
through purchases or loan originations. The fair value of capitalized
mortgage servicing rights is based upon the present value of estimated
expected future cash flows. Based upon current fair values, capitalized
mortgage servicing rights are assessed periodically for impairment, which
is recognized in the statement of income during the period in which
impairment occurs by establishing a corresponding valuation allowance.
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio of capitalized mortgage servicing rights on the
basis of certain risk characteristics.
As a result of the adoption of SFAS No. 122, the Company recorded
additional gains on sale of mortgage loans of $284,000 and $383,000 for
the three and six month periods ended March 31, 1996, respectively, which
represented the present value of originated mortgage servicing rights
capitalized on loans sold with servicing retained. No valuation
allowances for originated mortgage servicing rights were established as of
March 31, 1996.
13
14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RECENT EVENTS
The deposits of thrift institutions such as the Bank are insured up to
applicable limits under the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Deposits of commercial banks
such as Bank Wisconsin are insured under the Bank Insurance Fund ("BIF") of the
FDIC. Insured institutions pay assessments to the applicable fund based on
assessment rate schedules determined by the law and FDIC regulation. Although
BIF and SAIF assessment rate schedules historically have been identical, under
rules adopted by the FDIC on August 8, 1995, the assessment for SAIF members
will continue to range from 0.23% to 0.31% per $100 of deposits, while the
range of assessment rates for BIF members were reduced to 0.04% to 0.31% per
$100 of deposits. On November 14, 1995 the FDIC again modified the assessment
rate schedule for BIF member institutions, approving a schedule ranging from 0%
to 0.27% of deposits. Based upon this adjustment, a majority of BIF members
now qualify for free insurance (based on their capitalization and management)
and pay only the $2,000 minimum annual premium. Bank Wisconsin benefits from
these assessment rate reductions in deposit insurance premiums, while the Bank
has been placed at a competitive disadvantage based on higher deposit insurance
premium obligations.
Congress is currently evaluating various proposals and bills concerning the
premium differential between the FDIC's BIF and SAIF funds and related matters.
The current proposal calls for a one-time assessment of approximately 85 to 90
basis points per $100 of SAIF deposits as of March 31, 1995. Both funds would
then, going forward, have the same, lower deposit premiums. If this should
become law, the Bank would incur a one-time charge of approximately $3.2
million if the expense were to be tax deductible. FDIC premium expense would
then be reduced in future periods. Proposals under consideration also address
related issues, including (i) providing that certain bond obligations be borne
by all depository institutions (rather than solely by the SAIF); (ii) the
merger of the SAIF and BIF by January 1, 1998 (provided no FDIC-insured
depository institution is a savings association on that date); and (iii)
repealing the bad debt reserve accounting method currently available to thrift
savings associations such as the Bank, with certain provisions for deferred
recapture. Management is unable to predict when or whether any of the
foregoing legislation will be enacted, the amount or applicable retroactive
date of any one-time assessment, or the rates that might subsequently apply to
assessable SAIF deposits; however, management anticipates that the Bank, after
consideration of the one-time assessment, would continue to exceed all
regulatory minimum capital levels. Further, management does not anticipate
that any of the current legislative proposals, if enacted, would have a
material impact on the Company's financial condition in future periods.
FINANCIAL CONDITION
The Company's total assets increased $106.3 million or 8.9% to $1.296 billion
at March 31, 1996 from $1.189 billion at September 30, 1995. Loans receivable,
including loans held for sale, increased $31.6 million. Mortgage-backed and
related securities, including mortgage-backed and related securities available
for sale, increased $70.5 million. Funding the increase in assets was an
increase in deposits of $118.0 million. The Company's ratio of shareholders'
equity to total assets was 10.4% at March 31, 1996, compared to 11.4% at
September 30, 1995. The Company's book value per share was $23.35 at March 31,
1996, compared to $22.66 at September 30, 1995.
14
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
Mortgage-backed and related securities, including mortgage-backed and related
securities available for sale, increased $70.5 million to $588.1 million at
March 31, 1996 from $517.6 million at September 30, 1995. The increase was the
result of the Company purchasing adjustable rate mortgage-backed securities and
short- and medium-term REMIC securities. The Company has been an active
purchaser of adjustable rate mortgage-backed securities as well as short-term
mortgage-related securities because of the lower level of interest rate risk
and low credit risk in relation to the interest earned on such securities.
However, repayments and sales of existing securities have partially offset the
increases.
Loans receivable, including mortgage loans held for sale, increased $31.6
million to $546.0 million at March 31, 1996 from $514.4 million at September
30, 1995. The increase was due primarily to the increase in loans originated
for retention in the Company's loan portfolio. The Company currently sells
substantially all fixed rate mortgage loans and retains adjustable-rate loans
for its portfolio. Additionally, the Company has increased its emphasis on
consumer and interim financing products, which are primarily retained in the
Company's loan portfolio. The loan originations were funded primarily by the
increase in deposits and are consistent with the Company's efforts to build
earning assets. For the six months ended March 31, 1996, the Company originated
approximately $140.8 million in loans, as compared to $80.7 million for the
same period in the prior year. Of the $140.8 million in loans originated,
$69.7 million were in consumer and interim financing loans and $71.1 million
were in first mortgage loans. The Company has continued to greatly expand its
consumer lending activities. At March 31, 1996, the Company's consumer loan
portfolio totaled $178.2 million, or 31.2% of the Company's gross loans
receivable.
Deposits increased $118.0 million to $806.4 million at March 31, 1996 from
$688.3 million at September 30, 1995. The Company has continued to offer new
deposit products in an effort to attract new deposits and maintain current
relationships with customers. Significant new deposit products offered which
have contributed to the increase include a certificate of deposit with an
interest rate tied to the prime rate and a certificate of deposit with a rate
that adjusts every six months. Additionally, the Company continues to sell
certificates of deposit through investment brokers. At March 31, 1996, the
Company had approximately $99.9 million in brokered certificates compared with
$38.0 million at September 30, 1995. The brokered deposits are generally of
terms from three months to two years in maturity with interest rates that
approximate the Company's retail certificate rates. Although the Company has
experienced growth in its deposit liabilities during the six months ended March
31, 1996, there can be no assurance that this trend will continue in the
future, nor can there be any assurance the Company will retain the deposits it
now has. 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 has entered into interest rate swap agreements for some of the
fixed-rate advances from the Federal Home Loan Bank, swapping the fixed rate
for a variable rate (fixed pay, variable receive). Interest rate swaps
outstanding at both March 31, 1996 and September 30, 1995 totaled $65.0
million. The swaps are designed to offset the changing interest payments of
some of the Company's borrowings. The current fixed-pay, variable-receive
swaps will provide for a lower interest expense (or interest income) in a
rising rate environment while adding to interest expense in a falling rate
environment. During the quarter ended March 31, 1996, the Company recorded a
net reduction of interest expense of $255,000.
15
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
RESULTS OF OPERATIONS
NET INCOME. Net income for the six months ended March 31, 1996 was $8.4
million compared to $5.3 million for the six months ended March 31, 1995. Net
income for the three months ended March 31, 1996 was $4.3 million compared to
$3.0 million for the three months ended March 31, 1995. The increase for the
six-month period was the result of a $1.0 million increase in net interest
income and a $5.0 million increase in other income, partially offset by a $2.0
million increase in general and administrative expenses and an $866,000
increase in income tax expense. The increase for the three-month period was
the result of a $626,000 increase in net interest income and a $2.4 million
increase in other operating income, partially offset by a $1.4 million increase
in general and administrative expenses and a $282,000 increase in income tax
expense.
The following table shows the return on average assets and return on average
equity ratios for each period:
Six months ended Three months ended
March 31, March 31,
---------------- -------------------
1996 1995 1996 1995
------ ------- ------- --------
Return on average assets 1.36% 0.94% 1.36% 1.03%
Return on average equity 12.09% 8.68% 12.49% 9.85%
NET INTEREST INCOME. Net interest income before provision for loans losses
increased $1.0 million or 6.3% and $0.6 million or 7.5% for the six and three
months ended March 31, 1996, respectively, compared to the same periods in the
prior year. The net interest margin was 3.04% and 3.05% for the six months
ended March 31, 1996 and 1995, respectively, and 3.05% and 3.01% for the three
months ended March 31, 1996 and 1995, respectively.
Total interest income increased $4.5 million or 11.2% to $44.6 million for the
six months ended March 31, 1996, compared to $40.1 million for the six months
ended March 31, 1995, and increased $1.7 million or 7.8% to $22.9 million for
the three months ended March 31, 1996, compared to $21.2 million for the three
months ended March 31, 1995. The increase in interest income was primarily the
result of increases in interest on loans and mortgage-backed and related
securities. The increase in interest on loans was due to an increase in the
average balance of loans to $529.3 million from $486.4 million for the six
months ended March 31, 1996 and 1995, respectively, and an increase in the
average yield to 8.63% from 8.17% for the same periods. The increase in net
interest income on loans for the three months ended March 31, 1996 compared
with the three months ended March 31, 1995 was the result of an increase in the
average balance of loans to $534.6 million from $510.0 million and an increase
in the average yield to 8.67% from 8.28%. The increase in the average balance
of loans is consistent with the Company's efforts to emphasize mortgage and
home equity lending. The increase in interest income on mortgage-backed and
related securities was due to an increase in the average balance of such
securities to $535.2 million from $520.4 million for the six months ended March
31, 1996 and 1995, respectively, and an increase in the average yield on such
securities to 7.11% from 6.90% for the same periods. The increase in net
interest income on mortgage-backed and related securities for the three months
ended March 31, 1996 compared with the three months ended March 31, 1995 was
primarily the result of an increase in the average balance of securities to
$563.1 million from $529.2 million. The Company has
16
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
purchased significant amounts of adjustable rate and short- and medium-term
securities during the past year as part of its efforts to increase earning
assets and to reposition its available for sale mortgage-backed and related
securities portfolio by selling significant amounts of securities and replacing
them with securities with more favorable interest rate and maturity positions.
Total interest expense increased $3.4 million or 14.6% to $27.1 million for the
six months ended March 31, 1996, compared to $23.7 million for the six months
ended March 31, 1995. For the three months ended March 31, 1996, total
interest expense increased $1.0 million, or 8.1%, to $13.9 million compared to
$12.9 million for the three months ended March 31, 1995. The increase in
interest expense was the result of increases in the average balances and costs
on deposits. The average balances of deposits were $714.5 million and $755.2
million for the six and three months ended March 31, 1996, respectively, as
compared to $635.6 million and $678.8 million for the same periods in the prior
year. The increases in the balances of deposits are due to the Company's
offering of additional deposit products and the use of brokers to sell
certificates of deposit. The average cost of deposits increased to 4.98% and
4.99% for the six and three months ended March 31, 1996, respectively, from
4.41% and 4.55% for the same periods in the prior year. Deposit rates paid by
the Company reflected the general increase in market rates of interest, not the
effect of more brokered C/Ds. The average balance of advances and other
borrowings were $334.5 million and $333.0 million for the six and three months
ended March 31, 1996, respectively, as compared to $341.8 million and $356.2
million for the same periods in the prior year. The average cost of advances
and other borrowings decreased to 5.56% and 5.46% for the six and three months
ended March 31, 1996, respectively, from 5.66% and 5.96% for the same periods
in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the six- and three-month periods
ended March 31, 1996 and 1995, respectively.
17
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
SIX MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------- ------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits $20,633 $564 5.47 % $16,012 $407 5.10 %
Trading account securities 82 3 7.32 12,901 389 6.05
Investment securities 52,152 1,567 6.01 33,521 1,059 6.34
Mortgage-backed and related securities 535,240 19,035 7.11 520,365 17,913 6.90
Loans:
First mortgage 343,145 13,935 8.12 348,906 13,590 7.81
Home equity 80,155 3,964 9.89 72,597 3,404 9.40
Consumer 88,464 4,133 9.34 57,554 2,521 8.78
Commercial and agricultural 17,581 808 9.19 7,365 301 8.20
---------------------- ---------------------
Total loans 529,345 22,840 8.63 486,422 19,816 8.17
Federal Home Loan Bank stock 17,554 618 7.04 16,763 547 6.54
---------------------- ---------------------
Total earning assets 1,155,006 44,627 7.73 1,085,984 40,131 7.41
-------- ------
Valuation allowances (1,188) (11,773)
Cash and due from banks 13,829 14,440
Other assets 62,796 39,360
----------- ---------
Total assets $1,230,443 $1,128,011
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $41,318 315 1.52 $39,882 273 1.37
Money market demand accounts 131,690 3,095 4.70 108,691 2,161 3.99
Passbook 86,360 1,227 2.84 96,826 1,311 2.72
Certificates of deposit 455,154 13,140 5.77 390,165 10,220 5.25
---------------------- ---------------------
Total interest-bearing deposits 714,522 17,777 4.98 635,564 13,965 4.41
Advances and other borrowings 334,509 9,292 5.56 341,787 9,645 5.66
Advances from borrowers for taxes and insurance 5,383 17 0.63 5,307 20 0.76
---------------------- ---------------------
Total interest-bearing liabilities 1,054,414 27,086 5.14 982,658 23,630 4.82
Non interest-bearing deposits 25,627 16,514
Other liabilities 12,273 7,348
Shareholders' equity 138,129 121,491
---------- ----------
Total liabilities and shareholders' equity $1,230,443 $1,128,011
========== ==========
Net interest income $17,541 $16,501
======= =======
Net yield on interest-earning assets 3.04 3.05
Interest rate spread 2.59 2.59
Ratio of earning assets to interest-bearing liabilities
109.54 110.51
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------- ---------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits $21,470 $283 5.30 % $21,494 $308 5.81 %
Trading account securities - - - 12,603 198 6.37
Investment securities 49,405 744 6.06 37,488 640 6.92
Mortgage-backed and related securities 563,106 10,028 7.16 529,194 9,399 7.20
Loans:
First mortgage 341,644 6,932 8.16 359,182 6,980 7.88
Home equity 79,783 1,931 9.73 77,319 1,786 9.37
Consumer 93,770 2.227 9.55 64,665 1,461 9.16
Commercial and agricultural 19,381 433 8.99 8,797 182 8.39
---------------------- ---------------------
Total loans 534,578 11,523 8.67 509,963 10,409 8.28
Federal Home Loan Bank stock 17,631 321 7.32 17,165 279 6.59
---------------------- ---------------------
Total earning assets 1,186,190 22,899 7.76 1,127,907 21,233 7.63
----- ------
Valuation allowances (1,463) (11,280)
Cash and due from banks 14,111 17,643
Other assets 61,703 42,887
---------- ----------
Total assets $1,260,541 $1,177,157
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $41,163 155 1.51 $48,949 155 1.28
Money market demand accounts 139,591 1,607 4.63 113,972 1,191 4.24
Passbook 83,400 588 2.84 95,825 691 2.92
Certificates of deposit 491,095 7,026 5.75 420,047 5,580 5.39
---------------------- ---------------------
Total interest-bearing deposits 755,249 9,376 4.99 678,793 7,617 4.55
Advances and other borrowings 333,082 4,520 5.46 356,209 5,238 5.96
Advances from borrowers for taxes and insurance 2,276 3 0.53 2,466 4 0.66
---------------------- ---------------------
Total interest-bearing liabilities 1,090,607 13,899 5.13 1,037,468 12,859 5.03
Non interest-bearing deposits 23,763 10,332
Other liabilities 8,444 6,802
Shareholders' equity 137,727 122,555
----------
Total liabilities and shareholders' equity $1,260,541 $1,177,157
========== ==========
Net interest income $9,000 $8,374
====== ======
Net yield on interest-earning assets 3.05 3.01
Interest rate spread 2.64 2.61
Ratio of earning assets to interest-bearing liabilities
108.76 108.72
18
19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for
loan losses for each period:
Six months ended Three months ended
March 31, March 31,
------------------- --------------------
1996 1995 1996 1995
------ ------ ------ ------
(Dollars in thousands)
Beginning balance $4,076 $3,435 $4,132 $4,176
Provision for loan losses 144 120 78 60
Net charge-offs (16) (232) (6) (219)
Acquired bank's allowance - 694 - -
------ ------ ------ ------
Ending balance $4,204 $4,017 $4,204 $4,017
====== ====== ====== ======
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period 0.74% 0.75% 0.74% 0.75%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period 1053.63% 65.91% 1053.63% 65.91%
Ratio of net charge-offs to average
gross loans (annualized) 0.00% 0.10% 0.00% 0.17%
Management believes that the allowance for loan losses is adequate as of March
31, 1996, based upon its current evaluation of loan delinquencies,
non-performing loans, charge-off trends, economic conditions and other factors.
OTHER OPERATING INCOME. Other operating income increased by $5.0 million and
$2.4 million for the six and three months ended March 31, 1996, compared to the
same periods in the prior year. The following table shows the percentage of
other operating income to average assets for each period:
Six months ended Three months ended
March 31, March 31,
--------------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
(Dollars in thousands)
Other operating income $7,628 $2,617 $4,169 $1,786
Percent of average assets (annualized) 1.24% 0.47% 1.33% 0.62%
The increases were due primarily to increases in gains on investments and
mortgage-backed and related securities, gains on sales of mortgage loans, gain
on foreclosed properties and increases in other income. Gains on investments
and mortgage-backed and related securities increased $3.1 million to $3.3
million, and $1.4 million to $1.7 million, for the six and three months ended
March 31, 1996, respectively, compared to gains of $187,000 and $265,000 for
the same periods in the prior year. The gains recognized were primarily due to
the Company's aforementioned repositioning of its existing leverage portfolio.
The Company sold securities from the leverage portfolio and replaced them with
similar securities with more favorable interest rate and maturity
characteristics. Security sales and the amount of gain or loss recognized is
subject to many factors including but not limited to: 1) the level of and
change in interest
19
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
rates, 2) supply and demand factors related to specific securities, 3)
availability of acceptable investment alternatives and 4) the current status of
various risk factors within the company's portfolio, particularly interest rate
risk. Gains on sales of mortgage loans increased to $658,000 and $437,000, for
the six and three months ended March 31, 1996, respectively, compared to gains
of $119,000 and $49,000 for the same periods in the prior year. The gains
recognized were primarily the result of a more favorable interest rate
environment which led to increased loan originations. Mortgage loan
originations were $69.5 million and $47.4 million for the six months and three
months ended March 31, 1996 compared with $36.2 million and $15.1 million for
the six and three months ended March 31, 1995. Mortgage loan sales were $34.8
million and $25.4 million for the six and three months ended March 31, 1996
compared with $10.7 million and $2.7 million for the six and three months ended
March 31, 1995. Gains on foreclosed properties increased to $872,000 and
$740,000, for the six and three months ended March 31, 1996, respectively,
compared to a loss of $2,000 and $0 for the same periods in the prior year.
The gains were the result of the sale of one foreclosed property which had a
carrying value of $5.8 million. The gain on sale of this property was
$684,000. The increase in other income was due primarily to the operations of
the Company's affordable housing subsidiary, which had increases in income
(which represents primarily rental income) of $317,000 and $105,000 for the six
and three months ended March 31, 1996, as compared to the same periods in the
previous year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $2.1 million or 18.8% and $1.4 million or 25.2% for the six and
three months ended March 31, 1996, compared to the same periods in the prior
year. The following table shows the percentage of general and administrative
expenses to average assets for each period:
Six months ended Three months ended
March 31, March 31,
----------------------- ----------------------
1996 1995 1996 1995
-------- ------- ------- -------
(Dollars in thousands)
General and administrative expenses $13,089 $11,018 $6,992 $5,583
Percent of average assets (annualized) 2.13% 1.96% 2.23% 1.92%
The increases are due primarily to the inclusion of the general and
administrative expenses of Bank Wisconsin, acquired in November 1994, and the
expenses related to the operation of the Company's affordable housing
subsidiary. The affordable housing subsidiary showed increases in operating
expenses of $535,000 and $290,000 for the six and three months ended March 31,
1996, as compared to the same periods in the prior year.
INCOME TAX EXPENSE. Income tax expense increased $866,000 to $3.6 million for
the six months ended March 31, 1996, compared to the same period in the prior
year. The effective tax rate for the six months ended March 31, 1996 was
30.0%, as compared to 34.1% for the six months ended March 31, 1995. The
decrease in effective rates reflects the effect of the tax credits earned by
the Company's affordable housing subsidiary.
ASSET QUALITY
20
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
Total non-performing assets were $399,000 or 0.03% of total assets at March 31,
1996, compared to $6.1 million or 0.52% of total assets at September 30, 1995.
Non-performing assets include loans which have been placed on nonaccrual status
and property upon which a judgment of foreclosure has been entered but prior to
the foreclosure sale, as well as property acquired as a result of foreclosure.
Non-performing assets are summarized as follows:
March 31, September 30,
1996 1995
------------ ---------------
(Dollars in thousands)
Non-performing loans $ 399 $ 296
Foreclosed properties - 5,833
------- --------
Non-performing assets $ 399 $ 6,129
Non-performing loans to gross loans 0.07% 0.06%
Non-performing assets to gross assets 0.03% 0.52%
The decrease in non-performing assets is due to a cash sale of a $5.8 million
foreclosed property during the quarter resulting in a $684,000 gain included in
other operating income.
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,
except as disclosed above.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) encourage
medium- and long-term certificates of deposit. Although management believes
that its asset/liability management strategies have reduced the potential
effects of changes in interest rates on its operations, increases in interest
rates may adversely affect the Company's results of operations because
interest-bearing liabilities will reprice more quickly than interest-earning
assets.
At March 31, 1996, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 10.29% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest earning assets. The Company's three-year
cumulative gap as of March 31, 1996 was a negative 8.49% of total assets. With
a negative gap position, during periods of rising interest rates it is expected
that the cost of the Company's interest-bearing liabilities will rise more
quickly than the yield on its interest-earning assets, which will have a
negative effect on its net interest income. Although the opposite effect on
net interest income would occur in periods of falling interest rates, the
Company could experience substantial prepayments of its
fixed-rate mortgage loans and mortgage-backed and related securities in periods
of falling interest rates, which would result in the reinvestment of such
proceeds at market rates which are lower than current rates.
21
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of March 31,
1996.
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)
Fixed $ 23,936 $ 21,207 $ 29,837 $ 16,399 $ 67,532 $ 158,911
Variable 32,151 42,320 114,520 11,611 8,118 208,720
Consumer loans (2) 84,007 36,002 14,729 13,268 23,436 171,442
Mortgage-backed and related securities 5,255 8,999 27,300 20,825 9,316 71,695
Assets available for sale:
Mortgage loans 6,977 - - - - 6,977
Fixed rate mortgage related 8,413 27,612 22,321 24,116 50,509 132,971
Variable rate mortgage related 312,764 70,680 - - - 383,444
Other 18,993 7,973 9,572 3,992 6,583 47,113
Trading account securities 0 - - - - 0
Investment securities and other assets 32,148 3,156 - - - 35,304
-------- --------- -------- -------- -------- ----------
Total $524,644 $ 217,949 $218,279 $ 90,211 $165,494 $1,216,577
======== ========= ======== ======== ======== ==========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts $ 4,587 $ 10,702 $ 15,701 $ 6,231 $ 4,101 $ 41,322
Passbook savings accounts 7,597 17,725 30,135 14,765 14,186 84,408
Money market deposit accounts 42,293 98,684 9,034 398 19 150,428
Certificates of deposit 224,779 197,537 70,079 10,453 - 502,848
Borrowings (4) 216,944 55,000 70,009 64 - 342,017
-------- --------- -------- -------- -------- ----------
Total $496,200 $ 379,648 $194,958 $ 31,911 $ 18,306 $1,121,023
======== ========= ======== ======== ======== ==========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 28,444 $(161,699) $ 23,321 $ 58,300 $147,188 $ 95,554
======== ========= ======== ======== ======== ==========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities 28,444 (133,255) (109,934) (51,634) 95,554
======== ========= ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets 2.20% -10.29% -8.49% -3.99% 7.38%
======== ========= ======== ======== ========
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics, modified for forecasted
statistics using the Public Securities Association model of prepayments.
For fixed rate mortgage loans and mortgage-backed and related securities,
annual prepayment rates ranging from 8% to 30%, based on the loan coupon
rate, were used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
insurance premiums, deferred loan fees, purchased loan discounts and
allowances for loan losses, which aggregated $24.8 million at March 31,
1996.
(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 37%, 17% and 88%, 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 $227.8 million or 17.6% of
total assets.
(4) Adjustable and floating rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due. The effect of interest rate swap agreements
are included in the balances. The effect of the interest rate swap
agreements are to decrease borrowings set to mature or reprice within
three months by $65.0 million, increase borrowings set to mature or
reprice in more than four months to twelve months by $10.0 million and
increase borrowings set to mature or reprice in more than one year to
three years by $55.0 million.
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
Assumptions regarding the withdrawal and prepayment are based on historical
experience, and management believes such assumptions reasonable, although the
actual withdrawal and repayment 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 on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the data in the table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these
assets is dependent on the Company's operating, financing and investing
activities during any given period. Cash and cash equivalents totaled $32.2
million and $20.8 million as of March 31, 1996 and September 30, 1995,
respectively.
The Company's primary sources of funds are deposits, including brokered
certificates, borrowings from the FHLB and proceeds from principal and interest
payments on loans and mortgage-backed and related securities. Although
maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At March 31, 1996, the Bank's
additional available borrowing capacity from the FHLB was approximately $77.0
million.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiaries 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. As of March 31, 1996, the capital of the Company
and each of its wholly-owned subsidiaries, exceeded all capital requirements of
the Federal Reserve, the Office of Thrift Supervision and the State of
Wisconsin as mandated by federal and state law and regulations.
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24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant 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 Registrant and the Bank.
ITEM 2. CHANGES IN SECURITIES
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 24, 1996. Only
shareholders of record at the close of business on December 1, 1995
(the "Voting Record Date") were entitled to vote at the annual
meeting. On the Voting Record Date, there were 6,112,976 shares of
Common Stock outstanding, and 5,459,589 shares present at the meeting
by the holders thereof in person or by proxy, which constituted a
quorum. The following is a summary of the matters voted upon at the
meeting.
NUMBER OF VOTES
-------------------------------------------
BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--- -------- ----------- ---------
NOMINEE FOR DIRECTOR FOR ONE-
YEAR TERM EXPIRING IN 1997
James C. Hazzard 5,432,815 - 16,774 248,025
NOMINEES FOR DIRECTOR FOR
THREE-YEAR TERM EXPIRING IN
1999
Rudolph T. Hoppe 5,415,563 - 33,926 248,025
Thomas R. Perz 5,418,270 - 31,319 248,025
David J. Drury 5,424,915 - 24,674 248,025
RATIFICATION OF APPOINTMENT OF
KPMG PEAT MARWICK LLP AS
AUDITORS 5,403,223 21,251 25,115 248,025
ITEM 5. OTHER INFORMATION
On February 13, 1996, the Company announced it had adopted a share
repurchase program for its Common Stock. The Company plans to purchase
up to 5%, or approximately 297,800 shares, of its common shares
outstanding commencing February 15, 1996 depending on market
conditions. The repurchased shares will become treasury shares and
will be used for general corporate purposes.
On April 18, 1996, the Company announced the declaration of a dividend
of $0.10 per share on the Company's common stock for the quarter ended
March 31, 1996. The dividend is payable on May
22, 1996 to shareholders of record as of May 10, 1996. This will be
the third cash dividend payment since the Company became a
publicly-held company in June 1993.
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25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
On April 22, 1996, the Company announced that it had reached a
definitive agreement with Kilbourn State Bank for the acquisition of
Kilbourn State Bank by St. Francis Capital Corporation. Under the
terms of the definitive agreement, St. Francis Capital Corporation will
acquire all of the outstanding shares of Kilbourn State Bank for cash,
with Kilbourn subsequently merging into Bank Wisconsin, St. Francis
Capital Corporation's commercial banking subsidiary. The acquisition,
which has been approved by the Board of Directors of St. Francis
Capital Corporation and Kilbourn State Bank, is expected to close by
the first quarter of 1997, subject to Kilbourn shareholder approval,
and various other conditions of closing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this
report was filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: May 13, 1996 By: /s/ John C. Schlosser
--------------------- -------------------------------------
John C. Schlosser
President and Chief Executive Officer
Dated: May 13, 1996 By: /s/ Jon D. Sorenson
--------------------- -------------------------------------
Jon D. Sorenson
Chief Financial Officer
26