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 December 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 5,356,064 at January 31, 1997.
Page 1 of 24 pages
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
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 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 2. Changes In Securities 23
ITEM 3. Defaults Upon Senior Securities 23
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 5. Other Information 23
ITEM 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
- ----------
2
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, September 30,
1996 1996
---------- ----------
(In thousands)
ASSETS
Cash and due from banks $ 18,463 $ 17,604
Federal funds sold and overnight deposits 6,488 4,855
---------- ----------
Cash and cash equivalents 24,951 22,459
---------- ----------
Trading account securities, at market - -
Assets available for sale, at market:
Debt and equity securities 59,207 60,001
Mortgage-backed and related securities 517,577 519,766
Mortgage loans held for sale, at lower of cost or market 10,731 20,582
Securities held to maturity:
Debt and equity securities (market values of $5,799 and $6,331,
respectively) 5,676 6,215
Mortgage-backed and related securities (market values of $66,644
and $65,316, respectively) 68,077 68,392
Loans receivable, net 624,082 610,699
Federal Home Loan Bank stock, at cost 19,263 19,063
Accrued interest receivable 8,131 8,067
Foreclosed properties 127 80
Real estate held for investment 39,610 36,865
Premises and equipment, net 17,551 16,432
Other assets 14,333 15,495
---------- ----------
Total assets $1,409,316 $1,404,116
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 894,465 $ 877,684
Advances and other borrowings 378,491 375,034
Advances from borrowers for taxes and insurance 368 11,092
Accrued interest payable and other liabilities 10,082 15,127
---------- ----------
Total liabilities 1,283,406 1,278,937
---------- ----------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued - -
Common stock $.01 par value: Authorized 12,000,000 shares;
Issued, 7,289,620 shares;
Outstanding, 5,356,064 and 5,475,509 shares, respectively 73 73
Additional paid-in-capital 72,592 72,243
Unrealized loss on securities available for sale, net of tax (1,063) (1,765)
Unearned ESOP compensation (3,386) (3,488)
Treasury stock at cost (1,933,556 and 1,814,111 shares, respectively) (38,585) (35,529)
Retained earnings, substantially restricted 96,279 93,645
---------- ----------
Total shareholders' equity 125,910 125,179
---------- ----------
Total liabilities and shareholders' equity $1,409,316 $1,404,116
========== ==========
See accompanying Notes to Consolidated Financial Statements
3
4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Three months ended
December 31,
------------------------------
1996 1995
--------- ---------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans $ 13,265 $ 11,317
Mortgage-backed and related securities 9,901 9,007
Debt and equity securities 1,009 823
Federal funds sold and overnight deposits 259 281
Federal Home Loan Bank stock 330 297
Trading account securities 70 3
--------- ---------
Total interest and dividend income 24,834 21,728
--------- ---------
INTEREST EXPENSE:
Deposits 10,759 8,401
Advances and other borrowings 5,125 4,786
--------- ---------
Total interest expense 15,884 13,187
--------- ---------
Net interest income before provision for loan losses 8,950 8,541
Provision for loan losses 261 66
--------- ---------
Net interest income 8,689 8,475
--------- ---------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees 458 400
Depository fees and service charges 403 355
Trading securities gains and commitment fees, net 385 128
Gain on debt and equity and mortgage-backed
and related securities, net 476 1,599
Gain on sales of mortgage loans held for sale, net 227 221
Insurance and annuity commissions 81 63
Gain (loss) on foreclosed properties, net (14) 132
Income from affordable housing 550 433
Other income 91 128
--------- ---------
Total other operating income, net 2,657 3,459
--------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes and other employee benefits 3,626 3,004
Office building expenses, including depreciation 543 479
Furniture and equipment expenses, including depreciation 527 400
Federal deposit insurance premiums 331 331
Real estate held for investment 621 500
Other general and administrative 1,814 1,383
--------- ---------
Total general and administrative expenses 7,462 6,097
--------- ---------
Income before income tax expense 3,884 5,837
Income tax expense 727 1,762
--------- ---------
Net income $ 3,157 $ 4,075
========= =========
Earnings per share $ 0.59 $ 0.68
========= =========
See accompanying Notes to Consolidated Financial Statements
4
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Unrealized
Gain (Loss)
Shares of Additional on Securities Unearned
Common Common Paid-In Available ESOP
Stock Stock Capital For Sale Compensation
---------------------------------------------------------------------------
(Dollars in thousands)
Three months ended December 31, 1995
- ------------------------------------
Balance at September 30, 1995 6,078,799 $ 73 $ 71,819 $ 2,332 $ (3,996)
Net income - - - - -
Cash dividends paid - $0.10 per share - - - - -
Purchase of treasury stock (25,000) - - - -
Amortization of unearned compensation - - 103 - 145
Unrealized loss on securities available for
sale, net of tax - - - (436) -
--------- ------- --------- --------- ---------
Balance at December 31, 1995 6,053,799 $ 73 $ 71,922 $ 1,896 $ (3,851)
========= ======= ========= ========= =========
Three months ended December 31, 1996
- ------------------------------------
Balance at September 30, 1996 5,475,509 $ 73 $ 72,243 $ (1,765) $ (3,488)
Net income - - - - -
Cash dividends paid - $0.12 per share - - - - -
Purchase of treasury stock (119,445) - - - -
Amortization of unearned compensation - - 349 - 102
Unrealized gain on securities available for
sale, net of tax - - - 702 -
--------- ------ --------- --------- ---------
Balance at December 31, 1996 5,356,064 $ 73 $ 72,592 $ (1,063) $ (3,386)
========= ====== ========= ========= =========
Unearned
Restricted Treasury Retained
Stock Stock Earnings Total
-------------------------------------------------------------
(Dollars in thousands)
Three months ended December 31, 1995
- ------------------------------------
Balance at September 30, 1995 $ (701) $(20,142) $ 85,843 $ 135,228
Net income - - 4,075 4,075
Cash dividends paid - $0.10 per share - - (565) (565)
Purchase of treasury stock - (579) - (579)
Amortization of unearned compensation 234 - - 482
Unrealized loss on securities available for
sale, net of tax - - - (436)
------- -------- --------- ---------
Balance at December 31, 1995 $ (467) $(20,721) $ 89,353 $ 138,205
======= ======== ========= =========
Three months ended December 31, 1996
- ------------------------------------
Balance at September 30, 1996 $ - $(35,529) $ 93,645 $ 125,179
Net income - - 3,157 3,157
Cash dividends paid - $0.12 per share - - (523) (523)
Purchase of treasury stock - (3,056) - (3,056)
Amortization of unearned compensation - - - 451
Unrealized gain on securities available for
sale, net of tax - - - 702
------- -------- --------- ---------
Balance at December 31, 1996 $ - $(38,585) $ 96,279 $ 125,910
======= ======== ========= =========
See accompanying Notes to Consolidated Financial Statements
5
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Three Months Ended
December 31,
-----------------------
1996 1995
-----------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,157 $ 4,075
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provisions for loan losses 261 66
Depreciation, accretion and amortization 833 249
Deferred income taxes 2,856 (508)
Gain on debt and equity, mortgage-backed and related
securities and trading account securities, net (861) (1,727)
Gains on the sales of mortgage loans held for sale, net (227) (221)
Stock-based compensation expense 451 482
Decrease in loans held for sale 9,851 4,664
Decrease in trading account securities, net - 3,000
Other, net (5,746) 6,052
-------- --------
Total adjustments 7,418 12,057
-------- --------
Net cash provided by operating activities 10,575 16,132
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt and equity securities 998 22,727
Purchases of debt and equity securities (459) (18,145)
Principal repayments on mortgage-backed and related securities 315 4,760
Purchases of mortgage-backed securities available for sale (69,286) (88,190)
Proceeds from sales of mortgage-backed securities available
for sale 57,482 61,823
Principal repayments on mortgage-backed securities available
for sale 13,993 14,076
Purchase of debt and equity securities available for sale (16,654) (3,700)
Proceeds from sales of debt and equity securities available for sale 6,663 1,371
Principal repayments on debt and equity securities available for sale 10,874 -
Purchases of Federal Home Loan Bank stock (200) (264)
Purchase of loans (4,901) (10,470)
Increase in loans, net of loans held for sale (8,482) (2,821)
Decrease (increase) in real estate held for investment (2,745) 261
Purchases of premises and equipment, net (1,616) (1,313)
-------- --------
Net cash used in investing activities (14,018) (19,885)
-------- --------
See accompanying Notes to Consolidated Financial Statements
6
7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Three Months Ended
December 31,
1996 1995
------- -------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 16,781 37,573
Proceeds from advances and other borrowings 29,209 -
Repayments on advances and other borrowings (25,752) (14,533)
Decrease in advances from borrowers for taxes and insurance (10,724) (10,380)
Dividends paid (523) (565)
Purchase of treasury stock (3,056) (579)
------- -------
Net cash provided by financing activities 5,935 11,516
------- -------
Increase in cash and cash equivalents 2,492 7,763
Cash and cash equivalents:
Beginning of period 22,459 20,780
------- -------
End of period $24,951 $28,543
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $16,197 $14,076
Income taxes 10 158
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities 17,252 -
Reclassification of assets held to maturity to assets
available for sale - 117,300
Transfer of mortgage loans to mortgage loans held
for sale 7,143 6,240
See accompanying Notes to Consolidated Financial Statements
7
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
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"), St. Francis Bank, F.S.B.
(the "Bank"), Bank Wisconsin ("Bank Wisconsin") and the Bank's and Bank
Wisconsin'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
period ended December 31, 1996 are not necessarily indicative of the
results which may be expected for the entire year ending September 30,
1997. The September 30, 1996 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 1997 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
Financial instruments whose contract amounts represent credit risk are as
follows:
Contractual or Notional Amount(s)
---------------------------------
December 31, September 30,
1996 1996
------------ -------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans $ 3,542 $ 18,487
Variable-rate loans 13,575 18,722
Guarantees under IRB issues 11,220 4,200
Interest rate swap agreements 55,000 55,000
Commitments to:
Purchase mortgage-backed securities - 12,800
Sell mortgage-backed securities 5,000 1,100
Unused and open-ended lines of credit:
Consumer 114,054 107,052
Commercial 16,258 14,935
Open option contracts written:
Short-put options 6,000 4,000
Short-call options 6,000 4,000
Commitments to fund equity investments 8,582 13,796
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, 1996 have interest rates ranging from 7.45%
to 8.20%. 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.
The Company has entered into agreements whereby, for an initial and annual
fee, it will guarantee payment for an industrial development 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.
9
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The agreements at December 31, 1996 consist of the following:
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- ----------------------------------------------------------------
$10,000 Fixed Pay-Floating Receive 1998 4.93% 5.61%
10,000 Fixed Pay-Floating Receive 1998 5.04% 5.59%
15,000 Fixed Pay-Floating Receive 1998 5.25% 5.50%
10,000 Fixed Pay-Floating Receive 1998 5.23% 5.50%
10,000 Fixed Pay-Floating Receive 1998 5.43% 5.50%
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 December 31,
1996, the fair value of the interest rate swaps was approximately
$807,000.
Commitments to purchase/sell mortgage-backed securities are contracts
which represent notional amounts to purchase/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. Because these
contracts can expire without being drawn upon, the total commitment
amounts do not necessarily represent cash requirements. 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 Section 42 of the Internal Revenue Code (the "Code"). The Code
provides a per state volume cap on the amounts of low-income housing tax
credits ("LIHTCs") that may be taken with respect to low-income housing
projects in each state. In order to claim a LIHTC, a credit allocation
must be received from the appropriate state or local housing development
authority. SFEP is currently a limited partner in 20 projects and has
committed to equity investments totaling $8.6 million in an additional
five projects within the state of Wisconsin. At December 31, 1996, SFEP's
equity investments in such projects totaled $16.7 million. Additionally,
the Bank has provided financing or committed to provide financing to 24 of
these projects. At December 31, 1996, the Bank had loans outstanding to
such projects of $20.7 million. The primary return to the Company on these
projects is in the form of tax credits.
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11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(4) Securities
The Company's securities available for sale and held to maturity at
December 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 obligations and obligations
of U.S. Government Agencies $ 23,085 $ 49 $ 66 $ 23,068
State and municipal obligations 2,404 - 67 2,337
Corporate notes and bonds 7,549 49 14 7,584
Asset-backed securities 20,156 8 1 20,163
Marketable equity securities 6,055 - - 6,055
---------- ---------- ---------- ----------
Debt and equity securities available for sale 59,249 106 148 59,207
Mortgage-backed and related securities 519,284 3,117 4,824 517,577
---------- ---------- ---------- ----------
Total securities available for sale $578,533 $3,223 $4,972 $576,784
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
-------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ----------- ----------- ------------
(In thousands)
U.S. Treasury obligations and obligations
of U.S. Government Agencies $ 3,036 $ 80 $ - $ 3,116
State and municipal obligations 1,642 40 - 1,682
Corporate notes and bonds 998 3 - 1,001
---------- ---------- ----------- ----------
Debt and equity securities held to maturity 5,676 123 - 5,799
Mortgage-backed and related securities 68,077 85 1,518 66,644
---------- ---------- ----------- ----------
Total securities held to maturity $73,753 $208 $1,518 $72,443
========== ========== =========== ==========
Gross proceeds from the sale of securities available for sale during the
three months ended December 31, 1996 totaled approximately $64.2 million.
Gross realized gains and losses on the sale of securities available for
sale during the three months ended December 31, 1996 totaled approximately
$509,000 and $33,000, respectively.
(5) Earnings Per Share
Earnings per share of common stock for the three months ended December 31,
1996 and 1995, 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. 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. Book value per share of common stock at December 31, 1996
and September 30, 1996 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. Common
shares outstanding have been reduced by the ESOP shares that have not been
committed to be released.
11
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The computation of earnings per common share is as follows:
Three months ended
December 31,
-------------------------
1996 1995
---------- ----------
Net income for the period $3,157,000 $4,075,000
========== ==========
Common shares issued 7,289,620 7,289,620
Net Treasury shares 1,890,574 1,216,419
Unallocated ESOP shares 338,198 380,445
---------- ----------
Weighted average common shares
outstanding during the period 5,060,848 5,692,756
Common stock equivalents based on the
treasury stock method 287,937 280,801
---------- ----------
Total weighted average common shares and
equivalents outstanding 5,348,785 5,973,557
========== ==========
Earnings per share $0.59 $0.68
The computation of book value per common share is as follows:
December 31, September 30,
1996 1996
----------- ------------
Common shares outstanding at the end
of the period 5,017,866 5,127,092
Incremental shares relating to dilutive stock
options outstanding at the end of the period 288,590 286,766
------------ ------------
5,306,456 5,413,858
============ ============
Total shareholders' equity at the end of
the period $125,910,000 $125,179,000
Book value per common share $23.73 $23.12
(6) Acquisitions
In April 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, the Company will acquire all of the outstanding
shares of Kilbourn State Bank for cash, with Kilbourn subsequently merging
into Bank Wisconsin, the Company's commercial banking subsidiary. The
acquisition, which has been approved by the Board of Directors of the
Company and Kilbourn State Bank, is expected to close during the second
quarter of 1997, subject to Kilbourn shareholder approval and various
other conditions of closing.
12
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, of Financial
Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company with the Securities and Exchange Commission, in quarterly reports or
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, various
words or phrases are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include words and phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions and various other statements indicated herein
with an asterisk after such statements. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors could
affect the Company's financial performance and could cause actual results for
future periods to differ materially from those anticipated or projected. Such
factors include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
Total assets at December 31, 1996 were $1.41 billion, virtually unchanged from
$1.40 billion at September 30, 1996. Asset categories were largely unchanged
while an increase in deposits of $16.8 million to $894.5 million was partially
offset by a decline in advances from borrowers for taxes and insurance of $10.7
million to $368,000. The Company's ratio of shareholders' equity to total
assets was 8.9% at December 31, 1996 and at September 30, 1996. The Company's
book value per share was $23.73 at December 31, 1996, compared to $23.12 at
September 30, 1996.
Mortgage-backed and related securities, including mortgage-backed and related
securities available for sale, decreased $2.5 million to $585.7 million at
December 31, 1996 from $588.2 million at September 30, 1996. The decrease is
the result of a combination of purchases, sales and repayments of existing
securities.
Loans receivable, including mortgage loans held for sale, increased $3.5
million to $634.8 million at December 31, 1996 from $631.3 million at September
30, 1996. The increase was due primarily to the increase in loans originated
for retention in the Company's loan portfolio. The Company currently sells all
fixed rate mortgage loans and retains adjustable-rate mortgage 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 three months ended December 31, 1996, the Company originated
approximately $80.9 million in loans, as compared to $55.3 million for the same
period in the prior year. Of the $80.9 million in loans originated, $7.8
million were in commercial loans, $28.6 million were in consumer and interim
financing loans and $44.5 million were in first mortgage loans.
Deposits increased $16.8 million to $894.5 million at December 31, 1996 from
$877.7 million at September 30, 1996. Approximately $10.0 million of the
increase in deposits resulted from the acquisition of the Southgate office
13
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
by the Company's St. Francis Bank subsidiary. 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 money market demand account with an
interest rate tied to a nationally recognized money market index. At December
31, 1996, the Company had approximately $136.4 million in brokered certificates
of deposit compared with $138.6 million at September 30, 1996. Although the
Company has experienced modest growth in its deposit liabilities during the
three months ended December 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.
Advances and other borrowings increased by $3.5 million to $378.5 million at
December 31, 1996 from $375.0 million at September 30, 1996. The Company
primarily uses borrowed funds to fund purchases of mortgage-backed and related
securities.
The Company has entered into interest rate swap agreements for some of its
variable rate advances from the Federal Home Loan Bank, swapping the variable
rate for a fixed rate (fixed-pay, variable-receive). Interest rate swaps
outstanding at both December 31, 1996 and September 30, 1996 totaled $55.0
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 three months ended December 31, 1996, the Company
recorded a net reduction of interest expense of $70,000 as a result of the
Company's interest rate swap agreements.
RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended December 31, 1996 was $3.2
million compared to $4.1 million for the three months ended December 31, 1995.
The decrease in net income was due to a decrease in other operating income,
which consisted primarily of a $1.1 million decrease in gains on the sale of
mortgage-backed and related securities, coupled with a $1.4 million increase in
general and administrative expenses, partially offset by a $1.0 million
decrease in income tax expenses and a $214,000 increase in net interest income.
The following table shows the return on average assets and return on average
equity ratios for each period:
Three months ended
December 31,
1996 1995
------- ------
Return on average assets 0.88% 1.35%
Return on average equity 10.01% 11.70%
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $409,000 or 4.8% to $8.9 million for the three months ended December
31, 1996, compared to $8.5 million for the same period in the prior year. The
net interest margin was 2.67% for the three months ended December 31, 1996,
compared to 3.02% for the three months ended December 31, 1995. The decline in
the net interest margin is due to decreasing interest rate spreads that the
Company has been experiencing in its asset and liability base and a changing
asset mix which includes a higher level of non-interest earning assets. The
Company increased its investment in affordable housing units to $39.6 million at
December 31, 1996 compared with $24.1 million at December 31, 1995. This
investment
14
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
strategy provides returns primarily through income tax credits but is not an
interest earning asset and thus has the effect of decreasing the Company's net
interest margin.
Total interest income increased $3.1 million or 14.3% to $24.8 million for the
three months ended December 31, 1996, compared to $21.7 million for the three
months ended December 31, 1995. The increase in interest income was primarily
the result of increases in interest income on loans and securities. The
increase in interest on loans was due to increases in the average balance of
loans to $636.7 million for the three months ended December 31, 1996, compared
to $524.1 million for the same period in the prior year, partially offset by
decreases in the average yield on loans to 8.27% from 8.59% for the same period
in the prior year. The decrease in the average yield is partially due to the
Company selling substantially all new originations of long-term, fixed-rate
single-family mortgages in the secondary market and retaining new originations
of adjustable-rate single family mortgages. The increase in the average
balance of loans is due primarily to the Company's recent efforts to emphasize
consumer and home equity lending. The increase in interest income on debt and
equity securities was due to an increase in the average balance of such
securities to $68.4 million for the three months ended December 31, 1996, from
$54.9 million for the same period in the prior year. However, the average
yield on such securities decreased to 5.85% for the three months ended December
31, 1996, from 5.96% for the same period in the prior year. The increase in
interest income on mortgage-backed and related securities was due to an
increase in the average balance of such securities to $579.9 million for the
three months ended December 31, 1996, from $507.4 million for the same period
in the prior year, partially offset by a decrease in the average yield on such
securities to 6.77% from 7.06% for the same periods. The Company has been
active during the past year repositioning its available for sale
mortgage-backed and related securities portfolio by selling significant amounts
of securities and replacing them with securities with more favorable maturity
positions and characteristics which reflect the Company's overall
asset/liability management strategies.
Total interest expense increased $2.7 million or 20.5% to $15.9 million for the
three months ended December 31, 1996, compared to $13.2 million for the three
months ended December 31, 1995. The increase in interest expense was the
result of increases in the average balances of deposits and advances and other
borrowings as well as a slight increase in the cost of deposits. The average
balances of deposits were $858.9 million for the three months ended December
31, 1996, compared to $673.8 million for the same period in the prior year.
The increases in the balances of deposits are due primarily to the Company's
offering of additional deposit products, the use of brokers to sell
certificates of deposit and the acquisition of the Southgate office by the
Company's St. Francis Bank subsidiary. The average cost of deposits increased
slightly to 4.97% for the three months ended December 31, 1996, from 4.96% for
the same period in the prior year. Deposit rates paid by the Company reflected
the general increase in market rates of interest as a result of the increased
competition with other financial products offered in the marketplace. The
average balance of advances and other borrowings increased to $370.5 million
for the three months ended December 31, 1996, compared to $335.9 million for
the same period in the prior year, while the average cost of advances and other
borrowings decreased to 5.49% for the three months ended December 31, 1996,
from 5.67% for the same period in the prior year. The borrowings are primarily
adjustable-rate FHLB advances which have repriced to reflect the slight
decrease in rates levels associated with the respective borrowing rate indexes
from the same period in the prior year.
15
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the three month periods ended
December 31, 1996 and 1995, respectively.
THREE MONTHS ENDED DECEMBER 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 $ 20,459 $ 259 5.02 % $ 19,796 $ 281 5.63 %
Trading account securities 4,369 70 6.36 163 3 7.32
Debt and equity securities 68,413 1,009 5.85 54,900 823 5.96
Mortgage-backed and related securities 579,941 9,901 6.77 507,374 9,007 7.06
Loans:
First mortgage 417,381 8,348 7.94 344,646 7,003 8.08
Home equity 93,076 2,129 9.07 80,527 2,033 10.04
Consumer 100,939 2,187 8.60 83,158 1,906 9.12
Commercial and agricultural 25,274 601 9.43 15,781 375 9.45
----------------------- -----------------------
Total loans 636,670 13,265 8.27 524,112 11,317 8.59
Federal Home Loan Bank stock 19,259 330 6.80 17,477 297 6.76
----------------------- -----------------------
Total earning assets 1,329,111 24,834 7.41 1,123,822 21,728 7.69
------- -------
Valuation allowances (6,922) (913)
Cash and due from banks 16,438 13,547
Other assets 78,184 63,889
---------- ----------
Total assets $1,416,811 $1,200,345
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 43,499 156 1.42 $ 41,473 160 1.53
Money market demand accounts 187,190 2,174 4.61 123,789 1,488 4.78
Passbook 77,037 553 2.85 89,320 639 2.85
Certificates of deposit 551,135 7,876 5.67 419,212 6,114 5.80
----------------------- -----------------------
Total interest-bearing deposits 858,861 10,759 4.97 673,794 8,401 4.96
Advances and other borrowings 370,540 5,125 5.49 335,936 4,786 5.67
Advances from borrowers for taxes and insurance 8,478 - - 8,491 - -
----------------------- -----------------------
Total interest-bearing liabilities 1,237,879 15,884 5.09 1,018,221 13,187 5.15
------- -------
Non-interest bearing deposits 35,728 27,491
Other liabilities 18,061 16,102
Shareholders' equity 125,143 138,531
---------- ----------
Total liabilities and shareholders' equity $1,416,811 $1,200,345
========== ==========
Net interest income $ 8,950 $ 8,541
======= =======
Net yield on interest-earning assets 2.67 3.02
Interest rate spread 2.32 2.54
Ratio of earning assets to interest-bearing liabilities 107.37 110.37
16
17
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:
Three months ended
December 31,
1996 1995
------ ------
(Dollars in thousands)
Beginning balance $5,217 $4,076
Provision for loan losses 261 66
Recoveries 55 1
Charge-offs (473) (11)
------ ------
Ending balance $5,060 $4,132
====== ======
Ratio of allowance for loan losses to gross loans
receivable at the end of the period 0.75% 0.76%
Ratio of allowance for loan losses to total non-
performing loans at the end of the period 116.72% 1283.23%
Ratio of net charge-offs to average gross loans
(annualized) 0.26% 0.00%
Management believes that the allowance for loan losses is adequate as of
December 31, 1996, based upon its current evaluation of loan delinquencies,
non-performing loans, charge-off trends, economic conditions and other factors.
The increase in the provision for loan losses in the current quarter reflects
the continued growth in the Company's loan portfolio and also reflects the
Company's increased mix of higher yielding and higher risk loans. Repossessed
autos sold during the quarter resulted in charge-offs of $436,000. It is
anticipated that as more loans default and the repossessed autos are sold,
additional charge-offs will be incurred.* The Company believes that the
allowance for loan losses is adequate to provide for potential losses based on
current conditions.
OTHER OPERATING INCOME. Other operating income decreased by $800,000 to $2.7
million for the three months ended December 31, 1996, compared to $3.5 million
for 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,
1996 1995
------ ------
(Dollars in thousands)
Other operating income $2,657 $3,459
Percent of average assets (annualized) .74% 1.15%
The decrease was due primarily to gains on investments and mortgage-backed and
related securities, partially offset by increases in gains on trading account
activity and income from the Company's affordable housing subsidiary. Gains on
investments and mortgage-backed and related securities decreased $1.1 million
to $476,000 for the three months ended December 31, 1996, compared to a gain of
$1.6 million for the same period in the prior year. The Company does not
consider gains on the sales of securities as a predictable source of earnings
as such sales are based on the Company's ongoing review of the individual
securities within the Company's available for sale portfolio whereby securities
may be sold and replaced with ones that offer a better combination of interest
income,
17
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
interest rate risk or credit risk than the security sold. Gain/(loss)
on foreclosed properties decreased $146,000 to a loss of $14,000 for the three
months ended December 31, 1996, compared to a gain of $132,000 for the same
period in the prior year. For the quarter ended December 31, 1995, the Company
collected rental income on a foreclosed 104-unit apartment complex. Due to the
subsequent sale of the property, no rental income was collected in the quarter
ended December 31, 1996. Gains from the trading account were $385,000 for the
three months ended December 31, 1996, compared with $128,000 for the three
months ended December 31, 1995. The increase in trading gains was the result
of the sale of mortgage-backed securities which the Company had exchanged for
its own mortgage loans ("loan swaps"). This method of selling the Company's
salable mortgage production is required, under accounting rules, to be a
"trading" activity, and as such, the resulting realized and unrealized gains
are classified as trading income. The level of trading gains may fluctuate due
to the volume of originations of single-family mortgages which in turn can
fluctuate due to changes in interest rates. Sales of loans for cash as opposed
to loan swaps are recorded as sales of mortgage loans in the income statement.
Income from affordable housing (which represents primarily rental income)
increased $117,000 for the three months ended December 31, 1996, as compared to
the same period in the previous year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.4 million or 22.4% to $7.5 million for the three months ended
December 31, 1996, compared to $6.1 million for 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,
1996 1995
------ ------
(Dollars in thousands)
General and administrative expenses $7,462 $6,097
Percent of average assets (annualized) 2.09% 2.02%
Compensation expense increased $622,000 and furniture and equipment expenses
increased $127,000. These increases were due primarily to increased levels of
compensation and other costs associated with three new branches, a centralized
call center and other increased activity connected with the Company's higher
level of earning assets. Expenses related to the Company's affordable housing
subsidiary also increased $121,000 as compared to the same period in the prior
year due to the Company's increased investment in affordable housing units.
INCOME TAX EXPENSE. Income tax expense decreased $1.0 million to $727,000 for
the three months ended December 31, 1996, compared to the same period in the
prior year. The effective tax rate for the three months ended December 31,
1996 was 18.72%, as compared to 30.2% for the three months ended December 31,
1995. The decrease in effective rates reflects the effect of the tax credits
earned by the Company's affordable housing subsidiary. Income tax credits
increased $315,000 to $674,000 for the three months ended December 31, 1996,
compared to $359,000 for the three months ended December 31, 1995.
18
19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
ASSET QUALITY
Total non-performing assets were $4.5 million or 0.32% of total assets at
December 31, 1996, compared to $4.0 million or 0.28% of total assets at
September 30, 1996. 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 as of December 31, 1996 included $3.7 million of
purchased auto loans which are past due or in default. These auto loans were
purchased in 1995 and 1996 under a warehouse financing arrangement the Company
had with the originator of the sub-prime automobile loans. The intent of the
financing was to warehouse the loans until the originator could originate
sufficient quantities to securitize the loans and sell to institutional
investors. At that time, the loans would be sold back to the originator. The
loans were serviced by an independent third party servicer and the loans had
various levels of insurance and in addition were guaranteed as to principal and
interest payments by the originator of the loans. The maximum amount that the
Company had outstanding at any point in time was a balance of $14.6 million
during February, 1996. The Company has not funded any loans since that time
and as of December 31, 1996, the balance of the sub-prime auto loans was $4.4
million compared to $7.7 million at September 30, 1996. During the quarter
$2.7 million of loans were sold back to the originator for face value plus a
gain of $50,000 which was treated as a recovery. Actions have been taken to
repossess the collateral on the delinquent loans and to enforce the guarantee
of the originator of these loans; however, it is anticipated that some portion
of these loans will ultimately result in a charge-off due to the possible
inability of the originator to perform under its guaranty.* In addition, the
level of insurance collected on policies paying for credit losses on the loans
has beed lower than anticipated. The Company is still pursuing repossession
and disposition of the autos and enforcement of the guarantee of the
originator. Repossessed autos sold during the quarter resulted in charge-offs
of $436,000. It is anticipated that as more loans default and the repossessed
autos are sold, additional charge-offs will be incurred.* The Company believes
that the allowance for loan losses is adequate to provide for potential losses
based on current conditions.
Non-performing assets are summarized as follows:
December 31, September 30,
1996 1996
------ ------
(Dollars in thousands)
Non-performing loans $4,335 $3,890
Foreclosed properties 127 80
------ ------
Non-performing assets $4,462 $3,970
====== ======
Non-performing loans to gross loans 0.64% 0.58%
Non-performing assets to total assets 0.32% 0.28%
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.
19
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter
interest rate characteristics. Although management believes that its
asset/liability management strategies have reduced the potential effects of
changes in interest rates on its operations, increases in interest rates may
adversely affect the Company's results of operations because interest-bearing
liabilities will reprice more quickly than interest-earning assets.
At December 31, 1996, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 10.9% 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 December 31, 1996 was a negative 9.1% 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, which would result in the
reinvestment of such proceeds at market rates which are lower than current
rates.*
20
21
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 December 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 $16,585 $23,627 $34,899 $22,088 $63,624 $160,823
Variable 41,271 85,026 106,752 40,277 5,317 278,643
Consumer loans (2) 90,462 38,769 16,615 20,309 18,461 184,616
Mortgage-backed and related securities 1,194 6,045 16,640 26,328 17,870 68,077
Assets available for sale:
Mortgage loans 10,731 - - - - 10,731
Fixed rate mortgagE related 6,079 16,522 30,299 18,786 15,254 86,940
Variable rate mortgage related 265,754 165,576 - - - 431,330
Other 17,850 8,702 19,124 10,560 2,278 58,514
Investment securities and other assets 25,948 - - - 4,679 30,627
-----------------------------------------------------------------------------------------
Total $475,874 $344,267 $224,329 $138,348 $127,483 $1,310,301
=========================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts $3,979 $11,938 $16,346 $6,488 $4,269 $43,020
Passbook savings accounts 3,102 9,307 18,848 12,985 28,753 72,995
Money market deposit accounts 42,446 127,337 14,949 3,737 1,246 189,715
Certificates of deposit 318,335 148,935 79,378 11,982 - 558,630
Borrowings (4) 308,422 9 70,000 60 - 378,491
------------------------------------------------------------------------------------------
Total $676,284 $297,526 $199,521 $35,252 $34,268 $1,242,851
==========================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(200,410) $46,741 $24,808 $103,096 $93,215 $67,450
==========================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities (200,410) (153,669) (128,861) (25,765) 67,450
============================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets -14.22% -10.90% -9.14% -1.83% 4.79%
===========================================================================
(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 $38.9 million at December 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 $261.3 million or 18.5% 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 $55.0 million, increase borrowings set to mature or
reprice in more than one year to three years by $55.0 million.
21
22
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 $25.0 million and
$22.5 million as of December 31, 1996 and September 30, 1996, 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 December 31, 1996, the Bank's available
unused borrowing capacity from the FHLB was approximately $110.0 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 December 31, 1996, the capital of the
Company and each of its wholly-owned subsidiaries, exceeded all capital
requirements of the Federal Reserve, the OTS and the State of Wisconsin as
mandated by federal and state law and regulations.
22
23
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
None.
ITEM 5. OTHER INFORMATION
On November 7, 1996, the Company announced it completed its sixth share
repurchase program for its common stock that began in July, 1996. The
Company purchased 5%, or 282,945 shares, of its common shares
outstanding at an average price of $25.75 per share. The repurchased
shares will be used for general corporate purposes.
On November 7, 1996, the Company announced it had adopted a share
repurchase program for its common stock. The Company plans to purchase
up to 10%, or 538,100 shares over a twelve month period commencing
November 11, 1996 depending on market conditions. The repurchased
shares will become treasury shares and will be used for general
corporate purposes.
On January 22, 1997, the Company announced the declaration of a
dividend of $0.12 per share on the Company's common stock for the
quarter ended December 31, 1996. The dividend is payable on February
21, 1997 to shareholders of record as of February 10, 1997. This will
be the sixth cash dividend payment since the Company became a
publicly-held company in June 1993.
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.
23
24
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, 1997 By: /s/ Jon D. Sorenson
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Jon D. Sorenson
Chief Financial Officer
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