<PAGE> 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 June 30, 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 5,648,909 at July 31, 1996.
Page 1 of 26 pages
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in 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 25
ITEM 2.Changes In Securities 25
ITEM 3.Defaults Upon Senior Securities 25
ITEM 4.Submission of Matters to a Vote of Security Holders 25
ITEM 5.Other Information 25
ITEM 6.Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
------------ --------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,881 $ 20,780
Federal funds sold and overnight deposits 3,914 5,070
----------- -------------
Cash and cash equivalents 22,795 20,780
----------- -------------
Trading account securities, at market - 3,000
Assets available for sale, at market value:
Investment securities 55,377 4,142
Mortgage-backed and related securities 518,261 360,077
Mortgage loans held for sale, at lower of cost or market 7,378 1,138
Investment securities held to maturity (estimated market values
of $3,206 and $49,574, respectively) 3,163 49,928
Mortgage-backed and related securities held to maturity (estimated
market values of $67,624 and $155,896, respectively) 71,541 157,495
Federal Home Loan Bank stock, at cost 18,038 17,440
Loans receivable, net 565,358 513,308
Accrued interest receivable 8,139 7,012
Foreclosed properties, net 60 5,833
Real estate held for investment 31,004 24,264
Premises and equipment, net 15,580 10,892
Other assets 13,209 13,906
----------- -------------
Total assets $1,329,903 $1,189,215
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 826,895 $ 688,348
Advances and other borrowings 355,875 345,681
Advances from borrowers for taxes and insurance 7,302 10,879
Accrued interest payable and other liabilities 9,175 9,079
----------- -------------
Total liabilities 1,199,247 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, 5,658,909 and 6,078,799 shares, respectively 73 73
Additional paid-in-capital 72,142 71,819
Unrealized loss on securities available for sale (1,947) 2,332
Unearned ESOP compensation (3,516) (3,996)
Unearned restricted stock - (701)
Treasury stock at cost (1,630,711 and 1,210,821 shares, respectively) (30,745) (20,142)
Retained earnings, substantially restricted 94,649 85,843
----------- -------------
Total shareholders' equity 130,656 135,228
----------- -------------
Total liabilities and shareholders' equity $1,329,903 $1,189,215
=========== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans $34,796 $30,929 $11,956 $11,113
Mortgage-backed and related securities 29,036 27,342 10,001 9,429
Investment securities 2,346 1,658 779 599
Federal funds sold and overnight deposits 794 947 230 540
Federal Home Loan Bank stock 905 805 287 258
Trading account securities 3 502 - 113
----------- --------- --------- ----------
Total interest and dividend income 67,880 62,183 23,253 22,052
----------- --------- --------- ----------
INTEREST EXPENSE:
Deposits 27,387 22,468 9,610 8,503
Advances and other borrowings 13,947 14,615 4,638 4,950
----------- --------- --------- ----------
Total interest expense 41,334 37,083 14,248 13,453
----------- --------- --------- ----------
Net interest income before provision for loan losses 26,546 25,100 9,005 8,599
Provision for loan losses 222 180 78 60
----------- --------- --------- ----------
Net interest income 26,324 24,920 8,927 8,539
----------- --------- --------- ----------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees 936 991 313 398
Depository fees and service charges 1,041 975 356 345
Trading securities gains and commitment fees, net 109 671 - 583
Gain (loss) on investments and mortgage-backed
and related securities, net 3,276 1,380 (1) 1,193
Gain on mortgage loans held for sale, net 815 201 157 82
Insurance and annuity commissions 205 196 40 53
Gain (loss) on foreclosed properties 867 (2) (5) -
Income from affordable housing 1,331 670 412 250
Other income 320 357 - 127
----------- --------- --------- ----------
Total other operating income, net 8,900 5,439 1,272 3,031
----------- --------- --------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits 9,843 8,216 3,490 2,689
Office building, including depreciation 1,513 1,264 508 524
Furniture and equipment, including depreciation 1,329 1,108 476 429
Federal deposit insurance premiums 1,063 1,074 374 375
Affordable housing expenses 1,538 1,018 458 385
Other general and administrative expenses 4,775 3,980 1,666 1,449
----------- --------- --------- ----------
Total general and administrative expenses 20,061 16,660 6,972 5,851
----------- --------- --------- ----------
Income before income tax expense 15,163 13,699 3,227 5,719
Income tax expense 4,268 4,654 683 1,935
----------- --------- --------- ----------
Net income $10,895 $ 9,045 $ 2,544 $ 3,784
----------- --------- --------- ----------
Earnings per share $ 1.86 $ 1.49 $ 0.45 $ 0.62
=========== ========= ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Unrealized
Losses on
Shares of Additional Securities Unearned Unearned
Common Common Paid-In Available ESOP Restricted
Stock Stock Capital For Sale Compensation Stock
----- ----- ------- -------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nine months ended June 30, 1995
- - -------------------------------
Balance at September 30, 1994 6,435,277 $73 $71,425 $(2,733) $(4,366) $(1,636)
Net income - - - - - -
Purchase of treasury stock (274,948) - - - - -
Exercise of stock options 16,470 - - - - -
Amortization of unearned compensation - 304 - 274 700
Unrealized gain on securities available
for sale, net of tax - - - 3,718 - -
----------- ------ ---------- --------- ------- ----------
Balance at June 30, 1995 6,176,799 $73 $71,729 $ 985 $(4,092) $ (936)
=========== ====== ========== ========= ======= ==========
Nine months ended June 30, 1996
- - -------------------------------
Balance at September 30, 1995 6,078,799 $73 $71,819 $ 2,332 $(3,996) $ (701)
Net income - - - - - -
Cash dividend - $0.30 per share - - - - - -
Purchase of treasury stock (419,890) - - - - -
Stock option payment - - - - - -
Amortization of unearned compensation - - 323 - 480 701
Unrealized loss on securities available
for sale, net of tax - - - (4,279) - -
----------- ------ ---------- --------- ------- ----------
Balance at June 30, 1996 5,658,909 $73 $72,142 $(1,947) $(3,516) $ -
=========== ====== ========== ========= ======= ==========
<CAPTION>
Treasury Retained
Stock Earnings Total
----- -------- -----
<S> <C> <C> <C>
Nine months ended June 30, 1995
- - -------------------------------
Balance at September 30, 1994 $(13,333) $73,271 $122,701
Net income - 9,045 9,045
Purchase of treasury stock (5,027) - (5,027)
Exercise of stock options 263 (126) 137
Amortization of unearned compensation - - 1,278
Unrealized gain on securities available
for sale, net of tax - - 3,718
-------- -------- ---------
Balance at June 30, 1995 $(18,097) $82,190 $131,852
======== ======== =========
Nine months ended June 30, 1996
- - -------------------------------
Balance at September 30, 1995 $(20,142) $85,843 $135,228
Net income - 10,895 10,895
Cash dividend - $0.30 per share - (1,671) (1,671)
Purchase of treasury stock (10,603) - (10,603)
Stock option payment - (418) (418)
Amortization of unearned compensation - - 1,504
Unrealized loss on securities available
for sale, net of tax - - (4,279)
-------- -------- ---------
Balance at June 30, 1996 $(30,745) $94,649 $130,656
======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,895 $ 9,045
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses 222 180
Depreciation, accretion and amortization 1,693 1,352
Deferred income taxes (738) (2,944)
Gain on investments, mortgage-backed and related
securities and trading account securities, net (3,385) (2,051)
Gains on the sales of mortgage loans held for sale, net (815) (201)
Stock-based compensation expense 1,504 1,278
(Increase) decrease in loans held for sale 4,517 (7,107)
Decrease in trading account securities, net 3,000 13,196
Other, net 1,827 3,261
---------- ---------
Total adjustments 7,825 6,964
---------- ---------
Net cash provided by operating activities 18,720 16,009
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities 25,520 16,049
Purchases of securities (18,535) (30,204)
Purchases of mortgage-backed and related securities (1,000) (9,307)
Principal repayments on mortgage-backed and related securities 5,464 7,971
Purchases of mortgage-backed and related securities available for sale (284,991) (110,666)
Proceeds from sales of mortgage-backed and related securities
available for sale 159,929 72,975
Principal repayments on mortgage-backed and related securities
available for sale 45,543 13,024
Purchase of securities available for sale (52,794) (1,121)
Proceeds from maturities of securities available for sale 9,528 -
Proceeds from sales of securities available for sale 31,680 1,050
Purchases of Federal Home Loan Bank stock (1,034) (1,265)
Redemption of Federal Home Loan Bank stock 436 -
Purchase of loans (36,585) (36,208)
Increase in loans, net of loans held for sale (26,222) (53,694)
Increase in real estate held for investment (6,740) (7,343)
Proceeds from sale of foreclosed properties 6,767 -
Purchases of premises and equipment, net (6,143) (2,663)
---------- ---------
Net cash used in investing activities (149,177) (141,402)
---------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE> 7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW, CONT.
<TABLE>
<CAPTION>
Nine months Ended
June 30,
---------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 138,547 136,523
Proceeds from advances and other borrowings 36,001 117,058
Repayments on advances and other borrowings (25,807) (102,227)
Decrease in advances from borrowers for taxes and insurance (3,577) (2,678)
Dividends paid (1,671) -
Stock option transactions (418) -
Purchase of treasury stock (10,603) (5,027)
---------- -----------
Net cash provided by financing activities 132,472 143,649
---------- -----------
Increase in cash and cash equivalents 2,015 18,256
Cash and cash equivalents:
Beginning of period 20,780 15,951
---------- -----------
End of period $ 22,795 $ 34,207
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 42,945 $ 36,702
Income taxes 4,473 8,656
Supplemental schedule of noncash investing and financing activities -
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities - $ 11,966
Reclassification of mortgage-backed and related securities
to assets available for sale $121,720 -
Transfer of mortgage loans to mortgage loans held
for sale 10,757 3,316
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 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
nine-month periods ended June 30, 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
<PAGE> 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:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
June 30, September 30,
1996 1995
----------------- -----------------
(In thousands)
<S> <C> <C>
Commitments to extend credit $24,453 $ 4,474
Guarantees under IRB issues 4,200 4,200
Interest rate swap agreements 65,000 65,0000
Commitments to:
Purchase mortgage-backed securities 9,600 13,700
Purchase investment securities 7,600 -
Unused and open-ended lines of credit:
Consumer 103,188 89,061
Commercial 13,710 6,711
Open option contracts written:
Short-put options - 13,000
Short-call options - 16,000
Commitments to fund equity investments 12,123 14,283
</TABLE>
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 June 30, 1996
consist of the following:
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- - -------- -------------------------- -------- --------------- --------------
<S> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1996 4.43% 5.48%
10,000 Fixed Pay-Floating Receive 1998 4.93 5.46
10,000 Fixed Pay-Floating Receive 1998 5.04 5.56
15,000 Fixed Pay-Floating Receive 1998 5.25 5.50
10,000 Fixed Pay-Floating Receive 1998 5.23 5.49
10,000 Fixed Pay-Floating Receive 1998 5.43 5.54
</TABLE>
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 June 30, 1996, the fair
value of the interest rate swaps was approximately $1,526,000.
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 19 projects and has committed to fund equity
investments in an additional two projects within the state of Wisconsin.
Additionally, the Bank has provided financing or committed to provide
financing to twenty of the projects. However, the primary benefit to the
Company on these projects is in the form of tax credits. At June 30,
1996, the Bank had loans outstanding to such projects of $28.2 million.
10
<PAGE> 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 June
30, 1996 were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ -------------- --------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,976 $ 30 $ 2 $ 5,004
U.S. Agency securities 12,989 47 179 12,857
Money market funds 14,232 - - 14,232
State and municipal obligations 9,241 - 172 9,069
Corporate debt securities 8,566 35 37 8,564
Asset-backed securities 5,063 2 - 5,065
Marketable equity securities 584 16 14 586
------------ -------------- --------------- -------------
Investment securities available for sale 55,651 130 404 55,377
Mortgage-backed and related securities 521,131 2,710 5,580 518,261
------------ -------------- --------------- -------------
Total securities available for sale $576,782 $2,840 $5,984 $573,638
============ ============== =============== =============
<CAPTION>
SECURITIES HELD TO MATURITY
------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ -------------- --------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
State and municipal obligations $ 1,980 $ 19 $ - $ 1,999
Corporate debt securities 1,183 24 - 1,207
------------ -------------- --------------- -------------
Investment securities held to maturity 3,163 43 - 3,206
Mortgage-backed and related securities 71,541 183 4,100 67,624
------------ -------------- --------------- -------------
Total securities held to maturity $ 74,704 $ 226 $4,100 $ 70,830
============ ============== =============== =============
</TABLE>
Gross proceeds from the sale of securities available for sale during the
nine months ended June 30, 1996 totaled approximately $191.6 million.
Gross realized gains and losses on the sale of securities available for
sale during the nine months ended June 30, 1996 totaled approximately $3.4
million and $91,000, 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
<PAGE> 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 nine-month
periods ended June 30, 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 June 30, 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:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding during the period 5,552,917 5,852,912 5,383,806 5,851,857
Incremental shares relating to dilutive stock
options outstanding during the period 289,985 206,206 289,476 233,766
----------- ---------- ---------- ----------
5,842,902 6,059,118 5,673,282 6,085,623
=========== ========== ========== ==========
Net income for the period $10,895,000 $9,045,000 $2,544,000 $3,784,000
Net income per common share $ 1.86 $ 1.49 $ 0.45 $ 0.62
</TABLE>
The computation of book value per common share is as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
------------------ ------------------
<S> <C> <C>
Common shares outstanding at the end
of the period 5,302,592 5,688,876
Incremental shares relating to dilutive stock
options outstanding at the end of the period 284,245 277,889
------------------ ------------------
5,586,837 5,966,765
================== ==================
Total shareholders' equity at the end of
the period $130,656,000 $135,228,000
Book value per common share $ 23.39 $ 22.66
</TABLE>
12
<PAGE> 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 $5.9 million at June 30, 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 $172,000 and $555,000 for
the three and nine month periods ended June 30, 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
June 30, 1996.
13
<PAGE> 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 during 1995, the assessment for SAIF members
continues to range from 0.23% to 0.31% per $100 of deposits, while the range of
assessment rates for BIF members was reduced to 0% to 0.27% per $100 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.
One element present in these proposals is a one-time assessment of
approximately 85 to 90 basis points per $100 of SAIF deposits as of March 31,
1995. 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. It is
anticipated that with the recapitalization of the SAIF, BIF and SAIF premiums
would be comparable, and FDIC premium expense for the Bank would therefore 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 deferral, and for
certain bad debt reserves, avoidance, of reserve recapture. The bad debt
reserve provision has been approved by Congress but has not yet been signed
into law. 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 $140.7 million or 11.8% to $1.330 billion
at June 30, 1996 from $1.189 billion at September 30, 1995. Loans receivable,
including loans held for sale, increased $58.3 million. Mortgage-backed and
related securities, including mortgage-backed and related securities available
for sale, increased $72.2 million. Funding the increase in assets was an
increase in deposits of $138.5 million. The Company's ratio of shareholders'
equity to total assets was 9.82% at June 30, 1996, compared to 11.4% at
September 30, 1995. The Company's book value per share was $23.39 at June 30,
1996, compared to $22.66 at September 30, 1995.
14
<PAGE> 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 $72.2 million to $589.8 million at
June 30, 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 $58.3
million to $572.7 million at June 30, 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 nine months ended June 30, 1996, the Company originated
approximately $228.6 million in loans, as compared to $113.7 million for the
same period in the prior year. Of the $228.6 million in loans originated,
$94.1 million were in consumer and interim financing loans and $124.9 million
were in first mortgage loans. The Company has continued to expand its consumer
lending activities. At June 30, 1996, the Company's consumer loan portfolio
totaled $182.2 million, or 29.9% of the Company's gross loans receivable.
Deposits increased $138.5 million to $826.9 million at June 30, 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 money market demand account with an
interest rate tied to a nationally recognized money market index.
Additionally, the Company continues to sell certificates of deposit through
investment brokers. At June 30, 1996, the Company had approximately $101.5
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 nine months ended June 30, 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. In addition, the
retention of brokered deposits is highly dependent upon rates paid. 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 $10.2 million to $355.9 million at June
30, 1996 from $345.7 million at September 30, 1995. The Company primarily uses
borrowed funds to fund purchases of mortgage-backed and related securities and
to a lesser extent to fund operations.
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 June 30, 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 nine months ended June
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
30, 1996, the Company recorded a net reduction of interest expense of $323,000
as a result of the Company's swap agreements.
RESULTS OF OPERATIONS
NET INCOME. Net income for the nine months ended June 30, 1996 was $10.9
million compared to $9.0 million for the nine months ended June 30, 1995. Net
income for the three months ended June 30, 1996 was $2.5 million compared to
$3.8 million for the three months ended June 30, 1995. The increase for the
nine-month period was the result of a $1.4 million increase in net interest
income, a $3.5 million increase in other operating income and a $386,000
decrease in income tax expense partially offset by a $3.4 million increase in
general and administrative expenses. The decrease in net income for the
three-month period was the result of a decrease of $1.8 million in other
operating income and a $1.1 million increase in general and administrative
expenses partially offset by a $466,000 increase in net interest income and a
$1.3 million decrease in income tax expense.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Return on average assets 1.16% 1.05% 0.79% 1.27%
Return on average equity 10.73% 9.71% 7.83% 11.60%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $1.4 million or 5.8% and $406,000 or 4.7% for the nine and three
months ended June 30, 1996, respectively, compared to the same periods in the
prior year. The net interest margin was 3.01% and 3.04% for the nine months
ended June 30, 1996 and 1995, respectively, and 2.95% and 3.02% for the three
months ended June 30, 1996 and 1995, respectively.
Total interest income increased $5.7 million or 9.1% to $67.9 million for the
nine months ended June 30, 1996, compared to $62.2 million for the nine months
ended June 30, 1995. The increase in interest income was primarily the result
of increases in interest on loans, mortgage-backed securities and investments,
partially offset by a decrease in interest income on trading securities. The
increase in interest income on loans was the result of an increase in the
average balance of loans to $539.5 million from $498.1 million for the nine
months ended June 30, 1996 and 1995, respectively, and an increase in the
average yield to 8.62% from 8.30% for the same periods. The Company's loan
growth has primarily taken place in the higher yielding consumer and commercial
loan areas with a decline taking place in mortgage lending. The increase in
interest income on mortgage-backed securities was primarily the result of an
increase in the average balance to $550.5 million from $519.5 million for the
nine months ended June 30, 1996 and 1995, respectively. The Company continues
its plan of purchasing mortgage-backed securities in addition to growing the
loan portfolio to increase its level of earning assets. The increase in
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
interest income on investments was primarily the result of an increase in the
average balance of investments which increased to $52.0 million from $37.6
million for the nine months ended June 30, 1996 and 1995, respectively. The
decrease in interest income on trading securities was the result of the Company
not carrying a significant balance of trading securities during the current
year.
Total interest income increased $1.2 million or 5.4% to $23.3 million for the
three months ended June 30, 1996, compared to $22.1 million for the three
months ended June 30, 1995. The increase was primarily the result of increases
in loans and mortgage-backed securities. The increase in interest income on
loans was primarily the result of an increase in the average balance of loans
to $559.7 million from $521.5 million for the three months ended June 30, 1996
and 1995, respectively. The increase in interest income on mortgage-backed
securities was primarily the result of an increase in the average balance of
mortgage-backed securities to $581.1 million from $517.9 million for the three
months ended June 30, 1996 and 1995, respectively, partially offset by a
decrease in the average yield to 6.92% from 7.30% for each of the periods.
Total interest expense increased $4.3 million or 11.5% to $41.3 million for the
nine months ended June 30, 1996, compared to $37.1 million for the nine months
ended June 30, 1995. The increase was primarily the result of an increase in
interest expense on deposits. The increase in interest expense on deposits was
primarily the result of an increase in the average balance of deposits to
$737.6 million from $652.4 million for the nine months ended June 30, 1996 and
1995, respectively and by an increase in the effective rate on deposits to
4.96% from 4.60%. The increase in the effective rate is a result of the
Company's changing mix of deposits which includes an emphasis on growth in
deposits which compete effectively against non-traditional deposit products
such as money market accounts. These accounts include an index-based money
market account and a prime-based certificate. The Company expects to continue
the trend to shorter-term more market sensitive deposit accounts. The mix of
these types of deposits with the Company's traditional passbook and certificate
accounts results in a higher cost of deposits along with a higher growth rate
of retail deposits. The Company also has increased its level of brokered
deposits which generally have terms from three months to two years with
interest rates that approximate the Company's retail certificate rates for
similar maturities.
Total interest expense increased $795,000 or 5.9% to $14.2 million for the
three months ended June 30, 1996, compared to $13.5 million for the three
months ended June 30, 1995. The increase was primarily the result of an
increase in interest expense on deposits. The increase in interest expense on
deposits was primarily the result of an increase in the average balance on
deposits to $783.6 million from $686.1 million for the three months ended June
30, 1996 and 1995, respectively. As stated above, the growth is primarily due
to increases in accounts that compete against non-traditional deposits and in
brokered certificates.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost of liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the nine- and three-month periods
ended June 30, 1996 and 1995, respectively.
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
1996 1995
---------------------- ----------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ------ ------------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits $19,730 $ 794 5.38% $ 22,215 $ 947 5.70 %
Trading account securities 55 3 7.29 10,575 502 6.35
Investment securities 52,016 2,346 6.02 37,625 1,658 5.89
Mortgage-backed and related securities 550,515 29,036 7.05 519,536 27,342 7.04
Loans:
First mortgage 348,096 21,315 8.18 356,958 20,779 7.78
Home equity 80,192 5,872 9.78 74,117 5,286 9.54
Consumer 93,014 6,351 9.12 56,331 4,082 9.69
Commercial and agricultural 18,168 1,258 9.25 10,723 782 9.75
---------- ------- ---------- -------
Total loans 539,470 34,796 8.62 498,129 30,929 8.30
Federal Home Loan Bank stock 17,618 905 6.86 16,967 805 6.34
---------- ------- ---------- -------
Total earning assets 1,179,404 67,880 7.69 1,105,047 62,183 7.52
------- -------
Valuation allowances (2,647) (9,429)
Cash and due from banks 13,967 12,113
Other assets 63,761 42,029
---------- ----------
Total assets $1,254,485 $1,149,760
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $41,767 $ 462 1.48 $ 42,000 412 1.31
Money market demand accounts 139,600 4,842 4.63 108,771 3,361 4.13
Passbook 85,266 1,814 2.84 95,431 1,940 2.72
Certificates of deposit 470,918 20,269 5.75 406,209 16,755 5.51
---------- ------- ---------- -------
Total interest-bearing deposits 737,551 27,387 4.96 652,411 22,468 4.60
Advances and other borrowings 337,552 13,922 5.51 340,721 14,585 5.72
Advances from borrowers for taxes and insurance 5,480 25 0.61 5,535 30 0.72
---------- ------- ---------- -------
Total interest-bearing liabilities 1,080,583 41,334 5.11 998,667 37,083 4.96
Non interest-bearing deposits 26,373 18,573
Other liabilities 11,882 7,924
Shareholders' equity 135,647 124,596
---------- ----------
Total liabilities and shareholders' equity $1,254,485 $1,149,760
========== ==========
Net interest income $26,546 $25,100
======= ==========
Net yield on interest-earning assets 3.01 3.04
Interest rate spread 2.58 2.56
Ratio of earning assets to interest-bearing
liabilities 109.15 110.65
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
1996 1995
------------------- ----------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ ---------- ------ ------------- ------------------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits $17,924 $ 230 5.16% $ 34,621 $540 6.26%
Trading account securities - - - 5,923 113 7.65
Investment securities 51,745 779 6.05 45,833 599 5.24
Mortgage-backed and related securities 581,065 10,001 6.92 517,878 9,429 7.30
Loans:
First mortgage 357,998 7,380 8.29 373,062 7,189 7.73
Home equity 80,266 1,908 9.56 77,157 1,882 9.78
Consumer 102,114 2.218 8.74 53,885 1,561 11.62
Commercial and agricultural 19,342 450 9.36 17,439 481 11.06
---------- ------- ---------- -------
Total loans 559,720 11,956 8.59 521,543 11,113 8.55
Federal Home Loan Bank stock 17,746 287 6.50 17,375 258 5.96
---------- ------- ---------- -------
Total earning assets 1,228,200 23,253 7.61 1,143,173 22,052 7.74
------- -------
Valuation allowances (5,565) (4,741)
Cash and due from banks 14,243 7,459
Other assets 65,691 47,367
---------- ----------
Total assets $1,302,569 $1,193,258
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $42,665 147 1.39 $ 46,236 139 1.21
Money market demand accounts 155,420 1,747 4.52 108,931 1,200 4.42
Passbook 83,078 587 2.84 92,641 629 2.72
Certificates of deposit 502,446 7,129 5.71 438,297 6,535 5.98
---------- ------- ---------- -------
Total interest-bearing deposits 783,609 9,610 4.93 686,105 8,503 4.97
Advances and other borrowings 343,638 4,630 5.42 338,589 4,940 5.85
Advances from borrowers for taxes and insurance 5,674 8 0.57 5,991 10 0.67
---------- ------- ---------- -------
Total interest-bearing liabilities 1,132,921 14,248 5.06 1,030,685 13,453 5.24
Non interest-bearing deposits 27,865 22,691
Other liabilities 11,100 9,076
Shareholders' equity 130,683 130,806
---------- ----------
Total liabilities and shareholders' equity $1,302,569 $1,193,258
========== ==========
Net interest income $ 9,005 $ 8,599
======= =======
Net yield on interest-earning assets 2.95 3.02
Interest rate spread 2.56 2.50
Ratio of earning assets to interest-bearing
liabilities 108.41 110.91
</TABLE>
18
<PAGE> 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:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------ --------------------------
1996 1995 1996 1995
-------------- -------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $4,076 $3,435 $4,204 $4,017
Provision for loan losses 222 180 78 60
Net charge-offs (39) (246) (23) (14)
Acquired bank's allowance - 694 - -
------------- ------------- ----------- -----------
Ending balance $4,259 $4,063 $4,259 $4,063
============= ============= =========== ===========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period 0.70% 0.76% 0.70% 0.76%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period 120.62% 68.95% 120.62% 68.95%
Ratio of net charge-offs to average
gross loans (annualized) 0.01% 0.06% 0.02% 0.01%
</TABLE>
Management believes that the allowance for loan losses is adequate as of June
30, 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 $3.5 million and
decreased by $1.8 million for the nine and three months ended June 30, 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:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------ -----------------------
1996 1995 1996 1995
-------------- -------------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Other operating income $8,900 $5,439 $1,272 $3,031
Percent of average assets (annualized) 0.95% 0.63% 0.39% 1.02%
</TABLE>
Other operating income increased to $8.9 million for the nine months ended June
30, 1996 compared to $5.4 million for the nine months ended June 30, 1995. The
increase was primarily the result of increases in gains on investments and
mortgage-backed securities, gains on mortgage loans, gains on foreclosed
properties and an increase in income from affordable housing, partially offset
by a decrease in trading securities gains. The gains on investments and
mortgage-backed securities increased to $3.3 million from $1.4 million for the
nine months ended June 30, 1996 and 1995, respectively. The gains in both
periods were primarily due to the Company's repositioning of its existing
leverage portfolio whereby it sold securities and replaced them with similar
securities with more favorable interest rate and maturity
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
characteristics. Securities 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 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 mortgage loans increased to $815,000
from $201,000 for the nine months ended June 30, 1996 and 1995, respectively.
The gains were primarily the result of a favorable interest rate environment
for the origination of fixed rate mortgage loans which the Company sells into
the secondary market. The Company's volume of mortgage loan sales was $54.2
million for the nine months ended June 30, 1996 compared to $17.0 million for
the nine months ended June 30, 1995. Gains on the sale of mortgage loans was
also favorably affected by the adoption of Financial Accounting Standards Board
(FASB) statement number 122 at the beginning of the current year. The new
standard changed the method by which the Company calculates gains on the sale
of loans sold with servicing retained and added $555,000 in gains for the
current year. Gains on foreclosed properties increased to $867,000 from a loss
of $2,000 for the nine months ended June 30, 1996 and 1995, respectively. The
gain was primarily the result of the sale of one foreclosed property which had
a carrying value of $5.8 million. Income from the Company's affordable housing
operation increased to $1.3 million from $670,000 for the nine months ended
June 30, 1996 and 1995, respectively. The Company currently has twelve
properties fully in operation compared to seven in the prior year. Trading
security gains decreased to $109,000 from $671,000 for the nine months ended
June 30, 1996 and 1995, respectively. The Company has been inactive in running
a trading portfolio for most of the current year although it may again do so in
the future.
Other operating income decreased to $1.3 million for the three months ended
June 30, 1996 compared to $3.0 million for the three months ended June 30,
1995. The decrease was primarily the result of a decrease in gains on
investments and mortgage-backed securities and a decrease in trading securities
gains, partially offset by an increase in income from affordable housing.
Gains from investments and mortgage-backed securities decreased to a loss of
$1,000 from a gain of $1.2 million for the three months ended June 30, 1996 and
1995, respectively. As stated in the previous paragraph, gains are subject to
a number of factors and are not a consistent source of earnings. Gains from
trading activity were zero and $583,000 for the three months ended June 30,
1996 and 1995, respectively. The Company had no trading activity during the
current quarter. Income from operations of affordable housing increased to
$412,000 from $250,000 for the three months ended June 30, 1996 and 1995,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $3.4 million or 20.4% and $1.1 million or 19.2% for the nine and
three months ended June 30, 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:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
---------------------------- --------------------------
1996 1995 1996 1995
------------- ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
General and administrative expenses $20,061 $16,660 $6,972 $5,851
Percent of average assets (annualized) 2.14% 1.94% 2.15% 1.97%
</TABLE>
The increases in general and administrative expenses for the nine and three
months ended June 30, 1996 are primarily the result of increases in
compensation and employee benefits and an increase in expenses
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
related to affordable housing. Compensation and employee benefit expenses
increased to $9.8 million and $3.5 million for the nine and three months ended
June 30, 1996 from $8.2 million and $2.7 million for the nine and three months
ended June 30, 1995. The increased compensation and benefits expenses are
primarily the results of the increased levels of business being transacted by
the Company as indicated by the annualized growth in loans receivable of 13.5%
and in retail deposits of 15.4%. Expenses related to affordable housing
increased to $1.5 million and $458,000 for the nine and three months ended
June 30, 1996 from $1.0 million and $385,000 for the nine and three months
ended June 30, 1995. The Company currently has twelve properties fully in
operation compared to seven in the prior year.
INCOME TAX EXPENSE. Income tax expense decreased to $4.3 million and $683,000
for the nine and three months ended June 30, 1996 from $4.7 million and $1.9
million for the nine and three months ended June 30, 1995. The effective tax
rate for the nine and three months ended June 30, 1996 was 28.15% and 21.17%,
respectively compared with 33.97% and 33.83% for the nine and three months
ended June 30, 1995. The decrease in effective rates for both the nine and
three month period reflects the effect of the tax credits earned by the
Company's affordable housing subsidiary.
ASSET QUALITY
Total non-performing assets were $3.6 million or 0.27% of total assets at June
30, 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:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans $3,531 $ 296
Foreclosed properties 60 5,833
------------- -------------
Non-performing assets $3,591 $6,129
============= =============
Non-performing loans to gross loans 0.58% 0.06%
Non-performing assets to total assets 0.27% 0.52%
</TABLE>
The decrease in non-performing assets is the result of a cash sale of a $5.8
million foreclosed property during the year partially offset by the addition of
$3.1 million of purchased auto loans to non-performing status. The nonaccruing
auto loans are part of a $9.4 million pool of auto loans made to individuals
with deficient credit histories that the Company purchased at various times
over the past eighteen months and still has remaining on its balance sheet as
of June 30, 1996. The purchased auto loans were originated by dealerships
located throughout the United States, are partially insured and are guaranteed
by the underwriter. The highest level of these purchased auto loans that the
Company had at one time was $14.7 million during the previous quarter. The
Company has not purchased any additional auto loans since that time. The
Company believes the loans now may only be partially insured and that the
additional guaranties from the underwriter may be of little or no value. The
Company has included in
21
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
nonaccrual status all purchased auto loans delinquent 60 days or more or in
process of repossession and sale. Any change in the amount of nonaccrual loans
in the near future can not be estimated at this time. Most of the reduction in
the outstanding balance of the purchased auto loans was the result of sales of
loans back to the underwriter. Future sales would reduce the balance of loans
outstanding.
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, consumer and commercial 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 June 30, 1996, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 11.23% 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 June 30, 1996 was a negative 8.24% 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.
22
<PAGE> 23
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 June 30, 1996.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed $ 16,385 $ 26,794 $ 32,247 $ 18,791 $59,685 $ 153,902
Variable 37,776 49,729 116,028 25,994 4,266 233,793
Consumer loans (2) 87,055 28,426 10,659 24,873 26,650 177,663
Mortgage-backed and related securities 1,048 3,911 29,883 27,437 9,262 71,541
Assets available for sale:
Mortgage loans 7,378 - - - - 7,378
Fixed rate mortgage related 7,385 17,053 30,145 44,016 17,762 116,361
Variable rate mortgage related 282,902 117,798 1,200 - - 401,900
Other 20,442 11,610 11,339 4,000 7,986 55,337
Trading account securities 0 - - - - 0
Investment securities and other assets 22,795 - 3,163 - - 25,958
-------------------------------------------------------------------------------
Total $483,166 $255,321 $ 234,664 $145,111 $125,611 $1,243,873
===============================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts $ 4,600 10,734 $ 15,747 $ 6,250 $ 4,113 $ 41,444
Passbook savings accounts 3,484 10,452 21,169 14,582 32,291 81,978
Money market deposit accounts 38,137 114,410 8,487 374 18 161,426
Certificates of deposit 249,993 170,243 79,534 11,231 - 510,941
Borrowings (4) 340,806 - 15,009 60 - 355,875
-------------------------------------------------------------------------------
Total $636,960 $305,839 $ 139,946 $ 32,497 $36,422 $1,151,664
=================================================================== ===========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(88,794) $(60,518) $ 39,718 $112,614 $89,189 92,209
================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities (88,794) (149,312) (109,594) 3,020 92,209
===================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets -6.68% -11.23% -8.24% 0.23% 6.93%
===================================================================
</TABLE>
(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 $37.0 million at June 30,
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.
23
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
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 $22.8
million and $20.8 million as of June 30, 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 Company's subsidiary
banks are limited by the FHLB to borrowing up to 35% of their total assets. At
June 30, 1996, the bank's additional available borrowing capacity from the FHLB
totaled approximately $109 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 June 30, 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.
24
<PAGE> 25
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 May 13, 1996, the Company announced it had completed the repurchase
of 297,800 shares, or 5% of its common stock outstanding at an average
price of $26.10 per share. The repurchased shares were classified as
treasury shares and may be used for general corporate purposes.
On July 10, 1996 the Company announced it had adopted a share
repurchase program for its common stock. The Company plans to
purchase up to 5%, or 282,945 shares over a six month period commencing
July 12, 1996 depending on market conditions. The repurchased shares
will become treasury shares and will be used for general corporate
purposes.
On July 25, 1996, the Company announced the declaration of a dividend
of $0.10 per share on the Company's common stock for the quarter ended
June 30, 1996. The dividend is payable on August 22, 1996 to
shareholders of record as of August 9, 1996. This will be the fourth
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.
25
<PAGE> 26
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: August 13, 1996 By: /s/ John C. Schlosser
------------------------ -----------------------------------------
John C. Schlosser
President and Chief Executive Officer
Dated: August 13, 1996 By: /s/ Jon D. Sorenson
------------------------ -----------------------------------------
Jon D. Sorenson
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 18,881
<INT-BEARING-DEPOSITS> 3,914
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 573,638
<INVESTMENTS-CARRYING> 74,704
<INVESTMENTS-MARKET> 70,830
<LOANS> 572,736
<ALLOWANCE> 4,259
<TOTAL-ASSETS> 1,329,903
<DEPOSITS> 826,895
<SHORT-TERM> 29,858
<LIABILITIES-OTHER> 16,477
<LONG-TERM> 326,017
0
0
<COMMON> 73
<OTHER-SE> 130,583
<TOTAL-LIABILITIES-AND-EQUITY> 1,329,903
<INTEREST-LOAN> 34,796
<INTEREST-INVEST> 31,382
<INTEREST-OTHER> 1,702
<INTEREST-TOTAL> 67,880
<INTEREST-DEPOSIT> 27,387
<INTEREST-EXPENSE> 41,334
<INTEREST-INCOME-NET> 26,546
<LOAN-LOSSES> 222
<SECURITIES-GAINS> 3,276
<EXPENSE-OTHER> 4,775
<INCOME-PRETAX> 15,163
<INCOME-PRE-EXTRAORDINARY> 10,895
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,895
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 7.69
<LOANS-NON> 3,531
<LOANS-PAST> 8
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,076
<CHARGE-OFFS> 67
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 4,259
<ALLOWANCE-DOMESTIC> 4,259
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
