<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 quarterly period ended December 31, 1999
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
-------------------------------
(Exact name of Registrant as Specified in its Charter)
WISCONSIN 39-1747461
- ----------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
---------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(262) 787-8700
---------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
--- ---
(2) Yes x No
--- ---
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 10,132,669 at January 31, 1999.
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Consolidated Financial Statements.......................................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 29
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 29
ITEM 3. Defaults Upon Senior Securities..................................................................... 29
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 29
ITEM 5. Other Information................................................................................... 29
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 29
SIGNATURES .................................................................................................. 30
</TABLE>
Page 2 of 30
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................... $ 48,042 $ 29,074
Federal funds sold and overnight deposits ................................. 319 3,488
------------ ------------
Cash and cash equivalents ................................................. 48,361 32,562
------------ ------------
Securities available for sale, at fair value:
Debt and equity securities ............................................ 212,379 216,649
Mortgage-backed and related securities ................................ 871,524 919,879
Mortgage loans held for sale, at lower of cost or market .................. 2,833 8,620
Securities held to maturity, at amortized cost:
Debt securities (fair values of $828 and $834, respectively) .......... 810
810
Mortgage-backed and related securities (fair values of $33,670
and $39,250, respectively) ............................................ 34,280 39,475
Loans receivable, net ..................................................... 1,215,829 1,113,391
Federal Home Loan Bank stock, at cost ..................................... 32,322 30,827
Accrued interest receivable ............................................... 15,120 14,090
Foreclosed properties ..................................................... 375 371
Real estate held for investment ........................................... 28,407 28,402
Premises and equipment, net ............................................... 32,406 32,924
Other assets .............................................................. 34,532 35,356
------------ ------------
Total assets .............................................................. $ 2,529,178 $ 2,473,356
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 1,545,109 $ 1,484,303
Short term borrowings ..................................................... 706,393 588,790
Long term borrowings ...................................................... 131,121 245,948
Advances from borrowers for taxes and insurance ........................... 938 8,904
Accrued interest payable and other liabilities ............................ 14,588 13,897
------------ ------------
Total liabilities ......................................................... 2,398,149 2,341,842
------------ ------------
Commitments and contingencies ............................................. -- --
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued ........................................................... -- --
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 10,147,657 and 10,156,770 shares, respectively ........... 146 146
Additional paid-in-capital ................................................ 86,437 82,426
Accumulated other comprehensive loss ...................................... (17,740) (13,057)
Unearned ESOP compensation ................................................ (981) (2,260)
Treasury stock at cost (4,431,583 and 4,422,470 shares, respectively) ..... (59,205) (58,934)
Retained earnings, substantially restricted ............................... 122,372 123,193
------------ ------------
Total shareholders' equity ................................................ 131,029 131,514
------------ ------------
Total liabilities and shareholders' equity ................................ $ 2,529,178 $ 2,473,356
============ ============
</TABLE>
Page 3 of 30
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1999 1998
---------- ----------
(In thousands, except
per share data)
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans ............................................ $ 23,643 $ 18,537
Mortgage-backed and related securities ........... 14,910 10,309
Debt and equity securities ....................... 3,306 1,152
Federal funds sold and overnight deposits ........ 17 398
Federal Home Loan Bank stock ..................... 605 385
Trading account securities ....................... 27 11
---------- ----------
Total interest and dividend income .................... 42,508 30,792
---------- ----------
INTEREST EXPENSE:
Deposits ......................................... 17,057 13,722
Advances and other borrowings .................... 11,288 6,541
---------- ----------
Total interest expense ................................ 28,345 20,263
---------- ----------
Net interest income before provision for loan losses .. 14,163 10,529
Provision for loan losses ............................. 500 480
---------- ----------
Net interest income ................................... 13,663 10,049
---------- ----------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees ............. 575 519
Depository fees and service charges .............. 1,239 952
Securities gains (losses) ........................ (16) 28
Gain on sales of loans ........................... 128 1,264
Insurance, annuity and brokerage commissions ..... 344 386
Gain (loss) on foreclosed properties ............. 7 (22)
Income from affordable housing ................... 769 1,346
Gain on sale of real estate held for sale ........ -- 733
Other income ..................................... 118 259
---------- ----------
Total other operating income, net ..................... 3,164 5,465
---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits ............... 10,228 5,384
Office building, including depreciation .......... 1,024 1,003
Furniture and equipment, including depreciation .. 1,038 1,014
Affordable housing expenses ...................... 786 1,409
Other general and administrative expenses ........ 2,240 2,183
---------- ----------
Total general and administrative expenses ............. 15,316 10,993
---------- ----------
Income before income tax expense ...................... 1,511 4,521
Income tax expense .................................... 1,305 756
---------- ----------
Net income ............................................ $ 206 $ 3,765
========== ==========
Basic earnings per share .............................. $ 0.02 $ 0.43
========== ==========
Diluted earnings per share ............................ $ 0.02 $ 0.41
========== ==========
</TABLE>
Page 4 of 30
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares of
Common Additional Unearned
Stock Common Paid-In ESOP Retained
Outstanding Stock Capital Compensation Earnings
------------------------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C> <C>
Three months ended December 31, 1998
Balance at September 30, 1998 - as
previously reported .......................... 4,787,683 $ 73 $ 75,310 $ (2,678) $ 112,362
2-for-1 stock split declared March 23, 1999 ...... 4,787,683 73 (73) -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 9,575,366 $ 146 $ 75,237 $ (2,678) $ 112,362
Net income ....................................... -- -- -- -- 3,765
Unrealized loss on securities available
for sale .................................... -- -- -- -- --
Reclassification adjustment for gains
realized in net income ...................... -- -- -- -- --
Income taxes ..................................... -- -- -- -- --
Comprehensive income .............................
Cash dividend - $0.08 per share .................. -- -- -- -- (745)
Purchase of treasury stock ....................... (217,987) -- -- -- --
Exercise of stock options, net ................... 40,582 -- -- -- (738)
Amortization of unearned compensation ............ -- -- 331 103 --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 ..................... 9,397,361 $ 146 $ 75,568 $ (2,575) $ 114,644
=========== =========== =========== =========== ===========
Three months ended December 31, 1999
Balance at September 30, 1999 .................... 10,156,770 $ 146 $ 82,426 $ (2,260) $ 123,193
Net income ....................................... -- -- -- -- 206
Unrealized loss on securities available
for sale .................................... -- -- -- -- --
Reclassification adjustment for gains
realized in net income ...................... -- -- -- -- --
Income taxes ..................................... -- -- -- -- --
Comprehensive loss ............................... --
Cash dividend - $0.09 per share .................. -- -- -- -- (915)
Purchase of treasury stock ....................... (28,967) -- -- -- --
Exercise of stock options, net ................... 19,854 -- -- -- (112)
Amortization of unearned compensation ............ -- -- 4,011 1,279 --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ..................... 10,147,657 $ 146 $ 86,437 $ (981) $ 122,372
=========== =========== =========== =========== ===========
<CAPTION>
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
--------------------------------------
(In thousands, except Shares of Common
Stock Outstanding)
<S> <C> <C> <C>
Three months ended December 31, 1998
Balance at September 30, 1998 - as
previously reported .......................... $ 381 $ (63,903) $ 121,545
2-for-1 stock split declared March 23, 1999 ...... -- -- --
----------- ----------- -----------
Balance at September 30, 1998 $ 381 $ (63,903) $ 121,545
Net income ....................................... -- -- 3,765
Unrealized loss on securities available
for sale .................................... (5,616) -- (5,616)
Reclassification adjustment for gains
realized in net income ...................... (28) -- (28)
Income taxes ..................................... 2,204 -- 2,204
-----------
Comprehensive income ............................. 325
Cash dividend - $0.08 per share .................. -- -- (745)
Purchase of treasury stock ....................... -- (8,408) (8,408)
Exercise of stock options, net ................... -- 993 255
Amortization of unearned compensation ............ -- -- 434
----------- ----------- -----------
Balance at December 31, 1998 ..................... $ (3,059) $ (70,958) $ 113,766
=========== =========== ===========
Three months ended December 31, 1999
Balance at September 30, 1999 .................... $ (13,057) $ (58,934) $ 131,514
Net income ....................................... -- -- 206
Unrealized loss on securities available
for sale .................................... (7,541) -- (7,541)
Reclassification adjustment for gains
realized in net income ...................... 17 -- 17
Income taxes ..................................... 2,841 -- 2,841
-----------
Comprehensive loss ............................... (4,477)
Cash dividend - $0.09 per share .................. -- -- (915)
Purchase of treasury stock ....................... -- (536) (536)
Exercise of stock options, net ................... -- 265 153
Amortization of unearned compensation ............ -- -- 5,290
----------- ----------- -----------
Balance at December 31, 1999 ..................... $ (17,740) $ (59,205) $ 131,029
=========== =========== ===========
</TABLE>
Page 5 of 30
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 206 $ 3,765
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses ................................................ 500 480
Depreciation, accretion and amortization ................................. 4,417 2,172
Deferred income taxes .................................................... 1,209 2,144
Securities (gains) losses ................................................ 16 (28)
Originations of loans held for sale ...................................... (9,220) (86,207)
Proceeds from sales of loans held for sale ............................... 14,879 83,952
ESOP Expense ............................................................. 5,290 434
Gain on sale of loans .................................................... 128 1,264
Gain on sale of real estate held for sale ................................ -- 733
Other, net ............................................................... 531 (4,117)
--------- ---------
Total adjustments .............................................................. 17,750 827
--------- ---------
Net cash provided by operating activities ...................................... 17,956 4,592
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity ............... -- 4
Principal repayments on mortgage-backed and related securities
held to maturity ....................................................... 5,195 6,029
Purchases of mortgage-backed securities available for sale ................. -- (200,950)
Proceeds from sales of mortgage-backed securities available
for sale ................................................................. 12,001 23,990
Principal repayments on mortgage-backed securities available
for sale ................................................................. 36,494 72,850
Purchase of debt and equity securities available for sale .................. -- (81,058)
Proceeds from sales of debt and equity securities available for sale ....... 1,644 47,005
Proceeds from maturities of debt and equity securities available for sale .. 2,635 20,518
Purchases of Federal Home Loan Bank stock .................................. (1,495) (5,900)
Redemption of Federal Home Loan Bank stock ................................. -- 1,200
Purchase of loans .......................................................... (14,985) (4,627)
Increase in loans, net of loans held for sale .............................. (96,650) (30,340)
Gain on sale of real estate held for sale .................................. -- (733)
Proceeds from sale of real estate held for sale ............................ -- 14,190
Increase in real estate held for investment ................................ (513) (333)
Purchases of premises and equipment, net ................................... (402) (528)
--------- ---------
Net cash used in investing activities .......................................... (56,076) (138,683)
--------- ---------
</TABLE>
Page 6 of 30
<PAGE> 7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ........................................................ 60,806 38,560
Proceeds from advances and other borrowings ..................................... 409,678 283,684
Repayments on advances and other borrowings ..................................... (393,740) (169,169)
Increase (decrease) in securities sold under agreements to repurchase ........... (13,561) 23,282
Decrease in advances from borrowers for taxes and insurance ..................... (7,966) (8,310)
Dividends paid .................................................................. (915) (745)
Stock option transactions ....................................................... 153 255
Purchase of treasury stock ...................................................... (536) (8,048)
------------ ------------
Net cash provided by financing activities ........................................... 53,919 159,509
------------ ------------
Increase in cash and cash equivalents ............................................... 15,799 25,418
Cash and cash equivalents:
Beginning of period ........................................................... 32,562 30,746
------------ ------------
End of period ................................................................. $ 48,361 $ 56,164
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 26,173 $ 19,352
Income taxes .................................................................. -- 100
Supplemental schedule of noncash investing and financing activities:
Mortgage loans secured as mortgage-backed securities .......................... $ 6,568 $ 3,959
Transfer from loans to foreclosed properties .................................. 367 156
Transfer of mortgage loans to mortgage loans held for sale .................... 3,041 18,591
</TABLE>
Page 7 of 30
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances
of St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included. Operating results
for the three-month period ended December 31, 1999 are not necessarily
indicative of the results which may be expected for the entire year
ending September 30, 2000.
Certain previously reported balances have been reclassified to conform
with the 2000 presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
The contractual or notional amounts of off-balance sheet financial
instruments are as follows:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
December 31, September 30,
1999 1999
---------- ----------
(In thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed-rate loans .................................. $ 3,362 $ 959
Variable-rate loans ............................... 33,989 50,043
Mortgage loans sold with recourse ..................... 22,506 17,053
Guarantees under IRB issues ........................... 29,878 24,484
Commercial letters of credit .......................... 2,433 2,695
Interest rate swap agreements (notional amount) ....... 360,000 350,000
Unused and open-ended lines of credit:
Consumer ............................................ 165,652 176,958
Commercial .......................................... 96,185 40,855
</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. Fixed rate
loan commitments as of December 31, 1999 have interest rates ranging
from 7.63% to 8.38%. 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
Page 8 of 30
<PAGE> 9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
extends credit on a secured basis. Collateral obtained consists
primarily of one- to four-family residences and other residential and
commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans
that are sold to secondary market agencies, primarily the Federal
National Mortgage Association ("FNMA"), with the servicing of these
loans being retained by the Company. The Company's exposure on loans
sold with recourse is the same as if the loans remained in the
Company's loan portfolio. The Company receives a larger servicing
spread on those loans being serviced than it would if the loans had
been sold without recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party. Potential
losses on the letters of credit are the notional amount of the
guarantees less the value of the real estate collateral. At December
31, 1999, appraised values of the real estate collateral exceeded the
amount of the guarantees.
Interest rate swap agreements generally involve the exchange of fixed
and variable rate interest rate payments without the exchange of the
underlying notional amount on which the interest rate payments are
calculated. The notional amounts of these agreements represent the
amounts on which interest payments are exchanged between the
counterparties. The notional amounts do not represent direct credit
exposures. The Company is exposed to credit-related losses in the event
of nonperformance by the counterparties on interest rate payments, but
does not expect any counterparty to fail to meet their obligations. The
fixed receive-floating pay agreements were entered into as hedges of
the interest rates on fixed rate certificates. Interest receivable or
payable on interest rate swaps is recognized using the accrual method.
The use of interest rate swaps enables the Company to synthetically
alter the repricing characteristics of designated interest-bearing
liabilities.
Page 9 of 30
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The agreements at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 15,000 Fixed Receive-Floating Pay 2007 2000 6.90% 6.03%
5,000 Fixed Receive-Floating Pay 2003 2000 6.47% 6.12%
15,000 Fixed Receive-Floating Pay 2008 2000 6.30% 5.93%
10,000 Fixed Receive-Floating Pay 2004 2000 6.05% 6.02%
5,000 Fixed Receive-Floating Pay 2003 2000 6.43% 6.12%
15,000 Fixed Receive-Floating Pay 2005 2000 6.00% 5.96%
5,000 Fixed Receive-Floating Pay 2009 2001 6.25% 5.99%
10,000 Fixed Receive-Floating Pay 2004 2000 6.63% 6.06%
10,000 Fixed Receive-Floating Pay 2004 2000 7.00% 6.04%
10,000 Fixed Receive-Floating Pay 2006 2000 7.00% 5.70%
10,000 Fixed Receive-Floating Pay 2009 2000 6.00% 6.07%
10,000 Fixed Receive-Floating Pay 2009 2000 6.25% 5.97%
10,000 Fixed Receive-Floating Pay 2009 2000 6.30% 5.89%
15,000 Fixed Receive-Floating Pay 2009 2000 7.00% 6.03%
15,000 Fixed Receive-Floating Pay 2009 2000 7.00% 6.04%
15,000 Fixed Receive-Floating Pay 2005 2000 6.25% 6.04%
15,000 Fixed Receive-Floating Pay 2003 2000 6.00% 6.01%
15,000 Fixed Receive-Floating Pay 2005 2000 6.10% 6.04%
10,000 Fixed Receive-Floating Pay 2008 2000 5.85% 6.01%
10,000 Fixed Receive-Floating Pay 2009 2000 6.05% 6.35%
10,000 Fixed Receive-Floating Pay 2007 2000 7.13% 5.91%
15,000 Fixed Receive-Floating Pay 2007 2000 7.05% 5.91%
10,000 Fixed Receive-Floating Pay 2009 2000 6.00% 6.08%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 6.04%
10,000 Fixed Receive-Floating Pay 2006 2000 6.13% 6.09%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 5.99%
10,000 Fixed Receive-Floating Pay 2009 2000 7.13% 6.09%
10,000 Fixed Receive-Floating Pay 2005 2000 7.00% 6.02%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 5.83%
15,000 Fixed Receive-Floating Pay 2004 2000 6.50% 5.18%
5,000 Fixed Receive-Floating Pay 2004 2000 6.50% 5.69%
10,000 Fixed Pay-Floating Receive 2001 -- 7.05% 7.06%
10,000 Fixed Pay-Floating Receive 2000 -- 6.75% 7.13%
</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. The interest
rate swaps are off-balance sheet items; therefore, at December 31,
1999, the gross unrealized gains and losses of $284,000 and $13.3
million, respectively, equal the net fair value loss of the interest
rate swaps of approximately $13.0 million.
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 these lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for
these commitments may include, but may not be limited to, real estate,
investment securities, equipment, accounts receivable, inventory, and
deposits maintained at the Company.
Page 10 of 30
<PAGE> 11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES:
U.S. Treasury obligations and obligations of
U.S. Government Agencies ...................... $ 220,284 $ -- $ 9,121 $ 211,163
Corporate notes and bonds ....................... 1,000 -- 1 999
Marketable equity securities .................... 217 -- -- 217
---------- ---------- ---------- ----------
TOTAL DEBT AND EQUITY SECURITIES ................. $ 221,501 $ -- $ 9,122 $ 212,379
========== ========== ========== ==========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC ......................................... $ 933 $ -- $ 12 $ 921
FNMA .......................................... 29,610 -- 1,642 27,968
Private issue ................................. 68,026 282 1,790 66,518
REMICs:
FHLMC ......................................... 149,320 41 4,435 144,926
FNMA .......................................... 36,305 13 909 35,409
Private issue ................................. 607,232 156 11,642 595,746
CMO residual .................................... 36 -- -- 36
---------- ---------- ---------- ----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................. $ 891,462 $ 492 $ 20,430 $ 871,524
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
DEBT SECURITIES:
State and municipal obligations ........... $ 810 $ 18 $ -- $ 828
---------- ---------- ---------- ----------
TOTAL DEBT SECURITIES ..................... $ 810 $ 18 $ -- $ 828
========== ========== ========== ==========
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FNMA .................................... $ 246 $ -- $ 1 $ 245
Private issue ........................... 34,034 4 613 33,425
---------- ---------- ---------- ----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ........................... $ 34,280 $ 4 $ 614 $ 33,670
========== ========== ========== ==========
</TABLE>
During the three month periods ended December 31, 1999 and 1998, gross
proceeds from the sale of securities available for sale totaled
approximately $13.6 million and $24.0 million, respectively. The gross
realized gains on such sales totaled approximately $30,000 and $9,000
for the three month periods ended December 31, 1999 and 1998,
respectively. The gross realized losses on such sales totaled
approximately $54,000 and $31,000 for the three-month periods ended
December 31, 1999 and 1998, respectively.
Page 11 of 30
<PAGE> 12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
At December 31, 1999 and September 30, 1999, $467.2 million and $484.2
million, respectively, of mortgage-related securities were pledged as
collateral for Federal Home Loan Bank ("FHLB") advances.
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
-----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
First mortgage - one- to four-family ......... $ 341,041 $ 294,438
First mortgage - residential construction .... 88,289 103,100
First mortgage - multi-family ................ 176,653 160,593
Commercial real estate ....................... 275,702 251,914
Home equity .................................. 167,879 156,695
Commercial and agriculture ................... 121,454 123,899
Consumer secured by real estate .............. 87,933 89,991
Interim financing and consumer loans ......... 12,919 13,744
Indirect auto ................................ 44,357 44,299
Education .................................... 1,357 984
------------- -------------
Total gross loans ........................ 1,317,584 1,239,657
------------- -------------
Less:
Loans in process ......................... 87,792 106,960
Unearned insurance premiums .............. 143 (21)
Deferred loan and guarantee fees ......... 471 614
Purchased loan discount .................. 752 737
Allowance for loan losses ................ 9,764 9,356
------------- -------------
Total deductions ......................... 98,922 117,646
------------- -------------
Total loans receivable ....................... 1,218,662 1,122,011
Less: First mortgage loans held for sale .... 2,833 8,620
------------- -------------
Loans receivable, net ........................ $ 1,215,829 $ 1,113,391
============= =============
</TABLE>
Page 12 of 30
<PAGE> 13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Beginning Balance ............ $ 9,356 $ 7,530
Charge-offs:
Real estate - mortgage ..... (34) --
Commercial loans ........... -- (10)
Home equity loans .......... (30) --
Consumer ................... (51) (42)
--------- ---------
Total charge-offs ............ (115) (52)
--------- ---------
Recoveries:
Home equity loans .......... 10 --
Consumer ................... 13 6
--------- ---------
Total recoveries ............. 23 6
--------- ---------
Net charge-offs ............. (92) (46)
--------- ---------
Provision .................... 500 480
--------- ---------
Ending balance ............... $ 9,764 $ 7,964
========= =========
</TABLE>
(7) Earnings Per Share
Basic earnings per share of common stock for the three-month periods
ended December 31, 1999 and 1998, have been determined by dividing net
income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the three month periods ended December 31, 1999 and
1998, have been determined by dividing net income for the period by the
weighted average number of shares of common stock outstanding during
the period adjusted for the dilutive effect of outstanding stock
options. Book value per share of common stock at December 31, 1999 and
September 30, 1999 have been determined by dividing total shareholders'
equity by the number of shares of common stock outstanding during the
period adjusted for the dilutive effect of outstanding stock options at
the respective dates. Stock options are regarded as potential common
stock and are, therefore, considered in per share calculations. Common
stock equivalents are computed using the treasury stock method. Total
shares outstanding for earnings per share calculation purposes have
been reduced by the Employee Stock Ownership Plan ("ESOP") shares that
have not been committed to be released. The Company incurred and
additional expense in the three month period ended December 31, 1999
related to the voluntary acceleration of loan principal owed to the
Company's ESOP, which accounted for a charge to diluted earnings per
share of approximately $0.43.
Page 13 of 30
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------
1999 1998
------------- -----------
<S> <C> <C>
Net income for the period .............. $ 206,000 $ 3,765,000
============ ============
Average common shares issued ........... 14,579,240 14,579,240
Average net Treasury shares ............ 4,421,958 5,298,552
Unallocated ESOP shares ................ 306,957 513,426
------------ ------------
Average common shares
outstanding during the period ...... 9,850,325 8,767,262
Effect of dilutive stock options
outstanding ........................ 368,420 496,582
------------ ------------
Diluted average common shares
outstanding ......................... 10,218,745 9,263,844
============ ============
Basic earnings per share ............... $ 0.02 $ 0.43
Diluted earnings per share ............. $ 0.02 $ 0.41
</TABLE>
The computation of book value per common share is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ ------------
<S> <C> <C>
Common shares outstanding at the end
of the period ................................ 9,951,442 9,705,600
Incremental shares relating to dilutive stock
options outstanding at the end of the period .. 232,728 370,243
------------ ------------
10,184,170 10,075,843
============ ============
Total shareholders' equity at the end of
the period .................................... $131,029,000 $131,514,000
Book value per common share ...................... $ 12.87 $ 13.05
</TABLE>
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less
than the fair value of the underlying common stock as of the date of
the option grant, and the maximum term cannot exceed ten years. Stock
options awarded to directors may be exercised at any time or on a
cumulative basis over varying time periods, provided the grantee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At December 31, 1999, 184,548 shares were reserved for future grants.
Further information concerning the options is as follows:
Page 14 of 30
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Three months ended December 31,
----------------------------------------------------------------
1999 1998
----------------------------------------------------------------
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period ..... $ 1,565,682 $ 15.70 $ 1,163,620 $ 10.51
Granted ................................ 5,000 22.00 155,616 19.98
Canceled ............................... -- -- -- --
Exercised .............................. (19,854) 7.67 (91,000) 5.00
------------- ------------- ------------- -------------
Outstanding at end of period ........... $ 1,550,828 $ 15.83 1,228,236 $ 12.12
============= ============= ============= =============
Options exercisable .................... 420,188 $5.00 - 22.00 524,012 $10.00 - 22.25
============= ============= ============= =============
</TABLE>
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Three months ended Dec. 31,
1999 1998
------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Federal income tax expense at statutory rate of 35% ........ $ 529 $ 1,582
State income taxes, net of Federal income tax benefit ...... 11 99
Tax exempt interest ........................................ (31) (36)
Non-deductible compensation ................................ 1,404 116
Acquisition intangible amortization ........................ 54 62
Affordable housing credits ................................. (650) (1,103)
Other, net ................................................. (12) 36
--------- ---------
$ 1,305 $ 756
========= =========
</TABLE>
(10) Acquisitions
In January 1999, the Company completed the acquisition of Reliance
Bancshares, Inc. for $25.4 million in stock and cash. Under the terms
of the agreement each share of Reliance common stock was converted into
either .25 shares of common stock of the Company or $10.40 in cash in
accordance with elections made by Reliance shareholders and subject to
certain specified allocation and proration procedures. The Company
issued 367,283 shares of common stock in connection with this
transaction. The acquisition was treated as a purchase transaction for
accounting purposes. The related accounts and results of operations
have been included in the Company's consolidated financial statements
from the date of acquisition. The acquisition of Reliance Bancshares,
Inc. added $40.0 million in assets, including additions of $25.7
million to net loans and $16.6 million to deposits.
Page 15 of 30
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(11) Changes in Accounting Policy
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which established new rules for the recognition
and measurement of derivatives and hedging activities. It requires all
derivatives to be recorded on the balance sheet at fair value, although
the timing of recognition in earnings will depend on the classification
of the hedge according to criteria established by SFAS 133. Changes in
the fair value of derivatives that do not meet these criteria are
required to be included in earnings in the period of the change.
The FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133" in June
1999, which statement deferred the effective date of Statement No. 133.
Statement No. 133, as amended, is now effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, although earlier
adoption is encouraged.
Statement No. 133 generally requires that derivatives embedded in
hybrid instruments be separated from their host contracts and be
accounted for separately as derivative contracts. For instruments
existing at the date of adoption, Statement No. 133, as modified by
Statement No. 137, provides an entity the option of not applying this
provision to such hybrid instruments entered into before January 1,
1999 and not substantially modified thereafter.
The Company will adopt this standard on October 1, 2000 and expects
that it will not materially effect results of operations or financial
position.
(12) Segment Information
The Company's operations include four strategic business segments:
Retail Banking, Commercial Banking, Mortgage Banking and Investments.
Financial performance is primarily based on the individual segments
direct contribution to Company net income. The segments do not include
the operations of the parent holding Company, as a holding company, nor
the operations of the Bank's operating subsidiaries. Capital is not
allocated to the segments and thus net interest income related to the
free funding associated with capital is not included in the individual
segments. The Company only charges the segments with direct expenses.
Costs associated with administrative and centralized back-office
support areas of the Bank are not allocated to the segments. Income
taxes are allocated to the segments based on the Bank's effective tax
rate prior to the consolidation with its affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits,
branch and Automated Teller Machine ("ATM") network, consumer lending
operations, annuity and brokerage services and call center. The segment
includes a much higher level of interest-bearing liabilities than
earning assets. The Company views this segment as a significant funding
vehicle for the Commercial Banking and Mortgage Banking segments. The
Company's transfer pricing model has the effect of viewing this segment
as a comparison to the cost of wholesale funds.
The Commercial Banking segment consists of the Bank's commercial,
commercial real estate and multifamily lending operations. It also
includes lending related to the Company's affordable housing
subsidiary.
The Mortgage Banking segment consists of the Bank's single-family
mortgage lending operation. Single-family lending consists of three
primary operations: portfolio lending, lending for sale in the
secondary market and loan servicing.
The Investment segment consists of the Company's portfolio of
mortgage-backed and related securities, its debt and equity securities
and other short-term investments. This segment also includes the
Company's wholesale sources of funding including FHLB advances,
brokered certificates of deposits, reverse repurchase agreements and
federal funds purchased.
Page 16 of 30
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Quarter ended December 31, 1999
Net interest income $ 5,828 $ 3,625 $ 1,774 $ 2,042 $ 13,269
Provision for loan losses 197 237 66 -- 500
Other operating income 1,755 175 395 (20) 2,305
General and administrative expenses 5,156 831 997 189 7,173
Income taxes 752 923 373 619 2,667
------------- ------------- ------------- ------------- -------------
Segment profit 1,478 1,809 733 1,214 5,234
============= ============= ============= ============= =============
Segment average assets $ 309,853 $ 517,113 $ 368,880 $1,197,636 $2,393,482
============= ============= ============= ============= =============
Quarter ended December 31, 1998
Net interest income $ 3,785 $ 2,741 $ 1,320 $ 1,473 $ 9,319
Provision for loan losses 127 293 60 -- 480
Other operating income 1,526 228 1,433 (26) 3,161
General and administrative expenses 5,768 698 1,138 181 7,785
Income taxes (205) 650 521 428 1,394
------------- ------------- ------------- ------------- -------------
Segment profit (379) 1,328 1,034 838 2,821
============= ============= ============= ============= =============
Segment average assets $ 281,772 $ 362,086 $ 279,704 $ 838,958 $1,762,520
============= ============= ============= ============= =============
</TABLE>
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Quarter ended December 31,
1999 1998
<S> <C> <C>
Net interest income and other operating income
Total for segments $ 15,574 $ 12,480
Unallocated transfer pricing credit (primarily on capital) 1,469 2,128
Income from affordable housing subsidiary 769 1,346
Gain on sale of real estate not allocated to segments -- 733
Holding company interest expense (317) (354)
Elimination of intercompany interest income (285) (564)
Other 117 225
------------- -------------
Consolidated total revenue $ 17,327 $ 15,994
============= =============
Profit
Total for segments $ 5,234 $ 2,821
Unallocated transfer pricing credit (primarily on capital) 881 1,277
Unallocated administrative and centralized support costs(a) (1,447) (988)
Holding company net loss (230) (308)
Elimination of intercompany interest income (171) (338)
Gain on sale of real estate not allocated to segments -- 440
Affordable housing tax credits 650 1,103
Additional ESOP expense not allocated to segments (4,385) --
Other (326) (242)
------------- -------------
Consolidated net income $ 206 $ 3,765
============= =============
Average assets
Total for segments $ 2,393,482 $ 1,762,520
Elimination of intercompany loans (13,426) (18,056)
Other assets not allocated 138,428 130,309
------------- -------------
Consolidated average assets $ 2,518,484 $ 1,874,773
============= =============
</TABLE>
(a) After-tax effect of $2.4 million and $1.6 million of general and
administrative expenses for the quarters ended December 31, 1999 and 1998,
respectively.
Page 17 of 30
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operations and business of the Company. The
Company cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and 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.
YEAR 2000
The Company believes that it has successfully completed its Year 2000
activities. No events or issues occurred that had a material effect on the
Company's results of operations on financial position. The Company's Year 2000
compliance efforts had included completing an inventory of all products and
services that could have been affected by Year 2000 date related issues in
compliance with the Federal Financial Institution's Examination Council
("FFIEC") Year 2000 directives that were published in 1996, which established
policy guidelines and time frames to guide Year 2000 compliance
The Company did not experience any computer programming failures related to Year
2000 issues that had a material effect on business operations. The Company is
not aware of any significant problems experienced by its customers regarding the
Year 2000 which resulted in financial difficulties that could result in
customer's ability to repay their loans.
The estimated costs of the Year 2000 issues did not have a significant impact on
the Company's results of operations, liquidity or capital resources. Direct
costs of the Year 2000 issue are not expected to exceed $500,000 per year for
the fiscal years ending September 30, 1999 and 2000. The primary direct costs
included direct costs paid to vendors or others related to Year 2000
preparedness and the income statement effect of hardware and software purchased
to replace items not Year 2000 compliant. The figure did not include costs
considered by the Company to be indirect costs; primarily the time and effort of
many of the Company's employees to prepare for the Year 2000 in addition to
performing their normal work routines.
FINANCIAL CONDITION
The Company's total assets increased $55.8 million or 2.3% to $2.53 billion at
December 31, 1999 from $2.47 billion at September 30, 1999. The primary area of
growth was an increase of $102.4 million in loans receivable, including loans
held for sale, partially offset by a decrease of $48.4 million in
mortgage-backed and related securities available for sale. Funding the increase
in assets were increases in deposits of $60.8 million and increases in
borrowings of $2.8 million, partially offset by a decrease of $8.0 million in
advances from borrowers for taxes and insurance. The Company's ratio of
shareholders' equity to total assets was 5.18% at December 31, 1999, compared to
5.32% at September 30, 1999. The Company's diluted book value per share was
$12.87 at December 31, 1999, compared to $13.05 at September 30, 1999.
Loans receivable, including mortgage loans held for sale, increased $102.4
million to $1.22 billion at December 31, 1999 from $1.11 billion at September
30, 1999. The Company has been actively diversifying and growing its loan
portfolio and, as a result, the increase in loans was due to a variety of
lending areas including commercial real estate, single-family construction,
multi-family, commercial and automobile lending. For the three month period
ended December 31, 1999, the Company originated approximately $182.6 million in
loans, as compared to $236.3 million for the same period in the prior year. Of
the $182.6 million in loans originated, $32.0 million were in commercial loans,
$48.5 million were in consumer and interim financing loans and $102.1 million
were in first mortgage loans.
Mortgage-backed and related securities, including securities available for sale,
decreased $53.6 million to $905.8 million at December 31, 1999 from $959.4
million at September 30, 1999. The assets are financed primarily with FHLB
advances or brokered certificates of deposit that generally match the expected
repricing period or average lives of the respective securities. The Company
purchases mortgage-backed securities that are guaranteed by both government
sponsored enterprises such as the Federal Home Loan Mortgage Corporation
("FHLMC"), FNMA and the Government National Mortgage Association ("GNMA"), as
well as securities that are issued by private mortgage security conduits. These
securities have credit ratings of "A" or better at the time of purchase and meet
the FFIEC definition of low-risk securities. Mortgage-backed securities issued
by government sponsored enterprises generally increase the quality of the
Company's assets by virtue of the guarantees that back them. When the
intermediary is a private entity, neither the principal or interest on such
securities is guaranteed. In addition, loans that back private mortgage-backed
securities generally are non-conforming loans and consequently have a greater
amount of credit risk and generally will have a higher yield.
Page 18 of 30
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Deposits increased $60.8 million to $1.55 billion at December 31, 1999 from
$1.48 billion at September 30, 1999. The increase in deposits was primarily due
to an increase of $79.0 million in certificates of deposit, partially offset by
decreases of $12.0 million in passbook accounts and and $5.9 million in money
market demand deposits. At December 31, 1999, the Company had approximately
$481.2 million in brokered certificates of deposit compared with $421.8 million
at September 30, 1999. The brokered deposits generally consist of terms from
three months to ten years in maturity with interest rates that approximate the
Company's retail certificate rates. The level of deposit flows during any given
period is heavily influenced by factors such as the general level of interest
rates as well as alternative yields that investors may obtain on competing
instruments, such as money market mutual funds. The Company believes that the
likelihood for retention of brokered certificates of deposit is more a function
of the rate paid on such accounts, as compared to retail deposits which may be
established due to branch location or other undefined reasons.
Advances and other borrowings increased by $2.8 million to $837.5 million at
December 31, 1999 from $834.7 million at September 30, 1999. The increase is
primarily due to overnight Federal Funds borrowings partially offset by
decreases in reverse repurchase agreements and overnight borrowings from the
FHLB. Short term borrowings increased $117.6 million to $706.4 million at
December 31, 1999, compared to $588.8 million at September 30, 1999. Long term
borrowings decreased $114.8 million to $131.1 million at December 31, 1999,
compared to $245.9 million at September 30, 1999. At December 31, 1999, $185.0
million of the short term borrowings are callable FHLB advances with maturities
from five to ten years and are callable by the FHLB after three to six months.
At December 31, 1999, the Company had $360.0 million in interest rate swaps
outstanding compared with $350.0 million at September 30, 1999. The swaps are
designed to offset the changing interest payments of some of the Company's
borrowings and brokered certificates. Fixed receive-floating pay swaps totaled
$340.0 million at December 31, 1999 and were entered into to hedge interest
rates on brokered deposits and retail certificates of deposit used to fund the
purchase of floating rate securities. Fixed receive-floating pay swaps will
provide for a lower interest expense (or interest income) in a falling rate
environment while adding to interest expense in a rising rate environment. Fixed
pay-floating receive swaps totaled $20.0 million at December 31, 1999 and were
entered into to hedge interest rates on investments. During the three month
period ended December 31, 1999, the Company recorded a net reduction of interest
expense of $611,000 as a result of the Company's interest rate swap agreements
compared with a net reduction of $496,000 for the three months ended December
31, 1998.
There are certain risks associated with swaps, including the risk that the
counterparty may default and that there may not be an exact correlation between
the indices on which the swap agreements are based and the terms of the hedged
liabilities. In order to offset these risks, the Company generally enters into
swap agreements only with nationally recognized securities firms and monitors
the credit status of counterparties, the level of collateral for such swaps and
the correlation between the hedged liabilities and indices utilized.
RESULTS OF OPERATIONS
NET INCOME. Net income for the three month period ended December 31, 1999 was
$206,000, a decrease of $3.6 million from $3.8 million for the same period in
the prior year, due to an increase in general and administrative expenses as a
result of an additional expense of $4.9 million due to the voluntary
acceleration of loan principal repayment to the Company's ESOP, a decrease in
other operating income and an increase in income tax expense partially offset by
an increase in net interest income.
Page 19 of 30
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Return on average assets.................. 0.03% 0.80%
Return on average equity.................. 0.62% 12.91%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $3.6 million or 34.5% to $14.2 million for the three-month period
ended December 31, 1999 compared to the same period in the prior year. The
increase was due primarily to an increase of $660.8 million in average earning
assets for the three-month period ended December 31, 1999. Over the past year,
the margin has been affected by decreasing interest rate spreads that the
Company has been experiencing in its asset and liability base primarily due to
the rising level of interest rates that have occurred over that period.
Total interest income increased $11.7 million or 38.0% to $42.5 million for the
three-month period ended December 31, 1999, compared to $30.8 million for the
three month period ended December 31, 1998. The increase in interest income was
primarily the result of increases in interest on loans, mortgage-backed and
related securities and investment securities, partially offset by a slight
decrease in income from federal funds sold and overnight deposits for the
period. The increase in interest on loans was primarily the result of an
increase in the average balance of loans to $1.18 billion from $905.9 million
for the three month periods ended December 31, 1999 and 1998, respectively,
partially offset by a decrease in the average yield on loans to 7.95% from 8.12%
for the same period in the prior year. The increase in the average balance of
loans is due primarily to the Company's recent efforts to emphasize commercial,
consumer and home equity lending. Although interest rates are generally higher
then the previous year, the rates on loans being originated during much of the
year were lower than the loans in the existing portfolio. As loans repay, they
are replaced in the Company's portfolio by new loans which generally have lower
interest rates than the loans previously put in the portfolio. The increase in
interest income on mortgage-backed and related securities was primarily the
result of an increase in the average balance of mortgage-backed and related
securities to $952.4 million from $682.7 million for the three month periods
ended December 31, 1999 and 1998, respectively, in conjunction with an increase
in the average yield on such securities to 6.23% for the three months ended
December 31, 1999 from 5.99% for the same period in the prior year. The increase
in interest income on debt and equity securities was the result of an increase
in the average balance to $224.6 million from $90.1 million for the three month
periods ended December 31, 1999 and 1998, respectively, in conjunction with an
increase in the average yield on such securities to 5.85% for the three months
ended December 31, 1999 from 5.08% for the same period in the prior year.
Total interest expense increased $8.0 million or 39.9% to $28.3 million for the
three month period ended December 31, 1999, compared to $20.3 million for the
three month period ended December 31, 1998. The increase in interest expense was
the result of increases in the average balances of deposits and advances and
other borrowings. The average balances of deposits were $1.44 billion for the
three-month period ended December 31, 1999, as compared to $1.17 billion for the
same period in the prior year. The increases in the balances of deposits are due
to the Company's offering of additional deposit products and the use of brokers
to sell certificates of deposit. The average cost of deposits increased slightly
to 4.71% for the three month period ended December 31, 1999, from 4.65% for the
same period in the prior year. As part of a continuing strategy, the Company
continues to offer deposit products that compete more effectively with money
market funds and other products offered by non-financial institutions. Such
accounts have generally changed the Company's traditional mix of deposit
accounts to one that is more adjustable to current interest rates such as the
money market demand account. This has resulted in passbook and certificate of
deposit accounts representing a lower percentage of the Company's total deposit
portfolio. The average balance of advances and other borrowings were $849.7
million for the three month period ended December 31, 1999, as compared to
$504.3 million for the same period in the prior year. The average cost of
advances and other borrowings increased to 5.33% for the three-month period
ended December 31, 1999, from 5.21% for the same period in the prior year. The
borrowings are primarily adjustable-rate FHLB advances, reverse repurchase
agreements and Federal Funds purchased which have repriced to reflect the
changes in rate levels associated with the respective borrowing rate indexes
from the same period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the three month period ended December
31, 1999 and 1998, respectively. Tax-exempt investments are immaterial and the
tax-equivalent method of presentation is not included in the schedule.
Page 20 of 30
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------
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 ........ $ 1,482 $ 17 4.56% $ 30,291 $ 398 5.21%
Trading account securities ....................... 1,197 27 8.97 539 11 8.10
Debt and equity securities ....................... 224,648 3,306 5.85 90,055 1,152 5.08
Mortgage-backed and related securities ........... 952,370 14,910 6.23 682,694 10,309 5.99
Loans:
First mortgage ................................. 748,045 14,482 7.70 531,146 10,504 7.85
Home equity .................................... 161,553 3,450 8.50 142,599 3,003 8.35
Consumer ....................................... 148,084 3,119 8.38 138,579 3,050 8.73
Commercial and agricultural .................... 124,704 2,592 8.27 93,611 1,980 8.39
----------- ----------- ----------- -----------
Total loans ................................ 1,182,386 23,643 7.95 905,935 18,537 8.12
Federal Home Loan Bank stock ..................... 32,013 605 7.52 23,785 385 6.42
----------- ----------- ----------- -----------
Total earning assets ....................... 2,394,096 42,508 7.06 1,733,299 30,792 7.05
Valuation allowances ............................. (31,764) ----------- (10,851) -----------
Cash and due from banks .......................... 37,603 33,059
Other assets ..................................... 118,549 119,266
----------- -----------
Total assets ............................... 2,518,484 $ 1,874,773
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts .................................. $ 76,388 135 0.70 $ 68,615 215 1.24
Money market demand accounts .................. 362,721 3,980 4.37 332,906 3,748 4.47
Passbook ...................................... 113,145 631 2.22 131,060 993 3.01
Certificates of deposit ....................... 889,770 12,311 5.50 636,795 8,766 5.46
----------- ----------- ----------- -----------
Total interest-bearing deposits .................. 1,442,024 17,057 4.71 1,169,576 13,722 4.65
Advances and other borrowings .................... 841,751 11,282 5.33 497,288 6,534 5.21
Advances from borrowers for taxes and insurance... 7,991 6 0.30 7,014 7 0.40
----------- ----------- ----------- -----------
Total interest-bearing liabilities ........ 2,291,766 28,345 4.92 1,673,878 20,263 4.80
Non interest-bearing deposits .................... 78,534 72,939
Other liabilities ................................ 15,793 12,282
Shareholders' equity ............................. 132,391 115,674
----------- -----------
Total liabilities and shareholders' equity ....... $ 2,518,484 $ 1,874,773
=========== ===========
Net interest income .............................. $ 14,163 $ 10,529
=========== ===========
Net yield on interest-earning assets ............. 2.35 2.41
Interest rate spread ............................. 2.14 2.25
Ratio of earning assets to interest-bearing
liabilities.................................... 104.47 103.55
</TABLE>
Page 21 of 30
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
-------------------------
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Beginning balance ........................... $ 9,356 $ 7,530
Provision for loan losses ................... 500 480
Recoveries .................................. 23 6
Charge-offs ................................. (115) (52)
---------- ----------
Ending balance .............................. $ 9,764 $ 7,964
========== ==========
Ratio of allowance for loan losses to
Gross loans receivable at the end
of the period .......................... 0.74% 0.79%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ...................... 333.36% 247.48%
Ratio of net charge-offs to average
Gross loans (annualized) ............... 0.03% 0.02%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for potential losses as of December 31, 1999, based upon its current evaluation
of loan delinquencies, non-performing loans, charge-off trends, economic
conditions and other factors. Such evaluation, which includes a review of all
loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an accurate provision for loan
losses. At December 31, 1999, the provision for loan losses was $500,000
compared to $480,000 for the same period in the prior year. The Company's loan
portfolio is significantly more diversified than in previous years. The Company
has and continues to expect to increase its commercial, consumer and commercial
real estate loan portfolios which are generally presumed to have more risk than
single-family mortgage loans. Charge-offs for the three month period ended
December 31, 1999 were $115,000, compared to $52,000 for the three month period
ended December 31, 1998. The Company believes that the allowance for loan losses
is adequate to provide for potential anticipated losses based upon current known
conditions.
OTHER OPERATING INCOME. Other operating income decreased by $2.3 million to $3.2
million for the three month period ended December, 1999, compared to $5.5
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:
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------
1999 1998
------------ -------------
(Dollars in thousands)
<S> <C> <C>
Other operating income ...................... $ 3,164 $ 5,465
Percent of average assets (annualized) ...... 0.50% 1.16%
</TABLE>
The decrease was due primarily to decreases in gains on sales of mortgage loans,
income from the Company's affordable housing subsidiary and gains on the sale of
real estate held for sale, offset by increases in depository fees and service
charges during the three month period ended December 31, 1998. Gains on the sale
of mortgage loans decreased to $128,000 for the three month period ended
December 31, 1999, respectively, compared to gains of $1.3 million for the same
period in the prior year, due to a decreased level of sales. The Company's
volume of mortgage loan sales were $14.9 million for the three
Page 22 of 30
<PAGE> 23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
month period ended December 31, 1999, compared to $84.0 million for the three
month period ended December 31, 1998. The higher interest rate environment has
decreased the level of the Company's fixed rate loan production which is sold
into the secondary market. Income from depository fees and service charges
increased to $1.24 million from $952,000 for the three-month period ended
December 31, 1999 and 1998, respectively. The Company has been increasing the
number of checking accounts in its deposit base which has resulted in higher
levels of fee income. Income from the operations of the Company's affordable
housing subsidiary (which represents primarily rental income) decreased to
$769,000 million from $1.3 million for the three month period ended December 31,
1999 and 1998, respectively. The Company realized a gain of $733,000 on the sale
of 9 affordable housing properties during the three months ended December 31,
1998. The Company currently has 12 properties fully in operation compared to 16
in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $4.3 million or 39.3% to $15.3 million for the three month period
ended December 31, 1999, compared to $11.0 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:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------------------
1999 1998
------------ ----------
(Dollars in thousands)
<S> <C> <C>
General and administrative expenses ......... $ 15,316 $ 10,933
Percent of average assets (annualized) ...... 2.43% 2.33%
</TABLE>
The increase in general and administrative expenses is due primarily to an
additional ESOP expense of $4.9 million offset partially by a decrease in
operating expenses from the affordable housing subsidiary of $623,000 for the
three months ended December 31, 1999 as compared to the same period in the prior
year. The Company made a voluntary acceleration of loan principal to its ESOP
plan. The increased payment resulted in additional expense of $4.9 million in
the current quarter. The Company also intends to pay off the remaining ESOP loan
on an accelerated basis during the remainder of the fiscal year ending September
30, 2000. Thus, additional ESOP expense will be recognized. The expense is
recognized as ESOP shares are earned by employees as defined by applicable
regulations. The estimated ESOP expense for the year ended September 30, 2000,
including additional principal payments is expected to be $9.2 million ($0.81
per diluted share after-tax) compared with $1.7 million ($0.16 per diluted share
after-tax) for the previous year. However, the actual will be determined by the
average market price of the Company's stock during the year.
INCOME TAX EXPENSE. Income tax expense increased to $1.3 million for the three
months ended December 31, 1999, compared with $756,000 for the three months
ended December 31, 1998. The effective tax rate for the three-month period ended
December 31, 1999 was 86.4%, compared with 16.72% in the prior year. The primary
reason for the change in the effective tax rate is that the majority of the ESOP
expense is non-deductible. Also there was a decline in the amount of income tax
credits received on the Company's affordable housing investments due to the sale
of a number of the projects.
ASSET QUALITY
Total non-performing assets were $3.8 million, or 0.15% of total assets at
December 31, 1999, compared with $3.2 million, or 0.13% of total assets at
September 30, 1999. 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, 1999 and September 30, 1999 include a
single $798,000 commercial real estate loan on a shopping center.
Page 23 of 30
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans ........................ $ 3,418 $ 2,840
Foreclosed properties ....................... 375 371
---------- ----------
Non-performing assets ....................... $ 3,793 $ 3,211
========== ==========
Non-performing loans to gross loans ......... 0.26% 0.23%
Non-performing assets to gross assets ....... 0.15% 0.13%
</TABLE>
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.
Impaired loans totaled $804,000 at December 31, 1999 compared to $809,000 at
September 30, 1999. These loans had associated impairment reserves of $400,000
at December 31, 1999 and September 30, 1999.
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, 1999, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 17.52% 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, 1999 was a negative 20.27% 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.
Page 24 of 30
<PAGE> 25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of December 31,
1999.
<TABLE>
<CAPTION>
More than
Within Four to One Year
Three Twelve to Three
Months Months Years
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed ...................................... $ 60,135 $ 37,392 $ 47,675
Variable ................................... 123,387 118,787 148,324
Consumer loans (2) .............................. 168,578 65,155 32,413
Mortgage-backed and related securities .......... 3,947 10,599 14,236
Assets available for sale:
Mortgage loans ............................. 2,833 -- --
Fixed rate mortgage related ................ 58,913 87,631 210,269
Variable rate mortgage related ............. 352,361 -- --
Investment securities ...................... 70,834 3,094 43,888
Trading account securities ...................... -- -- --
Other assets .................................... 32,641 -- --
Impact of interest rate swaps ................... 20,000 -- (20,000)
----------- ----------- -----------
Total ...................................... $ 893,629 $ 322,658 $ 476,805
=========== =========== ===========
Interest-bearing liabilities:
Deposits: (3)
NOW accounts ............................... $ 7,104 $ 21,312 $ 27,017
Passbook savings accounts .................. 1,894 5,683 12,956
Money market deposit accounts .............. 89,739 269,220 14,895
Certificates of deposit .................... 252,174 218,070 133,364
Borrowings (4) .................................. 369,299 85,000 358,215
Impact of interest rate swap .................... 340,000 -- --
----------- ----------- -----------
Total ...................................... $ 1,060,210 $ 599,285 $ 546,447
=========== =========== ===========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ........ $ (166,581) $ (276,627) $ (69,642)
=========== =========== ===========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities ......... $ (166,581) $ (443,208) $ (512,850)
=========== =========== ===========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a
percent of total Assets ......................... (6.58)% (17.52)% (20.27)%
=========== =========== ===========
<CAPTION>
More than
Three
Years to Over Five
Five Years Years Total
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed ...................................... $ 24,556 $ 50,826 $ 220,584
Variable ................................... 202,516 90,992 684,006
Consumer loans (2) .............................. 29,203 15,887 311,236
Mortgage-backed and related securities .......... 5,497 -- 34,279
Assets available for sale:
Mortgage loans ............................. -- -- 2,833
Fixed rate mortgage related ................ 128,357 33,992 519,162
Variable rate mortgage related ............. -- -- 352,361
Investment securities ...................... 69,508 25,055 212,379
Trading account securities ...................... -- -- --
Other assets .................................... 810 -- 33,451
Impact of interest rate swaps ................... -- -- --
----------- ----------- -----------
Total ...................................... $ 460,447 $ 216,752 $ 2,370,291
=========== =========== ===========
Interest-bearing liabilities:
Deposits: (3)
NOW accounts ............................... $ 11,582 $ 7,622 $ 74,637
Passbook savings accounts .................. 10,494 44,740 75,767
Money market deposit accounts .............. 6,049 4,188 384,091
Certificates of deposit .................... 106,560 234,546 944,714
Borrowings (4) .................................. 25,000 -- 837,514
Impact of interest rate swap .................... (105,000) (235,000) --
----------- ----------- -----------
Total ...................................... $ 54,685 $ 56,096 $ 2,316,723
=========== =========== ===========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ........ $ 405,762 $ 160,656 $ 53,568
=========== =========== ===========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities ........ $ (107,088) $ 53,568
=========== ===========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a
percent of total Assets ......................... (4.23)% 2.12%
=========== ===========
</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 $98.9 million at December,
1999.
(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%, 10% and 93%, 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 $584.9 million or 23.1% 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.
Page 25 of 30
<PAGE> 26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
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 $48.4 million and
$32.6 million as of December 31, 1999 and September 30, 1999, respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At December 31, 1999, the Company had
a borrowing capacity available of $71.8 million from the FHLB; however,
additional securities may have to be pledged as collateral in event the Company
utilizes its greater borrowing capacity.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow Office of Thrift Supervision ("OTS") capital
regulations which require savings institutions to meet two capital standards:
(i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets
and (ii) "risk-based capital" of at least 8% of risk-weighted assets. Savings
institutions must meet all of the standards in order to comply with the capital
requirements.
Page 26 of 30
<PAGE> 27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Bank's capital ratios at the dates indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------- --------- ----------- ------------ --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Tangible capital ............. 145,239 5.74% 101,230=> =>4.0% 126,537=> =>5.0%
Core capital ................. 145,239 5.74% 101,230=> =>4.0% 126,537=> =>5.0%
Tier 1 risk-based capital .... 145,239 9.61% 60,440=> =>4.0% 90,661=> =>6.0%
Risk-based capital ........... 154,652 10.24% 120,881=> =>8.0% 151,101=> =>10.0%
As of September 30, 1999:
Tangible capital ............. 144,222 5.82% =>99,136 =>4.0% =>123,921 =>5.0%
Core capital ................. 144,222 5.82% =>99,136 =>4.0% =>123,921 =>5.0%
Tier 1 risk-based capital .... 144,222 9.98% =>57,803 =>4.0% =>86,704 =>6.0%
Risk-based capital ........... 153,578 10.63% =>115,606 =>8.0% =>144,507 =>10.0%
</TABLE>
As evidenced by the foregoing, the capital of the Bank exceeded all capital
requirements as mandated by the requirements of the OTS.
Page 27 of 30
<PAGE> 28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
March 31, 1999.
<TABLE>
<CAPTION>
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years To Four Years
-----------------------------------------------------------------------------------------------
Interest Earning Assets (Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
Commercial loans:
Fixed rate $ 70.6 8.38% $ 46.3 8.32% $ 13.2 8.32% $ 17.6 8.36%
Adjustable rate 171.0 8.54% 88.9 8.61% 54.7 8.50% 68.4 8.49%
Consumer loans:
Fixed rate 13.4 8.30% 21.8 8.47% 15.1 8.52% 15.1 8.52%
Adjustable rate 28.8 8.53% 20.1 8.53% 50.3 8.53% 25.8 8.53%
Mortgage-backed
Securities:
Fixed rate 161.1 6.37% 112.3 6.43% 112.3 6.51% 66.9 6.74%
Adjustable Rate 66.9 6.90% 52.9 6.90% 45.8 6.90% 42.2 6.90%
Debt and equity
securities 73.9 5.50% 21.9 6.02% 21.9 6.20% 34.8 6.30%
Other 32.6 5.50% -- -- -- -- -- --
Total interest ---------- ---------- ---------- ----------
earning assets $ 618.3 7.33% $ 364.2 7.48% $ 313.4 7.39% $ 270.9 7.53%
========== ========== ========== ==========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 28.4 0.50% $ 14.6 0.50% $ 14.6 0.50% $ 5.8 0.50%
Passbooks 7.6 1.00% 6.5 1.00% 6.5 1.00% 5.2 1.00%
Money market 359.0 4.50% 7.4 4.50% 7.4 4.50% 3.0 4.50%
Certificates 470.2 5.27% 119.6 5.71% 13.8 5.77% 18.9 5.91%
Borrowings
fixed rate 277.3 5.13% 358.2 5.48% 25.0 5.02% -- --
adjustable rate 177.0 6.00% -- -- -- -- -- --
Total interest ---------- ---------- ---------- ----------
bearing liabilities $ 1,319.5 5.00% $ 506.3 5.32% $ 67.3 3.75% $ 33.0 4.05%
========== ========== ========== ==========
<CAPTION>
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
------------------------------------------------------------------------------------------
Interest Earning Assets (Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
Commercial loans:
Fixed rate $ 22.7 8.37% $ 52.9 8.61% $ 223.4 8.42% $ 223.4
Adjustable rate 82.1 8.50% 218.9 8.51% 684.0 8.53% 684.0
Consumer loans:
Fixed rate 20.1 8.52% 82.0 9.07% 167.4 8.77% 167.9
Adjustable rate 18.7 8.53% -- -- 143.7 8.53% 143.7
Mortgage-backed
Securities:
Fixed rate 66.9 6.58% 34.0 6.50% 553.4 6.49% 540.0
Adjustable Rate 38.8 6.90% 105.7 6.90% 352.4 6.90% 346.2
Debt and equity
securities 34.8 6.40% 25.1 6.30% 212.4 6.22% 203.3
Other -- -- 0.8 5.15% 33.5 5.49% 33.5
Total interest ---------- ---------- ---------- ---------- ---------- ---------- ----------
earning assets $ 284.0 7.57% $ 519.4 8.04% $ 2,370.2 7.57% $ 2,341.6
========== ========== ========== ========== ========== ========== ==========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 5.8 0.50% $ 5.5 0.50% $ 74.6 0.50% $ 76.8
Passbooks 5.2 1.00% 44.7 1.00% 75.8 1.00% 75.8
Money market 3.0 4.50% 4.2 4.50% 384.1 4.50% 384.1
Certificates 87.6 6.27% 234.5 6.46% 944.7 5.73% 944.0
Borrowings
fixed rate -- -- -- -- 660.5 5.32% 658.7
adjustable rate -- -- -- -- 177.0 6.00% 159.0
Total interest ---------- ---------- ---------- ---------- ---------- ---------- ----------
bearing liabilities $ 101.7 5.62% $ 288.9 5.47% $ 2,316.7 5.11% $ 2,298.4
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Page 28 of 30
<PAGE> 29
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 AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On January 19, 2000, the Company announced the declaration of a
dividend of $0.09 per share on the Company's common stock for the
quarter ended December 31, 1999. The dividend is payable on February
18, 2000 to shareholders of record as of February 10, 2000. This will
be the eighteenth cash dividend payment since the Company became a
publicly-held company in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share (See
Footnote 7 in "Notes to Unaudited Consolidated Financial
Statements")
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report was filed.
Page 29 of 30
<PAGE> 30
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 11, 2000 By: /s/ Jon D. Sorenson
------------------- ---------------------
Jon D. Sorenson
Chief Financial Officer
Page 30 of 30
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
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<INT-BEARING-DEPOSITS> 319
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<DEPOSITS> 1,545,109
<SHORT-TERM> 706,393
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146
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</TABLE>
