<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of November 30, 2000, there were issued and outstanding 14,579,240
and 9,404,097 shares of the Registrant's Common Stock, resepctively. The
aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the average of the bid and asked price of
such stock as of November 30, 2000, was $101.7 million. Soley for the purposes
of this calculation, all executive officers and directors of the Registrant are
assumed to be affiliates; also included as "affiliate shares" are certain shares
held by various employee benefit plans where the trustees are directors of the
Registrant or are required to vote a portion of unallocated shares at the
direction of executive officers or directors of the Registrant. The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of the
Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for the 2000
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
<PAGE> 2
FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part I
Item 1 - Business........................................................................ 3
Item 2 - Properties...................................................................... 34
Item 3 - Legal Proceedings............................................................... 34
Item 4 - Submission of Matters to a Vote of Security Holders............................. 34
Part II
Item 5 - Market for Registrant's Common Stock and Related
Stockholder Matters............................................................. 35
Item 6 - Selected Financial Data......................................................... 36
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 38
Item 7A - Quantitative and Qualitative Disclosures About Market Risk..................... 53
Item 8 - Financial Statements and Supplementary Data..................................... 54
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................ 89
Part III
Item 10 - Directors and Executive Officers of the Registrant.............................. 90
Item 11 - Executive Compensation.......................................................... 90
Item 12 - Security Ownership of Certain Beneficial Owners and Management.................. 90
Item 13 - Certain Relationships and Related Transactions.................................. 90
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 90
Signatures .................................................................................. 93
</TABLE>
2
<PAGE> 3
PART I
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operation and business of St. Francis Capital
Corporation (the "Company") within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements include words and
phrases such as "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," "intend" or similar expressions. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors could affect the Company's financial performance
and could cause actual results for future periods to differ materially from
those anticipated or projected. Such factors include, but are not limited to:
(i) general market rates, (ii) general economic conditions, (iii)
legislative/regulatory changes, (iv) monetary and fiscal policies of the U.S.
Treasury and Federal Reserve, (v) changes in the quality or composition of the
Company's loan and investment portfolios, (vi) demand for loan products, (vii)
deposit flows, (viii) competition, (ix) demand for financial services in the
Company's markets, and (x) changes in accounting principles, policies or
guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
ITEM 1. BUSINESS
GENERAL
The Company is a holding company incorporated under the laws of the State of
Wisconsin and is engaged in the financial services business through its
wholly-owned subsidiary, St. Francis Bank, F.S.B. (the "Bank"), a
federally-chartered stock savings bank. In January 1999, the Company acquired
Reliance Bancshares, Inc. in Milwaukee, Wisconsin and merged it into the Bank
after the acquisition was completed.
The Bank is headquartered in Milwaukee, Wisconsin and serves southeastern
Wisconsin with a network of 22 full-service, two limited-service and four loan
production offices. In addition, the Bank has a mortgage-banking subsidiary
based in Illinois that purchases single-family mortgage loans for resale,
primarily in the Chicago, Illinois metropolitan marketplace.
The Company's operations include four strategic business segments: Retail
Banking, Commercial Banking, Mortgage Banking and Investments. Management
evaluates the financial performance of each segment primarily based on the
individual segments' direct contribution to the Company's net income.
Information regarding the net interest income, other operating income, profit
and average assets for the fiscal years ended September 30, 2000, 1999 and 1998
is set forth in Note 18 to the Notes to Consolidated Financial Statements
included under Item 8 of this Annual Report on Form 10-K. In fiscal 2000, the
Company continued to reduce the size of its mortgage-backed securities portfolio
as part of a strategy to decrease the proportion of earnings from that segment
of its balance sheet. The reduction was primarily accomplished through the
repayment of principal on mortgage-backed securities, and to a lesser extent,
the sale of available-for-sale securities. Funds generated from the repayment of
principal from the mortgage-backed securities and investment securities
portfolios were used to fund the growth in the Company's loan portfolio.
Management anticipates that this form of "balance sheet restructuring" will be
an ongoing strategic initiative of the Company in fiscal 2001.
The Company's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from other
operations, primarily to originate mortgage, consumer, commercial and other
loans within its primary market areas, and to invest in mortgage-backed and
related securities. Primary areas of lending include single-family and
multi-family residential mortgages, home equity lines of credit, second
mortgages, commercial real estate and commercial loans. The Company also
purchases single-family mortgage loans, either by directly purchasing individual
loans from other local mortgage lenders or by purchasing pools of single-family
mortgage loans originated by other non-local lenders and secured by properties
located outside the
3
<PAGE> 4
State of Wisconsin. The Company also invests a significant portion of its assets
in mortgage-backed and related securities, and to a lesser extent, invests in
debt and equity securities, including U.S. Government and federal agency
securities, short-term liquid assets and other marketable securities. The
Company also invests in affordable housing projects throughout the State of
Wisconsin. The Company's revenues are derived principally from interest on its
loan portfolio, interest on mortgage-backed and related securities, and interest
and dividends on its debt and equity securities. The affordable housing projects
do not provide a significant source of income before taxes, but rather provide
income in the form of income tax credits which reduce the Company's income tax
liability. The Company's principal sources of funds are from deposits, including
brokered deposits, repayments on loans and mortgage-backed and related
securities, and advances from the Federal Home Loan Bank - Chicago ("FHLB").
MARKET AREA AND COMPETITION
The Company offers a variety of deposit products, services and consumer,
commercial and mortgage loan offerings primarily within the metropolitan
Milwaukee area. The Company's main office is located at 13400 Bishops Lane,
Suite 350, Brookfield, Wisconsin. The primary market area for the Company's
full-service and limited-service offices consists of Milwaukee and Waukesha
counties, and portions of Ozaukee, Washington and Walworth counties. The Bank's
Illinois mortgage banking subsidiary purchases single-family mortgage loans for
resale, primarily in the Chicago, Illinois metropolitan marketplace. The Bank's
loan production offices include two in the Milwaukee metropolitan area and one
in Kenosha county that originate single-family mortgage loans for both portfolio
and resale purposes. The Bank's other loan production office is located in
Brookfield, Wisconsin and originates commercial real estate, multifamily and
commercial loans. The market area for this type of lending is primarily in
southeastern Wisconsin, but does include the Midwest including the rest of the
state of Wisconsin, Illinois and Minnesota. The Company also evaluates lending
opportunities and may originate or purchase all types of loans located outside
the primary market areas.
With the exception of the downtown Milwaukee branch office, all full service
branches of the Bank are located in areas that generally are characterized as
residential neighborhoods, containing predominantly one- and two-family
residences. The Company also operates a mortgage banking subsidiary based in
Illinois.
The Company has significant competition in its mortgage, consumer and commercial
lending business, as well as in attracting deposits. The Company's competition
for loans is principally from other thrift institutions, savings banks, mortgage
banking companies, insurance companies and commercial banks. The Company's
competition for deposits comes from other thrifts, savings banks, commercial
banks and credit unions. The Company has additional competition for funds from
other financial service companies, such as brokerage firms and insurance
companies.
LENDING ACTIVITIES
GENERAL
The Company's largest component of the gross loan portfolio, which totaled $1.4
billion at September 30, 2000, was first mortgage loans secured by
owner-occupied one- to four-family residences. At September 30, 2000, one- to
four-family mortgage loans totaled $404.5 million or 29.5% of gross loans. Of
the total one- to four-family mortgage loans, $372.8 million or 92.2% were
adjustable rate mortgage loans ("ARMs"). Of the remaining loans held at
September 30, 2000, 22.4% were in commercial real estate, 13.8% were home equity
loans, 11.1% were in commercial and agricultural, 9.5% were in multi-family
mortgage loans, 9.2% were in consumer loans, and 4.5% were in residential
construction. As part of its strategy to manage interest rate risk, the Company
originates primarily ARM loans or fixed rate loans which have shorter maturities
for its own loan portfolio. The Company also originates longer-term fixed rate
mortgage loans, many of which are sold in the secondary market.
The Company has been actively growing its loan portfolio, which in addition to
its traditional one- to four-family lending, includes commercial real-estate,
multi-family, consumer and commercial and agricultural lending. The Company has
been diversifying its loan portfolio through lending efforts in all of the above
categories. Areas of lending other than one- to four-family lending generally
have higher levels of credit risk and higher yields. The Company may purchase
loans in the above categories in addition to originating the loans on its own.
Purchased loans involve different types of underwriting than loans originated
directly by the Company and as such represent a different level of risk.
4
<PAGE> 5
Levels of originations of various lending categories may vary from year-to-year
and result from differing levels of interest rates, market demand for loans and
emphasis by the Company on various types of loans. In fiscal 2000, originations,
especially of mortgage loan types were partially dependent on the level of
interest rates or changes in interest rates throughout the year. The Company
adjusts its lending emphasis occasionally in accordance with its view of the
relative returns and risks available from time to time in each category of
lending. Although there is likely to be activity in all areas in which the
Company makes loans in any given year, the amount may vary given changes in the
above factors.
5
<PAGE> 6
COMPOSITION OF LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- ---------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... $ 404,505 29.5% $ 294,438 23.8% $254,047 26.1%
Residential construction.......... 62,260 4.5% 103,100 8.3% 71,092 7.3%
Multi-family....................... 130,002 9.5% 160,593 13.0% 105,380 10.8%
Commercial real estate............ 306,778 22.4% 251,914 20.3% 170,562 17.6%
Home equity....................... 188,349 13.8% 156,695 12.6% 142,993 14.7%
---------- ------ ---------- ------ -------- ------
1,091,894 79.7% 966,740 78.0% 744,074 76.5%
Consumer loans:
Interim financing and installment 124,910 9.1% 148,034 11.9% 131,143 13.5%
Education......................... 1,615 0.1% 984 0.1% 2,529 0.3%
---------- ------ ---------- ------ -------- ------
126,525 9.2% 149,018 12.0% 133,672 13.8%
---------- ------ ---------- ------ -------- ------
Commercial and agriculture.......... 152,526 11.1% 123,899 10.0% 93,927 9.7%
---------- ------ ---------- ------ -------- ------
Gross loans receivable......... 1,370,945 100.0% 1,239,657 100.0% 971,673 100.0%
====== ====== ======
Deduct(Add):
Mortgage loans held for sale...... 8,066 8,620 23,864
Loans in process................... 54,679 106,960 83,436
Unearned discounts and
deferred loan fees............. 912 1,351 1,419
Allowance for loan losses......... 10,404 9,356 7,530
Other............................. (418) (21) 292
---------- ---------- --------
Loans receivable, net............... $1,297,302 $1,113,391 $855,132
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------
1997 1996
---------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... $ 240,522 30.7% $ 270,614 40.5%
Residential construction.......... 46,340 5.9% 32,249 4.8%
Multi-family....................... 101,289 12.9% 103,262 15.4%
Commercial real estate............ 87,950 11.2% 46,391 6.9%
Home equity....................... 115,293 14.7% 90,579 13.5%
--------- ------ --------- ------
591,394 75.4% 543,095 81.1%
Consumer loans:
Interim financing and installment 120,305 15.3% 88,236 13.2%
Education......................... 948 0.1% 12,142 1.8%
--------- ------ --------- ------
121,253 15.4% 100,378 15.0%
--------- ------ --------- ------
Commercial and agriculture.......... 72,144 9.2% 25,177 3.9%
--------- ------ --------- ------
Gross loans receivable......... 784,791 100.0% 668,650 100.0%
====== ======
Deduct(Add):
Mortgage loans held for sale...... 24,630 20,582
Loans in process................... 38,200 29,631
Unearned discounts and
deferred loan fees............. 2,332 1,874
Allowance for loan losses......... 6,202 5,217
Other............................. 552 647
--------- ---------
Loans receivable, net............... $ 712,875 $ 610,699
========= =========
</TABLE>
6
<PAGE> 7
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the years indicated. Mortgage
loans held for sale are included in the totals.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
2000 1999 1998
------------ ------------- ------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period....................................... $ 966,740 $ 744,074 $ 591,394
Mortgage loans originated:
One- to four-family..................................... 112,934 201,715 165,829
Residential construction................................ 65,439 132,675 90,911
Multi-family............................................ 26,832 58,605 39,808
Commercial real estate.................................. 70,760 129,233 103,363
Home equity............................................. 132,020 113,838 105,938
------------ ------------- ------------
Total mortgage loans originated....................... 407,985 636,066 505,849
Mortgage loans purchased:
One- to four-family.................................... 90,068 57,106 65,446
Multi-family............................................ -- 3,617 --
Commercial real estate................................. -- 15,349 2,000
------------ ------------- ------------
Total mortgage loans purchased........................ 90,068 76,072 67,446
------------ ------------- ------------
Total mortgage loans originated and purchased......... 498,053 712,138 573,295
Transfer of mortgage loans to foreclosed properties..... (929) (883) (560)
Transfer from commercial loans.......................... 6,986 2,627 --
Principal repayments.................................... (261,282) (290,887) (209,647)
Sales of mortgage loans:
Exchanged for mortgage-backed securities................ (13,021) (9,461) (19,373)
Cash sales.............................................. (104,653) (190,868) (191,035)
------------ ------------- ------------
Total sales of loans.................................. (117,674) (200,329) (210,408)
------------ ------------- ------------
At end of period............................................. $ 1,091,894 $ 966,740 $ 744,074
============ ============= ============
Consumer loans (gross):
At beginning of period....................................... $ 149,018 $ 133,672 $ 121,253
Loans originated........................................ 51,472 102,998 93,700
Repossessions, foreclosures and charge-offs............. (235) (456) (230)
Principal repayments.................................... (72,583) (84,112) (80,268)
Loans sold.............................................. (1,147) (3,084) --
------------ ------------- ------------
At end of period............................................. $ 126,525 $ 149,018 $ 133,672
============ ============= ============
Commercial and agricultural loans (gross):
At beginning of period....................................... $ 123,899 $ 93,927 $ 72,144
Loans originated........................................ 101,677 114,532 84,549
Transfer of commercial loans to mortgage loans.......... (6,986) (2,627) --
Loans sold.............................................. -- -- (273)
Principal repayments.................................... (66,064) (81,933) (62,493)
------------ ------------- ------------
At end of period............................................. $ 152,526 $ 123,899 $ 93,927
============ ============= ============
</TABLE>
7
<PAGE> 8
LOAN MATURITY AND REPRICING
The following table shows the maturity of the Company's loan portfolio at
September 30, 2000. The table does not include prepayments or scheduled
principal amortization. Prepayments and scheduled principal amortization on
mortgage loans totaled $261.3 million, $290.9 million and $209.6 million for the
years ended September 30, 2000, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000
-----------------------------------------------------------------------------------
ONE- TO COMMERCIAL GROSS
FOUR- MULTI- COMMERCIAL HOME AND LOANS
FAMILY (1) FAMILY (1) REAL ESTATE EQUITY CONSUMER AGRICULTURE RECEIVABLE
---------- ----------- ------------ ----------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year......... $ 4,518 $ 23,052 $ 54,488 $ 11,352 $ 7,568 $ 27,244 $ 128,222
After one year:
One to three years.... 4,475 14,170 33,493 89,099 59,399 16,746 217,382
Three to five years... 25,283 29,225 68,578 68,892 46,928 33,427 272,333
Over five years....... 432,489 63,555 150,219 19,006 12,630 75,109 753,008
--------- --------- -------- --------- -------- --------- ----------
Total due after one year 462,247 106,950 252,290 176,997 118,957 125,282 1,242,723
--------- --------- -------- --------- -------- --------- ----------
Total amounts due....... 466,765 130,002 306,778 188,349 126,525 152,526 1,370,945
Less:
Mortgage loans held for
sale.................... (8,066) - - - - - (8,066)
Loans in process........ (31,424) (1,701) (21,554) - - - (54,679)
Unearned discounts,
premiums and deferred
loan fees, net.......... 586 (1) (161) - 418 (1,336) (494)
Allowance for loan
losses.................. (1,555) (717) (2,318) (948) (1,578) (3,288) (10,404)
--------- --------- -------- --------- -------- --------- ----------
Loans receivable, net.... $ 426,306 $ 127,583 $282,745 $ 187,401 $125,365 $ 147,902 $1,297,302
========= ========= ======== ========= ======== ========= ==========
</TABLE>
(1) Includes some residential construction lending.
The following table sets forth at September 30, 2000 the dollar amount of all
loans and mortgage-backed and related securities due after September 30, 2001,
and whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 2001
-----------------------------------------------
FIXED ADJUSTABLE TOTAL
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family (1)...................... $ 92,450 $ 369,797 $ 462,247
Multi-family (1)............................. - 106,950 106,950
Commercial real estate....................... - 252,290 252,290
Home equity.................................. 176,997 - 176,997
Consumer loans.................................. - 118,957 118,957
Commercial and agriculture...................... 8,562 116,720 125,282
--------- ---------- ----------
Gross loans receivable....................... 278,009 964,714 1,242,723
Mortgage-backed and related securities.......... 481,294 323,103 804,397
--------- ---------- ----------
Gross loans receivable and mortgage-
backed and related securities.............. $ 759,303 $1,287,817 $2,047,120
========= ========== ==========
</TABLE>
(1) Includes some residential construction lending.
8
<PAGE> 9
ONE- TO FOUR-FAMILY MORTGAGE LENDING
A significant portion of the Company's lending activity is the origination of
first mortgage loans secured by one- to four-family, owner occupied residences
within the Company's primary market area. Long-term 15- and 30-year fixed rate
mortgages ("FRMs") are generally originated and sold in the secondary market.
The Company also originates and sells 30-Year FRMs under the Wisconsin Housing
and Economic Development Authority ("WHEDA") program. Shorter-term ARM loans are
originated both for sale in the secondary market and for the Company's loan
portfolio. Loans made under special loan terms or programs, principally
originated within the purposes of the Community Reinvestment Act of 1977, as
amended ("CRA"), are retained for the Company's own loan portfolio.
The Company typically follows secondary market underwriting guidelines for most
of its conforming one- to four-family mortgage production, including those
established by Fannie Mae, WHEDA, and other specific investors. In many cases,
the application of these guidelines include the use of the latest in automated
underwriting systems.
The lending policy of the Company generally allows for mortgage loans to be made
in amounts of up to 100% of the lesser of appraised value or purchase price of
the real estate to be mortgaged to the Company. Loans that are made in excess of
80% of appraised value generally require a credit enhancement such as private
mortgage insurance to mitigate risk.
ARM loans are often included in mortgage loans held by the Company as part of
its loan portfolio. During the adjustment period, ARM loans typically can adjust
by a maximum of two percentage points per year with a lifetime cap approximating
six percentage points above the interest rate established at the origination
date of the ARM loan. Monthly payments of principal and interest are adjusted
when the interest rate adjusts, in order to maintain full amortization of the
mortgage loan within a maximum 30-year term. The initial rates offered on ARM
loans fluctuate with general interest rate changes, and are determined by
secondary market pricing, competitive conditions and the Company's yield
requirements. Currently, the Company utilizes primarily the one-year Constant
Maturity Treasury rate in order to determine the interest rate payable upon the
adjustment date of its ARM loans outstanding. Because most of the ARM loans are
underwritten to meet secondary market standards, these loans include terms under
which the borrower may convert the loan to a fixed rate loan. The terms at which
the ARM may be converted to a fixed rate loan are established at the date of
loan origination and are set at a level allowing the Company to immediately sell
the ARM loan at the date of conversion.
The volume of one- to four-family mortgage loan origination is highly dependent
on the relative levels of interest rates. During periods of lower interest
rates, the Company originates a higher percentage of loans with fixed rates,
which the Company sells in the secondary market in connection with interest rate
risk management. In such environments, the Company's level of gains on mortgage
loan sales may be higher due to the increased percentage of loans being
originated which are subsequently sold in lieu of being retained in the
Company's portfolio.
At September 30, 2000, the Company had $404.5 million in one- to four-family
mortgage loans or 29.5% of the gross loan portfolio compared with $294.4 million
or 23.8% of the portfolio at September 30, 1999. This growth was largely the
result of increasing interest rates during the year which motivated consumers to
choose more attractively priced ARM financing alternatives.
RESIDENTIAL CONSTRUCTION/PERMANENT LENDING
Residential construction/permanent lending typically comprises a significant
portion of the Company's ARM loan production. These loans are made to borrowers
who have obtained plans, specs and a construction contract with a residential
home builder. Residential construction loan programs typically offered by the
Company include 1- 2- 3- and 5-year ARM loans. Most loans are originated with
terms of 30 years, with the construction period being included in the initial
portion of that term. The length of the construction period is the lessor of the
time it takes to complete the home or 12 months. During this period, the
borrower is required to pay interest only on the funds advanced. Thereafter, the
borrower is required to begin making principal and interest payments based on an
amortization schedule of the remaining months. Typically, the construction of
most homes financed take five to six months.
9
<PAGE> 10
At closing, loan proceeds adequate to complete the construction of the home are
placed in escrow and disbursements are made in increments as construction of the
residence progresses. Vendors are contracted to conduct inspections, disburse
proceeds, obtain lien waivers, and ensure that clear title to the property is
maintained.
One to four family, residential construction loans typically have loan to value
ratios of up to 95%. When the loan to value ratio exceeds 80%, private mortgage
insurance is generally required to reduce the Company's exposure to 80% of the
loan value or less.
At September 30, 2000, the Company had $62.3 million in residential construction
mortgage loans, or 4.5% of the gross loan portfolio, compared with $103.1
million or 8.3% of the portfolio at September 30, 1999. The decline in the
current year is primarily due to the higher interest rate environment during
fiscal 2000. A significant portion of the Company's residential construction
lending results in permanent mortgage loans that are either retained in the
mortgage loan portfolio or sold in the secondary market.
MULTI-FAMILY MORTGAGE LENDING
The Company originates multi-family mortgage loans which it typically holds in
its loan portfolio. Over the last five years, the Company has increased its
emphasis in multi-family mortgage lending and has offered both adjustable- and
fixed-rate mortgage loans. Multi-family mortgage loans generally have shorter
maturities than one- to four-family mortgage loans, though the Company has made
multi-family mortgage loans with terms of up to 30 years. Multi-family loans
generally are underwritten in amounts up to the lesser of 80% of the appraised
value or 85% of the borrower's purchase price of the underlying property,
although loans of up to 100% of property value have been made.
Loans secured by multi-family real estate generally have higher loan balances,
involve a greater degree of credit risk than one- to four-family loans, have a
higher rate of interest and ARM loans adjust at slightly higher rates. The
increased credit risk is the result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. In some instances, the risk level is mitigated
by obtaining individual guarantees, which may provide an additional source of
repayment of the loan. Despite the risks inherent in multi-family lending, the
Company's percentage of delinquent multi-family loans to gross multi-family
loans has been minimal.
At September 30, 2000, the Company had $130.0 million in multi-family mortgage
loans or 9.5% of the gross loan portfolio compared with $160.6 million or 13.0%
of the portfolio at September 30, 1999. During fiscal 2000, the decrease in
multi-family mortgage loans is primarily due to repayments of loans that were
not replaced with new originations. The Company is continuing its efforts to
increase the amount of multi-family loans in the loan portfolio. These loans
generally offer a greater yield than single-family loans, which, the Company
believes, justifies the increased credit risk.
COMMERCIAL REAL ESTATE LENDING
The current lending policy of the Company includes originating or purchasing
non-residential mortgage loans on a variety of commercial properties, including
office buildings, warehouses, industrial/manufacturing buildings, motel
properties, land development and other improved non-residential properties. In
recent years, commercial real estate lending has been identified as a growth
area for the Company with the allocation of additional Company resources. In
fiscal 2000, the Company originated and refinanced an increased amount of
commercial real estate loans within its normal credit risk guidelines. The
Company originated 78 loans with principal balances totaling $70.8 million
during the current fiscal year. At September 30, 2000, the Company had $306.8
million in commercial real estate mortgage loans or 22.4% of the gross loan
portfolio, compared with $251.9 million or 20.3% of the portfolio at September
30, 1999.
The Company's commercial real estate lending area includes the states of
Illinois and Minnesota as well as its' primary geographic focus of Wisconsin.
Commercial real estate loans generally are underwritten in amounts up to the
lesser of 80% of the appraised value or 85% of the borrower's purchase price of
the underlying property. Loans
10
<PAGE> 11
secured by commercial real estate properties are assumed to involve a greater
degree of credit risk than residential mortgage loans and generally carry larger
loan balances. This increased credit risk is a result of several factors,
including concentration of principal in a limited number of loans and borrowers,
the effects of general economic conditions on income-producing properties and
the increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related business
occupant. In addition, payments on loans secured by commercial real estate are
often susceptible to adverse conditions in the real estate market or the
economy. The risk may be increased on loans secured by properties located
outside of the Company's primary market area due to the decreased ability to
actively monitor such properties. Despite the risks inherent in commercial real
estate lending, the Company's percentage of delinquent commercial real estate
loans to gross commercial real estate loans has been minimal. The Company is
continuing its efforts to increase the amount of commercial real estate loans in
its loan portfolio as these loans generally offer a better interest rate than
single-family loans, which, the Company believes, justifies the increased credit
risk.
HOME EQUITY LENDING
The Company has increased its emphasis in originating home equity loans secured
by one- to four-family residences, usually by a second mortgage, within its
primary market area. These loans currently are originated with an interest rate
indexed to the prime rate and adjustable monthly, and thus play a role in the
Company's management of its interest rate risk. Home equity loans are revolving
lines of credit, which are granted for a five-year term, renewable at the sole
discretion of the Company for additional five-year periods. The minimum monthly
payment is interest only for loan to value ratios of up to 85% and 1.5% of the
outstanding balance for loan to value ratios greater than 85%. Typically, an
origination fee is charged upon the origination of the loan and an annual
service fee is charged thereafter. Home equity lines of credit may be made at up
to a 100% loan-to-value level, including any outstanding prior liens against the
property which serves as collateral for the line of credit. For loans over 85%
loan-to-value, the Company often requires private mortgage insurance. At
September 30, 2000, the Company held $188.3 million in home equity loans or
13.8% of the gross loan portfolio, compared with $156.7 million or 12.6% of the
portfolio at September 30, 1999.
CONSUMER LENDING
The Company originates a variety of secured consumer loans, including home
improvement loans, automobile loans, educational loans, fixed term installment
loans and interim financing loans, as well as loans secured by savings accounts
and unsecured loans. Consumer loan terms vary according to the type of
collateral, the term of the loan and the creditworthiness of the borrower. The
Company has been expanding its consumer lending portfolio because higher yields
can be obtained. The Company believes there is strong consumer demand for such
loan products, and the Company historically has experienced relatively low
delinquency and few losses on such products. Management also believes that
offering consumer loan products helps expand and create stronger customer
relationships.
At September 30, 2000, consumer loans totaled $126.5 million or 9.2% of gross
loans compared to $149.0 million or 12.0% of gross loans at September 30, 1999.
During the year ended September 30, 2000, the Company started to originate
consumer loans from its' website to customers in our primary market area. The
Company also originated loans through a correspondent program in which the
Company received second mortgage loan/line referrals from mortgage brokers
throughout Wisconsin. During fiscal 2000, the Company discontinued its indirect
automobile lending program. Although the credit history on the indirect
portfolio had been favorable, the level of interest rates the Company was able
to charge did not result in the level of profit desired. The Company continues
to originate direct automobile loans on a limited basis.
Consumer loans often entail greater risk than residential mortgage loans,
particularly in the case of unsecured loans or loans secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered from a borrower on such a loan. Although the
delinquencies and net charge-offs in the
11
<PAGE> 12
Company's consumer loan portfolio generally have been low, there can be no
assurance that the level of delinquencies and charge-offs will not increase in
the future.
COMMERCIAL AND AGRICULTURE LENDING
The Company originates a variety of commercial and agriculture loans, including
inventory and receivable financing, equipment loans, agriculture production
loans and interim financing loans. Collateral can take many forms, such as real
estate, inventory, and equipment or may include personal guarantees of business
owners or personal or other collateral of the business owner. Cash flows,
historical financials, financial projections and collateral valuations are
analyzed to give the Company assurance that the business will generate a
sufficient level of cash flow to cover ongoing business expenses and debt
service. The loan-to-value ratios vary depending upon the type and liquidity of
the collateral
Commercial and agriculture loans involve a greater degree of risk than most
other types of loans, and payments are often susceptible to adverse employment
and economic conditions. Also, the repayment of loans secured by commercial
business assets is typically dependent upon the successful operation and the
eventual cash flows of the business. To the extent the Company originates these
loans outside of its primary market area, the risks are increased due to
decreased ability to monitor the loans. The Company anticipates commercial
lending to continue to increase as management believes this type of lending is
providing a higher yield than residential loans and is an important component of
a balanced loan portfolio. Typically, the Company targets smaller businesses
with which to establish commercial banking relationships. Despite the risks
inherent in commercial lending, the Company's percentage of delinquent
commercial loans to gross commercial loans has been minimal.
The Company also participates with other financial institutions in syndicated
credits whereby several lenders participate in commercial loan arrangements that
are larger than those that the Company would typically do on a stand-alone
basis. However, the Company has participated only those in types of credits that
it would lend to directly from its own operations, except for the size of the
loan. The Company generally is not the lead lender in these loans, but does
underwrite the credit on its own in addition to the underwriting performed by
the lead lender. The Company also has limited itself to credit facilities to
commercial borrowers with headquarters or significant operational presence in
the Midwest. Syndicated credits in which the Company has participated are
generally variable rate loans, which also help contribute to the Company's
interest rate risk posture. At September 30, 2000, the Company had $50.2 million
or 32.9% of its commercial loan portfolio, in syndicated credits compared to
$34.9 million or 28.2% at September 30, 1999.
At September 30, 2000, the Company had $152.5 million in commercial loans or
11.1% of the gross loan portfolio compared with $123.9 million or 10.0% of the
portfolio at September 30, 1999. The Company intends to continue to increase its
involvement in commercial lending and expects that this portfolio will grow as a
percentage of the total loan portfolio.
CREDIT ENHANCEMENT PROGRAMS
The Company has entered into agreements whereby, for an initial and annual fee,
it will guarantee payment of an industrial revenue bond issue ("IRB"), issued by
a municipality to finance real estate owned by a third party. The Company does
not pledge collateral for purposes of these agreements. At September 30, 2000,
the amount of IRB's for which the Company has guaranteed payment was $32.6
million.
LOAN SALES AND PURCHASES
SALE OF MORTGAGE LOANS
The Company sells a significant amount of its originated residential mortgage
loans to secondary marketing agencies, principally Fannie Mae, and primarily on
a non-recourse basis. All mortgage loans, upon commitment, are immediately
categorized as either held for investment or held for sale. The level of
mortgage loan sales is dependent on the amount of saleable loans being
originated by the Company. Depending on factors such as interest rates, levels
of borrower refinancing and competitive factors in the Company's primary market
area, the amount of mortgage loans ultimately sold can vary significantly.
Mortgage loans originated and sold to the secondary market totaled $117.7
million with gains of $1.1 million for the year ended September 30, 2000, and
totaled $200.3 million
12
<PAGE> 13
with gains of $2.8 million for the year ended September 30, 1999. The level of
originations is partially dependent on the level of interest rates or changes in
interest rates throughout fiscal year 2000.
The Company is subject to interest rate risk on fixed rate loans from the point
in time that the rate is fixed with the borrower until the loan is sold. The
Company utilizes various financial techniques to mitigate such interest rate
risk, including short call/put option strategies, long put options and forward
sales commitments. Any one or all of these strategies may be used depending upon
management's determination of interest rate volatility, the amount of loans for
which the Company has issued a commitment and current market conditions for
mortgage-backed securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Asset/Liability Management."
The Company also makes loans under the WHEDA loan program. These loans are also
sold on a non-recourse basis. For the years ended September 30, 2000 and 1999,
the Company originated $7.2 million in each year of loans under this
governmental program.
Loan commitments are issued as soon as possible upon completion of the
underwriting process, and mortgage loans are closed as soon as all title
clearance and other required procedures have been completed. Because of the
frequency of both the issuance of commitments and the scheduled closing dates of
the loans, the amount of loan commitments outstanding will vary. At September
30, 2000, the Company had outstanding mortgage commitments totaling $13.1
million.
Historically, the Company has retained servicing of the majority of mortgage
loans sold, receiving a servicing fee which represents the difference between
the note rate on the loans sold and the yield at which such loans are sold. The
Company's new mortgage banking operation in Illinois intends to sell the
servicing on the majority of the loans originated there and thus the percentage
of servicing retained is expected to decline in fiscal 2001. The servicing yield
earned by the Company on such transactions is typically .25% of the total
balance of the loan serviced. The origination of a high volume of mortgage loans
and the related sales of the loans with servicing retained provides the Company
with additional sources of non-interest income through loan servicing income and
gains on the sales of loans. At September 30, 2000 the Company had recognized
$4.6 million in mortgage servicing rights as compared to $4.7 million at
September 30, 1999. Correspondingly, mortgage loans serviced for others
increased from $484.1 million at September 30, 1999 to $497.9 million at
September 30, 2000.
PURCHASE OF MORTGAGE LOANS
The Company, as a regular part of its mortgage lending activities, purchases
individual one- to four-family mortgage loans originated in its primary market
area by other lenders, primarily mortgage bankers and brokers. The types of
loans purchased are generally newly originated loans with the same
characteristics as the loans normally originated by the Company in its retail
lending operations. Even though the Company is not as involved in the
origination of these loans, they typically are underwritten by the Company. This
step, coupled with other quality control processes, helps mitigate the
additional risks associated with individual loan purchases. Although the
Company's historical loan purchase activity has been limited to one-to-four
family loans, the Company may purchase other types of loans, or pools of loans
other than one-to four-family loans in the future.
The majority of loans purchased are adjustable rate mortgages, which may or may
not be sold in the secondary market. The Company pays a fee to the originating
mortgage banker or broker which is amortized over the life of the loan for loans
retained in the portfolio or which becomes an adjustment to the gain or loss
recognized on loans sold in the secondary market. The Company maintains the
same, or more restrictive underwriting standards on these loans as it does on
the loans it originates directly. During the fiscal year ended September 30,
2000, the Company purchased $90.1 million of loans from other originators
compared to $57.1 million of loans purchased during the fiscal year ended
September 30, 1999. As part of the Company's plans to diversify its one- to
four-family loan production, it is expected that purchases of loans from other
originators will continue in future years.
From time to time, the Company also has purchased "pools" of one- to four-family
loans originated by other lenders in other parts of the country. The loans
purchased have generally been adjustable rate loans with interest rate
adjustment features of one month to one year and are indexed to current indexes
such as the one-year treasury note or to lagging indexes such as the 11th
district cost of funds. As part of its interest rate risk management, the
Company attempts to identify loans originated in other parts of the country
where adjustable rate lending is more
13
<PAGE> 14
prevalent, since the availability of similar loan products within its primary
market area is limited and competition for that limited demand may force
interest rates to levels considered too low compared to other available
instruments. Of the $90.1 million one- to four-family mortgage loans purchased
during the year ended September 30, 2000, $10.5 million were loans secured by
properties located outside of the Company's primary market area. The Company's
mortgage banking operation in Illinois purchased $56.2 million one- to
four-family mortgage loans for resale in the secondary market during the year
ended September 30, 2000.
The purchasing of "pools" of loans can result in a higher level of risk due to
the Company not fully controlling the origination process. Efforts taken to
mitigate the additional risk include a due diligence process prior to the actual
purchase. This process typically encompasses a review of the payment histories
as well as an analysis of the geographic concentration of the loans contained in
the package. It also includes the individual re-underwriting of the loan file
and verification of collateral value on a sample of loans.
LOAN ORIGINATION, SERVICING AND OTHER FEES
In addition to interest earned on loans, the Company receives income through
fees in connection with loan originations, loan sales, loan modifications, late
payments and for miscellaneous services related to its loans, including loan
servicing. Income from these activities varies from period to period with the
volume and type of loans originated.
In connection with the origination of mortgage loans, the Company typically
charges fees for processing and closing loans in addition to requiring borrower
reimbursement of out-of-pocket fees for costs associated with obtaining
independent appraisals, credit reports, title insurance, flood determination and
other items. The Company also may charge points for the origination of loans in
exchange for a lower interest rate on the loan itself. However, with the
availability of zero point mortgage loans in recent years, most borrowers
typically accept a slightly higher interest rate and pay zero points. A borrower
pays commitment fees at the time of a loan commitment, whereas the origination
and discount fees are paid at the time of closing. Commitment fees are
periodically collected on commercial real estate or multi-family mortgage loans
but are rarely collected as part of the origination of one- to four-family
mortgage loans.
DELINQUENCIES, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
DELINQUENT LOANS
When a borrower fails to make a required payment by the end of the month in
which the payment is due, the Company generally initiates collection procedures.
The Company will send a late notice, and in most cases, delinquencies are cured
promptly. However, if a loan has been delinquent for more than 60 days, the
Company contacts the borrower directly, to attempt to determine the reason for
the delinquency and to effect a cure, and where it believes appropriate, reviews
the condition of the property and the financial position of the borrower. At
that time the Company may (i) accept a repayment program for the arrearage; (ii)
seek evidence of efforts by the borrower to sell the property; (iii) request a
deed in lieu of foreclosure; or (iv) initiate foreclosure proceedings. When a
loan, secured by a mortgage, is delinquent for three or more monthly installment
periods, the Company generally will initiate foreclosure proceedings. With
respect to delinquencies on FHA, VA or other governmental loan program mortgage
loans, the Company follows the appropriate notification and foreclosure
procedures prescribed by the respective agencies.
On mortgage loans or loan participations purchased by the Company, the Company
receives monthly reports from its loan servicers with which it monitors the loan
portfolio. Based upon servicing agreements with the servicers of the loans, the
Company relies upon the servicers to contact delinquent borrowers, collect
delinquent amounts and initiate foreclosure proceedings, when necessary, all in
accordance with applicable laws, regulations and the terms of the servicing
agreements between the Company and its servicing agents.
NON-PERFORMING ASSETS
Loans are placed on nonaccrual status when, in the judgment of Company
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. Assuming no significant
mitigating circumstances, the Company discontinues the accrual of interest on
loans when the borrower is
14
<PAGE> 15
delinquent as to a contractually due principal or interest payment by 90 days or
more. When a loan is placed on nonaccrual status, all of the accrued interest on
it is reversed by way of a charge to interest income. Interest income is
recorded on nonaccrual loans when cash payments of interest are received. The
accrual of interest on a nonaccrual loan is resumed when the loan is brought to
less than 90 days delinquent unless management believes the collection of the
outstanding loan principal and contractually due interest is in doubt.
Property acquired by the Company as a result of a foreclosure or by deed in lieu
of foreclosure is classified as foreclosed property. Foreclosed property is
recorded at the lower of the unpaid principal balance of the related loan or the
fair market value of the real estate acquired less the estimated costs to sell
the real estate. The amount by which the recorded loan balance exceeds the fair
market value of the real estate acquired less the estimated costs to sell the
real estate is charged against the allowance for loan losses at the date title
is received. Any subsequent reduction in the carrying value of a foreclosed
property, along with expenses incurred to maintain or dispose of a foreclosed
property, is charged against current earnings. At September 30, 2000, the
Company had two loans classified as foreclosed property with a total combined
carrying value of $241,000.
Non-performing loans include loans placed on nonaccrual status and troubled debt
restructurings. Non-performing assets include non-performing loans and
foreclosed properties. The following table sets forth non-performing loans and
assets:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
One-to four-family mortgage loans. $ 793 $ 464 $ 600 $ 660 $ 44
Multifamily mortgage loans........ - - - - -
Commercial real estate loans...... - 848 833 850 -
------------- ------------- ------------- ------------- -------------
Total non-performing
mortgage loans............ 793 1,312 1,433 1,510 44
Commercial loans.................. 11,531 964 593 100 -
Consumer loans.................... 653 564 835 1,385 3,846
------------- ------------- ------------- ------------- -------------
Total non-performing loans... 12,977 2,840 2,861 2,995 3,890
Foreclosed properties............. 241 371 63 416 80
------------- ------------- ------------- ------------- -------------
Total non-performing assets.. $ 13,218 $ 3,211 $ 2,924 $ 3,411 $ 3,970
============= ============= ============= ============= =============
Total non-performing loans to
gross loans.................... 0.95 % 0.23 % 0.29 % 0.38 % 0.58 %
Allowance for loan losses to
total non-performing loans..... 80.17 329.44 263.19 207.08 134.11
Total non-performing assets to
total assets................... 0.53 0.13 0.16 0.21 0.28
Interest on non-performing loans
on the accrual basis........... $ 1,138 $ 274 $ 388 $ 647 $ 296
Actual interest received on
non-performing loans........... 848 150 161 206 11
------------- ------------- ------------- ------------- -------------
Net reduction of interest income.. $ 290 $ 124 $ 227 $ 441 $ 285
============= ============= ============= ============= =============
</TABLE>
CLASSIFICATION OF ASSETS
Federal regulations require that each insured financial institution classify its
assets on a regular basis. In addition, in connection with examinations of
insured institutions by regulatory authorities, regulatory examiners have
authority to identify problem assets as "Substandard," "Doubtful" or "Loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
15
<PAGE> 16
conditions and values, questionable, and there is a high possibility of loss. An
asset classified as Loss is considered uncollectible and of such little value
that continuance as an asset of the Company is not warranted. Assets classified
as Substandard or Doubtful require the Company to establish prudent general
allowances for loan losses. Assets classified as Loss must either be charged off
or must have a specific allowance established for 100% of the asset classified
as a Loss. At September 30, 2000, the Company had assets classified as
Substandard of $17.6 million, $740,000 classified as Doubtful, and $335,000
classified as Loss. The Substandard classification includes a $10 commercial
loan credit that was added to non-accrual status during the quarter ended
September 30, 2000. The Company is a participant with other financial
institutions in a credit facility to a company in the food industry. That
borrower has not made an interest payment since August 2000. Management has
taken the current known status about this credit into account in establishing
its allowance for loan losses and in the level of provision taken in the quarter
ended September 30, 2000. The FDIC examination policies also include a "Special
Mention" category, consisting of assets which currently do not expose the
Company to a sufficient degree of risk to warrant adverse classification, but do
possess credit deficiencies deserving management's close attention. At September
30, 2000, $3.6 million of the Company's assets were classified as Special
Mention.
Except for the aforementioned loans included in non-performing assets, the
classified assets principally consist of residential mortgage, consumer loans,
commercial real estate loans, commercial loans and foreclosed properties. None
of these remaining classified assets are considered to represent either
individually or in the aggregate any material loss to the Company; however, such
risk has been considered in establishing the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
Under federal regulations, when an insured institution classifies problem assets
as either Substandard or Doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Company may establish specific
loss reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances that have been established to recognize the
inherent risks associated with lending activities, but which, unlike specific
allowances, have not been allocated to recognize losses on particular problem
assets. The Company's determination as to its classification of assets and the
amount of its specific and general valuation allowances are subject to review by
the Company's regulators which can order the establishment of additional general
or specific loss allowances.
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through a
provision for loan losses based on management's evaluation of the risk inherent
in its loan portfolio and the general economy. 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 adequate loan loss
allowance.
16
<PAGE> 17
A summary of activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 9,356 $ 7,530 $ 6,202 $ 5,217 $ 4,076
Provision for loan losses.................. 2,509 1,920 2,300 1,280 1,300
Charge-Offs:
Mortgage Loans:
One- to four-family................. 124 59 176 24 15
Multifamily......................... - - - - -
Commercial real estate.............. 782 - - - -
Home equity......................... 183 51 71 - 6
Consumer............................... 380 316 740 2,028 167
Commercial and agricultural............ 94 21 12 2 -
--------- --------- ---------- ---------- ----------
Total charge-offs................ 1,563 447 999 2,054 188
Recoveries:
Mortgage Loans:
One- to four-family................. 31 - - - -
Multifamily......................... - - - - -
Commercial real estate.............. - - - - -
Home equity......................... 16 16 - - 21
Consumer............................... 55 33 27 80 8
Commercial and agricultural............ - 1 - 1 -
--------- --------- ---------- ---------- ----------
Total recoveries................. 102 50 27 81 29
--------- --------- ---------- ---------- ----------
Net charge-offs............................ 1,461 397 972 1,973 159
Acquired bank's allowance.................. - 303 - 1,678 -
--------- --------- ---------- ---------- ----------
Balance at end of year..................... $ 10,404 $ 9,356 $ 7,530 $ 6,202 $ 5,217
========= ========= ========== ========== ==========
Ratio of allowance for loan losses to
gross loans receivable at end of year...... 0.76% 0.75% 0.77% 0.79% 0.78%
Ratio of allowance for loan losses to
non-performing loans at end of year........ 80% 329% 263% 207% 134%
Ratio of net charge-offs to average
gross loans during year.................... 0.12% 0.04% 0.12% 0.30% 0.03%
</TABLE>
Management is aware of no material loans where serious doubts exist as to the
ability of the borrower to comply with the loan terms, except for the single
commercial loan previously discussed.
17
<PAGE> 18
The following table shows the Company's total allowance for loan losses and the
allocation to the various categories of loans at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ----------------------------- ----------------------------
% OF % OF % OF
% OF LOANS IN % OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY TOTAL CATEGORY
LOANS BY TO TOTAL LOANS BY TO TOTAL LOANS BY TO TOTAL
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------- -------- -------- ------- -------- -------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One- to four-family....... $ 1,555 0.33% 34.0% $ 1,368 0.34% 32.1% $ 1,186 0.36% 33.4%
Multi-family.............. 717 0.55% 9.5% 1,032 0.64% 13.0% 765 0.73% 10.8%
Commercial real estate.... 2,318 0.76% 22.4% 2,879 1.14% 20.3% 2,035 1.19% 17.6%
Home equity............... 948 0.50% 13.8% 949 0.61% 12.6% 746 0.52% 14.7%
------- ------ ------- ------ ------- ------
Total mortgage loans........ 5,538 79.7% 6,228 78.0% 4,732 76.5%
Consumer.................... 1,578 1.25% 9.2% 1,059 0.71% 12.0% 1,074 0.80% 13.8%
Commercial and agriculture.. 3,288 2.16% 11.1% 2,069 1.67% 10.0% 1,724 1.84% 9.7%
------- ------ ------- ------ ------- ------
Total allowance for loan
losses.................... $ 10,404 100.0% $ 9,356 100.0% $ 7,530 100.0%
======== ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------
1997 1996
---------------------------- -----------------------------
% OF % OF
% OF LOANS IN % OF LOANS IN
TOTAL CATEGORY TOTAL CATEGORY
LOANS BY TO TOTAL LOANS BY TO TOTAL
AMOUNT CATEGORY LOANS AMOUNT CATEGORY LOANS
------- -------- -------- ------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Breakdown of Allowance:
Mortgage loans:
One- to four-family....... $ 925 0.32% 36.6% $ 957 0.32% 45.3%
Multi-family.............. 670 0.66% 12.9% 840 0.81% 15.4%
Commercial real estate.... 1,281 1.46% 11.2% 593 1.28% 6.9%
Home equity............... 629 0.55% 14.7% 449 0.50% 13.5%
------- ------ ------ ------
Total mortgage loans........ 3,505 75.4% 2,839 81.1%
Consumer.................... 717 0.59% 15.4% 2,128 2.12% 15.0%
Commercial and agriculture.. 1,980 2.74% 9.2% 250 0.99% 3.9%
------- ------ ------ ------
Total allowance for loan
losses.................... $ 6,202 100.0% $5,217 100.0%
======= ====== ====== ======
</TABLE>
The increase in the reserves allocated to commercial and agriculture in the
current year reflects the Company's increased lending volume and the
aforementioned $10.0 million commercial loan credit that was added to nonaccrual
status during the quarter ended September 30, 2000.
18
<PAGE> 19
INVESTMENT ACTIVITIES
GENERAL
The investment policy of the Company is designed primarily to provide and
maintain required liquidity, generate a favorable return on investments without
incurring undue interest rate and credit risk, and complement the Company's
lending activities. The Company's investment policy permits investment in
various types of liquid assets permissible under Office of Thrift Supervision
("OTS") regulations, which include U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposits of insured banks and
savings institutions, certain bankers' acceptances and the purchase of federal
funds. The Company also invests in corporate debt and equity securities,
asset-backed securities, mortgage-backed securities ("MBS's") and collateralized
repurchase agreements, municipal securities, mortgage mutual funds,
collateralized mortgage obligations ("CMO's"), real estate mortgage investment
conduits ("REMIC's"), interest-only stripped securities ("IO's"), principal-only
stripped securities ("PO's") and CMO residuals. At the time of purchase, all of
the Company's investments are investment grade as rated by at least one of the
major rating agencies.
The Company determines the appropriate classification of securities at the time
of purchase based on regulatory and accounting guidelines. The Company has
incorporated the requirements of those guidelines into the Company's investment
policy and has categorized its investments in three separate categories: (i)
Held to Maturity: debt and mortgage-backed and related securities are classified
as held to maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held to maturity securities are carried at amortized
cost; (ii) Available for Sale: debt and mortgage-backed and related securities
not classified as held to maturity, or trading and marketable equity securities
not classified as trading are classified as available for sale. Available for
sale securities are stated at fair value, with the unrealized gains or losses,
net of tax, reported as a separate component of shareholders' equity; and (iii)
Trading: the Company maintains a separate portfolio of assets which are carried
at market value and have been acquired for short term/trading purposes, to
enhance the Company's financial results, with unrealized gains or losses
recognized in current income.
MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgage loans, the principal and interest
payments on which are passed from the mortgage loan originators through
intermediaries that pool and repackage the participation interest in the form of
securities for sale to investors such as the Company. Such intermediaries which
guarantee the payment of principal and interest to investors can be government
sponsored enterprises such as Federal Home Loan Mortgage Corporation ("FHLMC"),
FNMA and Government National Mortgage Association ("GNMA"), or private mortgage
security conduits. 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 and generally are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Company.
When purchased by the Company, these securities have credit ratings of A or
better and meet the Federal Financial Institutions Examination Council
definition of low-risk securities. At September 30, 2000, private-issue
mortgage-backed securities, CMO's and REMIC's totaled $623.5 million, 97% of
which had a credit rating of AAA and 3% of which had a credit rating of AA. At
September 30, 1999, private-issue mortgage-backed securities, CMO's and REMIC's
totaled $721.5 million, 82% of which had a credit rating of AAA, 13% of which
had a credit rating of AA, 3% of which had a credit rating of A, and 2% of which
had a credit rating lower than A.
The Company has been reducing the amount of its mortgage-backed securities
portfolio during the year ended September 30, 2000, and management anticipates
that this type of balance sheet restructuring will be an ongoing strategic
initiative of the Company in fiscal 2001. During fiscal 2000, the Company
reduced the size of the mortgage-backed securities and investment securities
portfolios from $1.2 billion at September 30, 1999 to $1.0 billion at September
30, 2000. The Company used the funds generated from the repayment of principal
from the mortgage-backed securities and investment securities portfolios to fund
the growth in the loan portfolio.
At September 30, 2000, the aggregate securities of any single issuer (excluding
securities of the U.S. government and U.S. government agencies and corporations)
did not exceed 10% of the Company's shareholders' equity.
19
<PAGE> 20
COMPOSITION OF THE COMPANY'S MORTGAGE-BACKED AND RELATED SECURITIES PORTFOLIO
Held to Maturity. At September 30, 2000, the Company held $27.1 million in its
mortgage-backed and related securities held to maturity portfolio. The estimated
market value of those securities at that date was $26.5 million. Of this amount,
at September 30, 2000, 100% were fixed rate REMIC securities. At September 30,
2000, the mortgage-backed and related securities held to maturity portfolio
represented 1.1% of the Company's total assets compared to $39.5 million or 1.6%
of total assets at September 30, 1999.
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's mortgage-backed and
related securities held to maturity at September 30, 2000.
<TABLE>
<CAPTION>
-------------------------------------------------------
OVER FIVE YEARS TO
TEN YEARS OVER TEN YEARS
-------------------------- ---------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
REMIC's:
Private Issue........ $ 7,256 6.47% $ 19,832 6.80%
------------ ------------
$ 7,256 $ 19,832
============ ============
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
TOTAL
-------------------------------------------------------
AVERAGE
REMAINING ESTIMATED WEIGHTED
YEARS TO AMORTIZED FAIR AVERAGE
MATURITY COST VALUE YIELD
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
REMIC's:
Private Issue........ 19.25 $ 27,088 $ 26,479 6.71%
------------ ------------
$ 27,088 $ 26,479
============ ============
</TABLE>
Available for Sale. At September 30, 2000, the Company had mortgage-backed and
related securities available for sale with a carrying value of $777.9 million
and an estimated market value of $777.9 million which comprised 31.2% of total
assets. Of these, $28.7 million were MBS's issued by various federal agencies,
$42.7 million were private issue MBS's, $152.2 million were agency REMIC's, and
$554.3 million were private issue REMIC's. At September 30, 1999, the Company's
mortgage-backed and related securities available for sale were $919.9 million,
representing 37.2% of total assets. Of these, $31.3 million were MBS's issued by
various federal agencies, $69.5 million were private issue MBS's, $205.9 million
were agency REMIC's, and $613.2 million were private issue REMIC's. Although
there may be various subordination levels within the MBS or REMIC structure or
levels of collateral underlying the securities that should protect the Company's
position in the securities, private issue securities represent an additional
level of credit risk when compared with agency issue securities.
20
<PAGE> 21
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's mortgage-backed and
related securities available for sale at September 30, 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
OVER ONE YEAR TO OVER FIVE YEARS TO
FIVE YEARS TEN YEARS OVER TEN YEARS
-------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
------------ ----------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Participation certificates:
FNMA................. $ - - $ - - $ 29,038 6.52%
FHLMC................ 758 5.32% - - - -
Private Issue........ - - 996 7.00% 42,807 6.79%
REMIC's:
FNMA................. 57 9.00% 236 6.72% 27,955 5.78%
FHLMC................ - - 18,708 6.12% 111,762 6.38%
Private Issue........ - - 48,118 6.40% 522,096 6.82%
------ -------- ---------
$ 815 $ 68,058 $ 733,657
====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
TOTAL
-------------------------------------------------------
AVERAGE
REMAINING ESTIMATED WEIGHTED
YEARS TO AMORTIZED FAIR AVERAGE
MATURITY COST VALUE YIELD
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Participation certificates:
FNMA................. 28.92 $ 29,038 $ 27,938 6.52%
FHLMC................ 0.75 758 762 5.32%
Private Issue........ 25.86 43,803 42,694 6.80%
REMIC's:
FNMA................. 22.71 28,248 27,529 5.80%
FHLMC................ 21.36 130,470 124,662 6.34%
Private Issue........ 25.17 570,214 554,333 6.78%
----------- -----------
$802,531 $777,918
=========== ===========
</TABLE>
Held for Trading. At September 30, 2000 and 1999, the Company did not have any
securities in its trading portfolio. The trading portfolio of the Company has
typically carried various mortgage-backed or related securities that are
purchased for short-term trading profits or securities that are required to be
classified as such by regulatory definition. The Company may from time to time
originate mortgage loans which are swapped for mortgage-backed securities backed
by the original loans. These securities are classified as trading securities by
the Company as it is the Company's intent to sell those securities over a short
period of time.
21
<PAGE> 22
OTHER SECURITIES
The Company invests in various types of investment-grade quality liquid assets
that are permissible investments for federally chartered savings associations,
including U.S. Treasury obligations, securities of various federal agencies,
certain certificates of deposit of insured banks and savings institutions,
federal funds and, from time to time, repurchase agreements. Subject to various
restrictions applicable to all federally chartered savings associations, the
Company also invests its assets in commercial paper, investment grade corporate
debt securities, municipal securities, asset-backed securities and mutual funds,
the assets of which conform to the investments the Company is otherwise
authorized to make directly. Debt securities are classified as either available
for sale or held to maturity at the time of purchase, and carried at market
value if available for sale or at amortized cost if held to maturity.
COMPOSITION OF THE COMPANY'S DEBT AND EQUITY SECURITIES PORTFOLIO
Held to Maturity. At September 30, 2000, the Company had debt securities with an
amortized cost of $510,000 and an estimated market value of $522,000. The entire
amount was state and municipal obligations. The Company purchases debt
securities that are in the top three investment grades (A or better) at the time
that the investment is made.
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's investment securities
held to maturity at September 30, 2000. The yields on the municipal securities
represent their taxable-equivalent yield. (Note: all state and municipal
obligations had a weighted term to maturity of over one year to five years.)
<TABLE>
<CAPTION>
-----------------------------------------------------
TOTAL
-----------------------------------------------------
AVERAGE
REMAINING ESTIMATED WEIGHTED
YEARS TO AMORTIZED FAIR AVERAGE
MATURITY COST VALUE YIELD
------------ ------------ ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
State and municipal obligations........... 2.00 $ 510 $ 522 6.10%
----------- -----------
$ 510 $ 522
=========== ===========
</TABLE>
22
<PAGE> 23
AVAILABLE FOR SALE.
At September 30, 2000, the Company had securities available for sale with an
amortized cost of $220.0 million and an estimated market value of $213.8
million. Of the total amount, $218.1 million were U.S. Treasury or agency
obligations, $0.1 million were corporate notes and bonds, and $1.8 million were
marketable equity securities, primarily shares of mutual funds invested in bank
or thrift eligible securities.
The following table sets forth certain information regarding the amortized cost,
weighted average yields and maturities of the Company's investment securities
available for sale at September 30, 2000. The yields on the municipal securities
represent their taxable-equivalent yield.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
OVER ONE YEAR TO OVER FIVE YEARS TO
LESS THAN ONE YEAR FIVE YEARS TEN YEARS
------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
------------ ------------ ------------ ------------ ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency
obligations................ $ 52,966 4.78% $ 104,668 6.11% $ 50,482 6.18%
Corporate notes and bonds..... 99 5.60% - - - -
Marketable equity securities.. 103 6.06% - - - -
----------- ----------- ----------
$ 53,168 $ 104,668 $ 50,482
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
------------------------- -----------------------------------------------------
OVER TEN YEARS TOTAL
------------------------- -----------------------------------------------------
AVERAGE
WEIGHTED REMAINING ESTIMATED WEIGHTED
AMORTIZED AVERAGE YEARS TO AMORTIZED FAIR AVERAGE
COST YIELD MATURITY COST VALUE YIELD
------------ ------------ ------------ ------------ ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency
obligations................ $ 10,000 6.50% 4.10 $ 218,116 $ 212,179 5.81%
Corporate notes and bonds..... - - 0.25 99 99 5.60%
Marketable equity securities.. 1,643 1.24% 11.73 1,746 1,570 1.52%
----------- ----------- ----------
$ 11,643 $ 219,961 $ 213,848
=========== =========== ==========
</TABLE>
23
<PAGE> 24
AFFORDABLE HOUSING ACTIVITIES
The Company, through the Bank's subsidiary St. Francis Equity Properties
("SFEP"), invests in affordable housing properties throughout the State of
Wisconsin. The properties qualify for tax credits under Section 42 of the
Internal Revenue Code ("Code"). Typically, SFEP will commit to the equity
funding of a specific property that a developer has submitted to WHEDA for
approval and received. The developer then builds the property, generally with
financing from the Bank, with final equity funding from SFEP coming at the
completion of construction. Each property is structured as a limited liability
partnership ("LLP") or limited liability corporation ("LLC"), with SFEP being a
98% or 99% partner or member in each individual LLP or LLC.
The financial condition, results of operations and cash flows of each LLP or LLC
is consolidated in the Company's financial statements. The operations of the
properties are not expected to contribute significantly to the Company's net
income before income taxes. However, the properties do contribute in the form of
income tax credits, which lower the Company's effective tax rate. Once
established, the credits on each property last for ten years and are passed
through from the LLP or LLC to SFEP and reduce the consolidated federal tax
liability of the Company. Gross revenues of SFEP were $3.0 million, $3.7 million
and $5.1 million for the years ended September 30, 2000, 1999 and 1998
respectively. Gross expenses of SFEP were $3.2 million, $3.8 million and $5.3
million for each of the three years, respectively. The net operating loss of
SFEP results in an income tax benefit which is then increased by the income tax
credits which totaled $2.6 million, $3.0 million and $4.2 million for the years
ended September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000, the amount invested in affordable housing projects was
$27.1 million compared with $28.4 million at September 30, 1999. SFEP was a
equity partner in 12 projects in each of those years. During the year ended
September 30, 1999, the Company realized gains of $1.2 million on the sale of 13
affordable housing projects which had been classified as real estate held for
sale at September 30, 1998. The Company's decision to dispose of several
properties was the result of a review of its consolidated federal tax return.
Under the alternative minimum tax rules, the Company is currently carrying
forward tax credits that it has not utilized on its tax return. Although all tax
credits are expected to be used before their expiration, sale of the properties
will allow the Company to utilize tax credits sooner on its consolidated federal
tax return. At September 30, 2000, the Company has a tax credit carryforward of
$4.8 million.
The primary risk to the Company's results of operations from the affordable
housing investments involves the maintenance of the tax credits. The Company has
instituted several procedures which it believes will result in the maintenance
of the tax credits. Those procedures include an outside audit of the individual
LLP or LLC, including tenant compliance records, an outside audit of the
original development costs, review of the LLP or LLC and tenant compliance
records by the Company's staff, and a review of audit and compliance records of
the LLP or LLC performed by WHEDA. The Company believes that it has maintained
compliance on all of its properties and that through September 30, 2000, no
income tax credits are at risk. Other risks of the affordable housing
investments include the risks common to the owning and operating of apartment
units.
24
<PAGE> 25
SOURCES OF FUNDS
GENERAL
The Company's primary sources of funds for use in lending, investing and for
other general purposes are deposits, including brokered deposits, proceeds from
principal and interest payment on loans, mortgage-backed and related securities
and debt and equity securities, FHLB advances, and to a lesser extent, reverse
repurchase agreements. Loan payments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general market interest rates and economic conditions. Borrowings
may be used on a short-term basis to compensate for seasonal or other reductions
in normal sources of funds or for deposit inflows at less than projected levels,
or they also may be used on a longer-term basis to support expanded lending or
investment activities. The Company utilizes advances from the FHLB and reverse
repurchase agreements as sources for its borrowings. At September 30, 2000 and
1999, the Company had advances from the FHLB of $532.0 million or 22.5% of total
liabilities, and $607.5 million or 25.9% of total liabilities, respectively. At
September 30, 2000 and 1999, the Company had reverse repurchase agreements
outstanding of $246.0 million or 10.4% of total liabilities, and $177.7 million
or 7.6% of total liabilities, respectively. Of the Company's outstanding FHLB
advances at September 30, 2000, $425.0 million will mature or may be called
before September 30, 2001.
DEPOSITS
The Company offers a variety of deposit accounts having a range of interest
rates and terms. The Company's deposits principally consist of demand accounts
(checking and money market demand accounts ("MMDA")), passbook, and certificates
of deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Company's
deposits are obtained primarily from the areas in which its branches are
located, and the Company relies principally on customer service, marketing
programs and long-standing relationships with customers to attract and retain
these deposits. Various types of advertising and promotions to attract and
retain deposit accounts also are used. Deposit promotions may involve the use of
specific advertising for a type of deposit or it may include some form of
pricing incentive: either a deposit product with a higher rate than currently
offered by most competitors in the Company's market area, or a temporary pricing
concession for a limited period of time. The Company also uses brokered deposits
as a funding source for its business activities. The brokered deposits are used
to fund the general operating activities of the Company and to fund the
Company's mortgage-backed and related securities portfolio. At September 30,
2000, the Company had $341.3 million of brokered deposits, representing 23.2% of
total deposits, compared to $421.8 million or 28.4% of total deposits at
September 30, 1999. Maturities of brokered certificates range from three months
to ten years and include certificates that are callable at the option of the
Company. The average maturity of brokered deposits was 67 months at September
30, 2000 and 64 months at September 30, 1999. The Company has used brokered
deposits to fund operational activities when such funds offer a better or
quicker funding source than retail deposits or FHLB advances.
Management monitors the Company's certificate accounts and, based on historical
experience, management believes it will retain a large portion of such accounts
upon maturity. However, management 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 intangible reasons. Management considers Company
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors in deposit offerings and promotions.
The Company has been competitive in the types of accounts and interest rates it
has offered on its deposit products. The Company intends to continue its efforts
to attract deposits as a primary source of funds for supporting its lending and
investing activities.
25
<PAGE> 26
At September 30, 2000, the Company had outstanding $63.1 million in certificates
of deposit, net of brokered deposits, in amounts of $100,000 or more maturing as
follows:
<TABLE>
<CAPTION>
AMOUNT AT
SEPTEMBER 30, 2000
-------------------
(In thousands)
<S> <C>
Three months or less..................................... $ 4,597
Over three through six months............................ 16,401
Over six months through twelve months.................... 16,372
Over twelve months....................................... 25,686
--------------
Total................................ $ 63,056
==============
</TABLE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the average nominal interest rates on each
category of deposits presented. Management does not believe that the use of
year-end balances instead of average balances resulted in any material
difference in the information presented. In this table, brokered deposits are
included with certificates.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL STATED OF TOTAL STATED
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------------- ----------- ---------- ------------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing... $ 87,072 5.9% - $ 73,906 5.0% -
Interest bearing....... 78,580 5.3% 0.80% 68,621 4.6% 1.14%
Passbook accounts......... 91,544 6.2% 1.95% 115,638 7.8% 2.29%
Money market
demand accounts........ 369,038 25.1% 5.26% 360,360 24.3% 4.29%
Certificates.............. 845,647 57.5% 6.25% 865,778 58.3% 5.66%
------------ ---------- ------------ ----------
Total deposits............ $ 1,471,881 100.0% 5.07% $ 1,484,303 100.0% 4.58%
============ ========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------
1998
--------------------------------------
PERCENT AVERAGE
OF TOTAL STATED
AMOUNT DEPOSITS RATE
------------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Demand deposits:
Non-interest bearing... $ 66,337 5.4% -
Interest bearing....... 61,821 5.1% 1.34%
Passbook accounts......... 133,282 11.0% 3.30%
Money market
Demand accounts........ 323,088 26.5% 4.81%
Certificates.............. 632,346 52.0% 5.85%
------------ -----------
Total deposits............ $ 1,216,874 100.0% 4.75%
============ ===========
</TABLE>
26
<PAGE> 27
BORROWINGS AND OTHER FINANCING TRANSACTIONS
Although deposits are the Company's largest source of funds, the Company's
policy has been to utilize borrowings as an alternative or less costly source of
funds. The primary source of borrowing is advances from the FHLB which are
collateralized by the capital stock of the FHLB held by the Company and certain
of its mortgage loans and mortgage-backed and related securities. Such advances
are made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. The maximum amount the FHLB will
advance to member institutions for purposes other than meeting withdrawals
fluctuates from time to time in accordance with policies of the OTS and the
FHLB. At September 30, 2000, the Company's FHLB advances totaled $532.0 million,
representing 22.5% of total liabilities, a decrease from the $607.5 million
outstanding at September 30, 1999. At September 30, 2000, the Company had
additional borrowing capacity of $93.7 million from the FHLB; however,
additional securities may have to be pledged as collateral and additional FHLB
stock may have to be purchased.
Of the Company's outstanding FHLB advances at September 30, 2000, $425.0 million
will mature before September 30, 2001. Included in the amount maturing within
one year are $370.0 million of convertible fixed rate advances ("CFA" or
"CFAs"). A CFA is an advance that allows the FHLB to demand repayment prior to
the stated maturity date of the advance in accordance with its contractual
terms. In the event interest rates rise, the FHLB will more than likely exercise
its right to demand repayment of the CFA. In that case, the Bank will have the
option of seeking alternative funding arrangements, if necessary, which may be
to enter into another CFA at the then prevailing interest rates or entering into
other funding arrangements. At September 30, 2000, the $370.0 million of
outstanding CFAs have a maturity of four to six years and are puttable by the
FHLB during the next fiscal year and quarterly thereafter.
The Company also utilizes reverse repurchase agreements as a funding source. A
reverse repurchase agreement is a transaction between the Company and a broker
whereby the Company borrows money against a specific asset, generally a
mortgage-backed and related security, for a set interest rate for a specified
term. The reverse repurchase agreements generally have terms of 30 to 60 days.
At September 30, 2000 and 1999, the Company had $246.0 million and $177.7
million, respectively, of reverse repurchase agreements.
The Company's borrowings from time to time include Federal funds purchased. At
September 30, 2000 and 1999, the Company had $45.0 million and $25.0 million,
respectively, of Federal funds purchased.
In fiscal 1997, The Company established a line of credit with a third party
lending institution for purposes of funding corporate activities of the Company.
These typically include dividends, share repurchases and acquisitions. Dividends
received from the Bank are used as the primary source of cash to pay principal
and interest on the line of credit. The line of credit has a maximum borrowing
amount of $40.0 million and is collateralized by the stock of the Bank. At
September 30, 2000 and 1999, the Company had $36.0 and $21.0 million,
respectively, outstanding on the line of credit.
While increases in borrowings and changes in the collateralization levels due to
market interest rate changes could require the Company to add collateral to
secure its borrowings, the Company does not anticipate having a shortage of
qualified collateral to pledge against its borrowings.
27
<PAGE> 28
The following table sets forth certain information regarding the Company's FHLB
advances, borrowed funds and reverse repurchase agreements at or for the years
ended on the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............................... $ 572,800 $ 580,842 $ 402,929
Maximum amount outstanding at any month-end during
the year............................................ 634,446 645,051 469,051
Balance outstanding at end of year........................ 532,000 607,546 452,051
Weighted average interest rate during the year (1)........ 5.42% 4.94% 5.56%
Weighted average interest rate at end of year............. 5.61% 5.02% 5.41%
Reverse repurchase agreements:
Average balance outstanding............................... $ 211,572 $ 125,210 $ 15,116
Maximum amount outstanding at any month-end during
the year............................................ 260,579 205,010 30,550
Balance outstanding at end of year........................ 245,993 177,654 30,550
Weighted average interest rate during the year (1)........ 6.06% 4.29% 2.31%
Weighted average interest rate at end of year............. 6.59% 5.35% 0.32%
Bank line of credit:
Average balance outstanding............................... $26,417 $ 24,750 $ 9,000
Maximum amount outstanding at any month-end during
the year............................................. 36,000 30,000 18,000
Balance outstanding at end of year........................ 36,000 21,000 18,000
Weighted average interest rate during the year (1)........ 7.44% 6.39% 6.94%
Weighted average interest rate at end of year............. 7.90% 6.62% 6.74%
Total advances, reverse repurchase agreements
and bank line of credit:........................................
Average balance outstanding............................... $810,789 $ 730,802 $ 427,045
Maximum amount outstanding at any month-end during
the year............................................ 931,025 851,601 517,601
Balance outstanding at end of year........................ 813,993 806,200 500,601
Weighted average interest rate during the year (1)........ 5.65% 4.99% 5.51%
Weighted average interest rate at end of year............. 5.65% 5.16% 5.16%
</TABLE>
(1) Computed on the basis of average daily balances.
SUBSIDIARY ACTIVITIES
During the fiscal year ended September 30, 2000, the Bank had four wholly owned
subsidiaries: SF Insurance Services Corporation ("SF Insurance"), St.
Francis Equity Properties, Inc. ("SFEP"), SF Investment Corporation ("SF
Investment") and St. Francis Mortgage Corporation ("SF Mortgage").
SF INSURANCE.
SF Insurance is a Wisconsin corporation and offers fixed
annuities, indexed annuities, life insurance, disability income and survivorship
life sold exclusively through licensed agents who also are employees of the
Bank. The Bank is reimbursed by SF Insurance for administration and sales
services provided by the Bank to SF Insurance. At September 30, 2000, the Bank's
total investment in SF Insurance was approximately $302,000, and SF Insurance's
assets of $298,000 consisted primarily of cash.
SFEP.
SFEP is a Wisconsin corporation incorporated in February 1993 to own, operate
and develop multi-family rental property, either as a limited partner or through
other ownership status, for investment and subsequent resale. Properties include
projects for low-to-moderate income housing, which would qualify for tax credits
under Section 42 of the Code. SFEP is currently a limited partner in 12 projects
within the state of
28
<PAGE> 29
Wisconsin. Additionally, the Bank has provided financing to all of the projects.
However, the primary return to the Company on these projects is in the form of
tax credits earned over the first ten years of the projects life. At September
30, 2000, the Bank had loans outstanding to such projects of $13.4 million. At
September 30, 2000, the Bank's total investment in SFEP was approximately $6.9
million and SFEP assets of $34.7 million consisted primarily of its interests in
the properties developed. See "-Affordable Housing Activities."
SF INVESTMENT.
SF Investment is a company incorporated in Nevada for the purpose
of managing a portion of the Bank's investment portfolio. At September 30, 2000,
the Bank's total investment in SF Investment was approximately $409.6 million
and the assets consisted primarily of mortgage-backed and related securities.
SF MORTGAGE.
SF Mortgage is a Wisconsin corporation with an office in Illinois that is in
the business of purchasing loans originated by mortgage brokers in the Midwest
and then selling these loans to various investors. At September 30, 2000, the
Bank's total investment in SF Mortgage was approximately $512,000, and SF
Mortgage's assets of $3.7 million consisted primarily of mortgage loans held for
sale.
PERSONNEL
As of September 30, 2000, the Company had 350 full-time employees and 130
part-time employees. The employees of the Company are not represented by a
collective bargaining unit and the Company believes its relationship with its
employees to be good.
TAXATION
GENERAL
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Company and does not purport to be a
comprehensive description of all applicable tax rules.
BAD DEBT RESERVES
For the taxable years beginning before 1996, savings institutions, such as the
Bank, which met certain definitional tests primarily relating to their assets
and the nature of their business ("qualifying thrifts"), were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
additions could have been, within specified formula limits, deducted in arriving
at their taxable income.
In addition, earnings appropriated for bad debt reserves and deducted for
federal income tax purposes could not be used by the Bank to pay cash dividends
to the Company without the payment of income taxes by the Bank at the then
current income tax rate on the amount deemed distributed, which included the
amount of any federal income taxes attributable to the distribution. Thus, any
dividends to the Company that would have reduced amounts appropriated to the
Bank's bad debt reserves and have been deducted for federal income tax purposes
could have created a tax liability for the Company.
The Small Business Job Protection Act of 1996 ("the Act") repealed the reserve
method of accounting for bad debts by thrift institutions, effective for taxable
years beginning after 1995. The Bank is now required to use the specific
charge-off method. The Act also granted partial relief from the bad debt reserve
"recapture" which occurs in connection with the change in method of accounting.
There will not be any additional income tax expense to the Bank on recapture.
CORPORATE ALTERNATIVE MINIMUM TAX
From time to time the Company may be subject to alternative minimum tax on its
corporate income tax returns. The alternative minimum tax is calculated at a
rate of 20% on alternative minimum taxable income as defined in the Internal
Revenue code. The Company's actual tax payment is then based on the higher of
its regular tax liability or its alternative minimum tax.
DISTRIBUTIONS
To the extent that (i) the Company's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under an
experience method and (ii) the Company makes "non-dividend distributions" to
shareholders that are considered to result in distributions from the excess bad
debt reserve or the supplemental
29
<PAGE> 30
reserve for losses on loans ("Excess Distributions"), then an amount based on
the amount distributed will be included in the Company's taxable income.
Non-dividend distributions include distributions in excess of the Company's
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the Company's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result in
a distribution from the Company's bad debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if certain portions of the Bank's
accumulated tax bad debt reserve are used for any purpose other than to absorb
qualified bad debt loans, such as for the payment of dividends or other
distributions with respect to the Company's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state
taxes). See "-Regulation," below for limits on the payment of dividends of the
Bank and the Company.
STATE TAXATION
The State of Wisconsin imposes a tax on the Wisconsin taxable income of
corporations, including savings institutions, at the rate of 7.9%. The State of
Illinois imposes a replacement tax and income tax on the Illinois taxable income
of corporations at the rates of 2.5% and 4.8%, respectively.
REGULATION
The Company is a savings and loan holding company registered with and subject to
regulation by the OTS under the Home Owners' Loan Act of 1933, as amended (the
"HOLA"). The Company is required to file certain reports and otherwise comply
with the rules and regulations of the OTS and the Securities and Exchange
Commission (the "SEC") under the federal securities laws. The Bank, as a
federally chartered savings bank, is subject to regulatory oversight by its
primary regulator, the OTS.
HOLDING COMPANY REGULATIONS
The Company must obtain approval from the OTS before acquiring control of more
than 5% of the voting shares of another institution whose deposits are insured
by the Savings Association Insurance Fund ("SAIF") of the FDIC. (See "New
Financial Services Act" below for further applicable regulation).
REGULATION OF FEDERAL SAVINGS BANKS
The OTS has extensive regulatory, supervisory and enforcement authority over the
operations of the Company, the Bank and their affiliated parties. This
regulation and supervision established a comprehensive framework of activities
in which the entities can engage and is intended primarily for the protection of
the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
The Bank is required to file periodic reports with the OTS Regional Director and
is subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted, examiners may, among other things, require the Bank
to provide for higher general or specific loan loss reserves or write down the
value of certain assets. The last regular examination by the OTS was in December
1999.
ASSESSMENTS
Savings institutions are required by OTS regulations to pay assessments to the
OTS to fund the operations of the OTS. The general assessment, paid on a
semiannual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's OTS assessment for the three month
period ended June 30, 2000 was $193,000, based on Bank assets as of March 31,
2000 of $2.5 billion and the current OTS assessment rate.
30
<PAGE> 31
QUALIFIED THRIFT LENDER REQUIREMENT
In order for the Bank to exercise the powers granted to SAIF-insured
institutions and maintain full access to FHLB advances, it must qualify as a
qualified thrift lender ("QTL"). Under the HOLA and OTS regulations, a savings
institution is required to maintain a level of qualified thrift investments
equal to at least 65% of its "portfolio assets" (as defined by statute) on a
monthly basis for nine out of 12 months per calendar year. Qualified thrift
investments for purposes of the QTL test consist primarily of the residential
mortgages and related investments. As of September 30, 2000, the Company
maintained 91.3% of its portfolio assets in qualified thrift investments and
therefore met the QTL test.
FEDERAL REGULATIONS
The Bank is subject to federal regulations which address various issues
including, but not limited to, insurance of deposits, capital requirements, and
community reinvestment requirements.
NEW FINANCIAL SERVICES ACT
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the "Financial
Services Modernization Act" or "Act") was signed into law. The new law does a
number of things intended to increase competition in the financial services
area, including repealing sections of the 1933 Glass-Steagall Act so that
financial firms, such as banks, securities and insurance firms can affiliate
with each other, through the formation of financial holding companies. The Act
appoints the Federal Reserve as the "umbrella" regulator for such entities. The
Act also restricts the chartering and transferring of unitary thrift holding
companies, although it does not restrict the operations of unitary holding
companies which were in existence prior to May 4, 1999, and which continue to
meet the Qualified Thrift Lender Test and control only a single savings
institution. The Company is a unitary holding company and it and the Bank
presently meet these requirements. The Act adopts a number of consumer
protections, including provisions aimed at protecting privacy of information and
requiring disclosure of ATM usage charges. Many of the Act's provisions require
regulatory action, including the promulgation of regulations, to become
effective and it is too early to assess the eventual impact of the Act on either
the financial services industry in general or the specific operations of the
Company and the Bank.
INSURANCE OF DEPOSIT ACCOUNTS
The bank is a member of the Savings Association Insurance Fund. The Federal
Deposit Insurance Corporation maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for insured institutions
are determined semiannually by the Federal Deposit Insurance Corporation and
currently range from zero basis points for the healthiest institutions to 27
basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1999, payments for Savings Association Insurance Fund members
approximated 6.1 basis points while Bank Insurance Fund members paid 1.2 basis
points. Since January 1, 2000, there has been equal sharing of Financing
Corporation payments between members of both insurance funds.
The Federal Deposit Insurance Corporation has authority to increase insurance
assessments. A significant increase in Savings Association Insurance Fund
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank. Management cannot predict what insurance
assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
31
<PAGE> 32
CAPITAL REQUIREMENTS
OTS REGULATION
For the fiscal years ended September 30, 2000 and 1999, the OTS capital
regulations 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 both standards to comply with the capital requirements.
The following table summarizes the Bank's capital ratios and the ratios required
by federal regulations:
<TABLE>
<CAPTION>
TO BE ADEQUATELY TO BE WELL
CAPITALIZED UNDER CAPITALIZED UNDER
PROMPT CORRECTIVE PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS ACTION PROVISIONS
-------------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------------- -------- -------- ------------ --------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Tangible capital............. $169,261 6.78% > or = $ 99,893 > or = 4.0% > or = $ 124,866 > or = 5.0%
Core capital ................ 169,261 6.78% > or = 99,893 > or = 4.0% > or = 124,866 > or = 5.0%
Tier 1 risk-based capital.... 169,261 10.92% > or = 61,995 > or = 4.0% > or = 92,993 > or = 6.0%
Risk-based capital........... 179,330 11.57% > or = 123,991 > or = 8.0% > or = 154,989 > or = 10.0%
As of September 30, 1999:
Tangible capital............. $144,222 5.82% > or = $ 99,136 > or = 4.0% > or = $123,921 > or = 5.0%
Core capital ................ 144,222 5.82% > or = 99,136 > or = 4.0% > or = 123,921 > or = 5.0%
Tier 1 risk-based capital.... 144,222 9.98% > or = 57,803 > or = 4.0% > or = 86,704 > or = 6.0%
Risk-based capital........... 153,578 10.63% > or = 115,606 > or = 8.0% > or = 144,507 > or = 10.0%
</TABLE>
Unrealized gains and losses on securities available for sale are not included in
the above tangible, core and risk-based capital amounts.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, as amended (the "CRA"), a
depository institution has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the federal regulators to assess the
institution's record of meeting with the credit needs of its community and to
take such record into account in its evaluation of certain applications by such
institution. The CRA also requires all institutions to make public disclosure of
their CRA ratings and requires an institution's primary regulator to provide a
written evaluation of an institution's performance. The Bank's latest CRA
rating, received in November 1998, was "Outstanding."
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System, consisting of 12 FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLBs operate in a safe and sound manner.
Members of the FHLB-Chicago are required to acquire and hold shares of capital
stock in the FHLB-Chicago in an amount equal to 1% of the aggregate outstanding
principal amount of residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year. Further, at no time shall
advances (borrowings) from the FHLB-Chicago exceed 20 times the amount paid by
such member for FHLB-Chicago capital stock. The
32
<PAGE> 33
Bank is in compliance with these requirements with a total investment in
FHLB-Chicago stock of $30.4 million at September 30, 2000.
Among other benefits, the FHLBs provide a central credit facility primarily for
member institutions and make advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the
FHLB-Chicago. At September 30, 2000, the Bank had $532.0 million in advances
from the FHLB-Chicago. See "Business of the Company."
RESERVE REQUIREMENTS
Regulation D, promulgated by the Federal Reserve Board ("FRB"), imposes reserve
requirements on all depository institutions which maintain transaction accounts
or non-personal time deposits. Checking accounts, NOW accounts and certain other
types of accounts that permit payments or transfers to third parties fall within
the definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts). Under Regulation D, a depository institution must
maintain average daily reserves equal to 3% on the first $46.5 million of
transaction accounts. There is no reserve requirement on non-personal deposits.
In addition, the first $4.9 million of otherwise reservable liabilities are
exempt from the reserve requirement. The Bank must reserve for transaction
accounts in excess of $46.5 million in an amount equal to 10% of such excess.
These percentages and tranches are subject to adjustment by the FRB. As of
September 30, 2000, the Bank met Regulation D reserve requirements.
OTHER FEDERAL LAWS
RESTRICTIONS ON LOANS TO INSIDERS
Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
Federal Reserve establish limits on the total amount an institution may lend to
its executive officers, directors, and principal shareholders, and their related
interests (collectively referred to in this section as "insiders"). Generally,
an insider may borrow an aggregate amount not exceeding 15% of the institution's
unimpaired capital and unimpaired surplus on an unsecured basis and an
additional 10% on a secured basis. The regulations limit, with certain
exceptions, the aggregate amount a depository institution may lend to its
insiders as a class to an amount not exceeding the institution's unimpaired
capital and unimpaired surplus.
Among other things, these provisions require that extensions of credit to
insiders (a) be made on terms that are substantially the same as, and follow
credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not
involve more than the normal risk of repayment or present other unfavorable
features and (b) not exceed certain limitations on the amount of credit extended
to such persons, individually and in the aggregate, which limits are based, in
part, on the amount of the Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by the Bank's Board of Directors.
However, recent legislation permits the Bank to make loans to executive
officers, directors and principal stockholders on preferential terms, provided
the extension of credit is made pursuant to a benefit or compensation program of
the Bank that is widely available to employees of the Bank or its affiliates and
does not give preference to any insider over other employees of the Bank or
affiliate. It is a violation for an insider to knowingly receive, or permit a
related interest to receive, a loan that violates applicable regulations. The
Bank has not been significantly affected by such restrictions on loans to
insiders.
TRANSACTIONS WITH AFFILIATES
The Bank is required to comply with Sections 23A and 23B of the Federal Reserve
Act ("Sections 23A and 23B") relative to transactions with affiliates.
Generally, Sections 23A and 23B limit the extent to which the insured
institution or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and
surplus, place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guaranty and similar other types of transactions. Exemptions from 23A or
23B may be granted only by the FRB. The Company has not been significantly
affected by such restrictions on transactions with affiliates.
33
<PAGE> 34
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the SEC under Section 12(g) of the
Securities and Exchange Act of 1934, under which the Company is subject to
various restrictions and requirements.
ITEM 2. PROPERTIES
The Company conducts its business through 22 full-service locations, two limited
service offices in residential retirement communities, four loan production
offices and a mortgage banking subsidiary based in Illinois. Eleven of the
full-service branches are located in Milwaukee County, five are in Waukesha
County, four are in Washington County, one in Ozaukee County, and one is in
Walworth County. Management believes the current facilities are adequate to meet
the present and immediately foreseeable needs of the Company. The total net book
value of property owned by the Company was $21.4 million at September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these various legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these legal actions will not have a
material effect on the Company's consolidated financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the three months
ended September 30, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as to the business experience is supplied with respect
to the executive officers of the Company who do not serve on the Company's Board
of Directors. There are no arrangements or understandings between the persons
named and any other person pursuant to which such officers were selected, nor
are there any family relationships among them.
JAMES S. ECKEL, age 45, is an Executive Vice President of the Bank. Mr. Eckel
has held his position with the Bank since January 1999. Prior to that Mr. Eckel
was a Senior Vice President of the Bank.
JUDITH M. GAUVIN, age 42, is an Executive Vice President of the Bank. Ms. Gauvin
has held her position with the Bank since October 1999. Prior to that Ms. Gauvin
was a Senior Vice President of the Bank.
JAMES C. HAZZARD, age 55, is an Executive Vice President of the Bank. Mr.
Hazzard has held his position with the Bank since September 1997. From November
1994 to September 1997, Mr. Hazzard was President of Bank Wisconsin.
WILLIAM R. HOTZ, age 55, is Secretary and General Counsel of the Company and of
the Bank. Mr. Hotz joined the Company in those positions in May 1997. Prior to
joining the Company and the Bank, Mr. Hotz was a shareholder of the law firm of
von Briesen, Purtell & Roper, s.c.
WILLIAM T. JAMES, age 41, is an Executive Vice President of the Company and the
Bank. Mr. James has held those positions since January 1999. Mr. James was a
Senior Vice President of the Company and the Bank from 1997 to 1999. Prior to
1997, Mr. James was an Assistant Vice President of the Company and a Vice
President of the Bank.
BRADLEY J. SMITH, age 45, is an Executive Vice President of the Bank. Mr. Smith
became Executive Vice President of the Bank in January 1997. Prior to joining
the Bank, Mr. Smith was a Senior Vice President of Provident Bank in Cincinnati,
Ohio.
JON D. SORENSON, age 45, is Chief Financial Officer and Treasurer and is an
Executive Vice President of the Company and of the Bank. Mr. Sorenson became
Chief Financial Officer and Treasurer of the Company in
34
<PAGE> 35
November 1992, and of the Bank in September 1997. From December 1992 to
September 1997, Mr. Sorenson was a Senior Vice President of the Bank.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is currently being traded on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") National Market System
over-the-counter exchange under the symbol of STFR. Information required by this
item is incorporated by reference to the "Quarterly financial information
(Unaudited)" shown in Note 19 to Notes to Consolidated Financial Statements and
the "Earnings per share" Note 13 to Notes to Consolidated Financial Statements
included under Item 8 of this Annual Report on Form 10-K.
As of September 30, 2000, there were approximately 1,200 holders of record and
approximately 2,850 beneficial holders owning a total of 9,437,197 shares.
The Company paid quarterly dividends of $0.05 per share starting in November
1995 and has increased the dividend by $0.01 per share in each of the following
years. The dividend was increased to $0.10 per share in November 2000. No
dividends were paid prior to November 1995. The Company executed a two-for-one
stock split effective April 19, 1999. While there can be no assurance of the
payment of future dividends, the Company anticipates that future dividends, if
paid, would be paid on a quarterly basis in February, May, August and November.
Future payments of dividends will be subject to determination and declaration by
the Company's Board of Directors, which will take into account the Company's
financial condition, results of operations, tax considerations, industry
standards, economic conditions and other factors, including regulatory
restrictions which affect the payment of dividends by the Company's subsidiaries
to the Company.
On September 25, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles shareholders to buy one one-hundredth of a share of the Company's
preferred stock at an exercise price of $150. Rights do not become exercisable
until eleven business days after any person or group has acquired, commenced, or
announced its intention to commence a tender or exchange offer to acquire 15% or
more of the Company's common stock, or in the event a person or group owning 10%
or more of the Company's common stock is deemed to be "adverse" to the Company.
If the rights become exercisable, holders of each right, other than the
acquiror, upon payment of the exercise price, will have the right to purchase
the Company's common stock (in lieu of preferred shares) having a value equal to
two times the exercise price. If the Company is acquired in a merger, share
exchange or other business combination or 50% or more of its consolidated assets
or earning power are sold, rights holders, other than the acquiring or adverse
person or group, will be entitled to purchase the acquiror's shares at a similar
discount. If the rights become exercisable, the Company may also exchange
rights, other than those held by the acquiring or adverse person or group, in
whole or in part, at an exchange ratio of one share of the Company's common
stock per right held. Rights are redeemable by the Company at any time until
they are excercisable at the exchange rate of $.01 per right. Issuance of the
rights has no immediate dilutive effect, does not currently affect reported
earnings per share, is not taxable to the Company or its shareholders, and will
not change the way in which the Company's shares are traded. The rights expire
ten years from the date of issuance.
The Company's most recent share repurchase program for approximately 505,000
shares that was announced on April 22, 1999 was completed on June 30, 2000 at an
average price of $14.43 per share. This was the tenth such repurchase program
that the Company has undertaken. At September 30, 2000, an aggregate of
6,711,304 shares had been repurchased in all such repurchase programs at an
average price of $13.19. On June 30, 2000, the Company announced a share
repurchase program for its common stock whereby the Company may purchase up to
5% of the outstanding stock, or approximately 485,000 shares. The repurchase
program was authorized to start June 30, 2000. At November 30, 2000, 297,500
shares had been repurchased at an average price of $14.79 per share.
35
<PAGE> 36
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data. The
financial data is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements and notes thereto presented elsewhere in
this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................... $2,493,083 $2,476,199 $1,864,176 $1,660,649 $1,404,116
Cash and cash equivalents.................. 34,747 32,562 30,746 42,858 22,459
Loans receivable, net...................... 1,297,302 1,113,391 855,132 712,875 610,699
Mortgage loans held for sale............... 8,066 8,620 23,864 24,630 20,582
Debt securities held to maturity........... 510 810 1,817 3,833 6,215
Debt and equity securities available for
sale..................................... 213,848 216,649 109,061 56,247 60,001
Mortgage-backed and related securities held
to maturity.............................. 27,088 39,475 63,087 66,849 68,392
Mortgage-backed and related securities
available for sale....................... 777,918 919,879 634,003 620,716 519,766
Real estate held for investment............ 27,145 28,402 29,997 51,476 36,865
Real estate held for sale.................. - - 20,772 - -
Deposits................................... 1,471,881 1,484,303 1,216,874 1,087,136 877,684
Advances from the FHLB and other borrowings 864,676 834,738 504,677 420,228 375,034
Shareholders' equity....................... 130,923 131,514 121,545 128,530 125,179
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest and dividend income......... $ 174,654 $ 145,545 $ 117,909 $ 108,146 $ 92,097
Total interest expense..................... 120,731 93,282 76,063 69,363 56,413
---------- ---------- ---------- ---------- ----------
Net interest income before provision for
loan losses.............................. 53,923 52,263 41,846 38,783 35,684
Provision for loan losses.................. 2,509 1,920 2,300 1,280 1,300
---------- ---------- ---------- ---------- ----------
Net interest income...................... 51,414 50,343 39,546 37,503 34,384
Other operating income, net
Loan servicing and loan related fees....... 2,734 2,016 2,125 1,813 1,258
Impairment loss on mortgage-backed
securities............................... - - - (3,400) -
Securities gains/(losses).................. 12 (253) 1,243 2,015 3,420
Gain on sales of mortgage loans held for
sale, net................................ 1,133 2,806 4,367 1,562 1,057
Other operating income .................... 10,326 11,717 11,173 6,672 4,879
---------- ---------- ---------- ---------- ----------
Total other operating income, net........ 14,205 16,286 18,908 8,662 10,614
---------- ---------- ---------- ---------- ----------
General and administrative expenses (1).... 49,132 43,563 41,831 32,903 31,622
---------- ---------- ---------- ---------- ----------
Income before income tax expense........... 16,487 23,066 16,623 13,262 13,376
Income tax expense......................... 5,364 6,410 1,826 1,544 2,911
---------- ---------- ---------- ---------- ----------
Net income......................... $ 11,123 $ 16,656 $ 14,797 $ 11,718 $ 10,465
========== ========== ========== ========== ==========
Basic earnings per share $ 1.13 $ 1.78 $ 1.51 $ 1.17 $ 0.96
========== ========== ========== ========== ==========
Diluted earnings per share......... $ 1.12 $ 1.70 $ 1.43 $ 1.10 $ 0.91
========== ========== ========== ========== ==========
Dividends per share................ $ 0.36 $ 0.32 $ 0.28 $ 0.24 $ 0.20
</TABLE>
------------------------
(1) General and administrative expenses for the year ended September 30, 1996
include a one-time special SAIF assessment of $4.2 million. General and
administrative expenses for the year ended September 30, 2000 include the
effect of an additional ESOP expense of $7.1 million voluntarily incurred
by the Company to repay the remaining loan principal to its ESOP plan. See
Note 15 to the Notes to Consolidated Financial Statements included under
Item 8 of this Annual Report on Form 10-K.
36
<PAGE> 37
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (cont.)
<TABLE>
<CAPTION>
At or For the Years Ended September 30,
----------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios (4):
Return on average assets................. 0.44% 0.75% 0.87% 0.77% 0.82%
Return on average equity................. 8.70 13.12 11.29 9.17 7.81
Shareholders' equity to total assets..... 5.25 5.31 6.52 7.74 8.92
Average shareholders' equity to average 5.11 5.73 7.71 8.37 10.48
assets....................................
Dividend payout ratio.................... 32.14 18.82 19.65 21.82 21.98
Net interest spread during the period (1) 1.98 2.33 2.47 2.45 2.56
Net interest margin (1).................. 2.24 2.51 2.68 2.73 2.97
General and administrative expenses to
average assets............................ 1.96 1.97 2.46 2.16 2.47
Other operating income to average assets. 0.57 0.74 1.11 0.57 0.83
Average interest-earning assets to average
interest-bearing liabilities........... 105.20 103.93 104.41 105.82 108.73
Asset Quality Ratios:
Non-performing loans to gross loans (2).. 0.95 0.23 0.29 0.38 0.58
Non-performing assets to total assets (2) 0.53 0.13 0.16 0.21 0.28
Allowance for loan losses to gross loans. 0.76 0.75 0.77 0.79 0.78
Allowance for loan losses to
non-performing loans (2).................. 80.17 329.44 263.19 207.08 134.11
Allowance for loan losses to
non-performing assets (2)................. 78.71 291.37 257.52 181.82 131.41
Net charge-offs to average loans......... 0.12 0.04 0.12 0.30 0.03
Regulatory Capital Ratios (3):
Tangible ratio........................... 6.78 5.82 6.48 7.14 6.86
Core ratio............................... 6.78 5.82 6.48 7.14 6.86
Tier 1 risk-based ratio.................. 10.92 9.98 10.23 11.66 12.60
Total risk-based ratio................... 11.57 10.63 10.88 12.21 13.12
Other Data:
Number of deposit accounts............... 141,080 136,292 128,643 119,575 96,880
Number of real estate loans outstanding.. 3,804 3,482 3,486 3,623 3,888
Number of real estate loans serviced..... 9,531 9,046 8,479 7,672 7,101
Mortgage loan originations (in thousands) $407,985 $636,066 $505,849 $310,172 $238,234
Consumer loan originations (in thousands) $ 51,472 $102,998 $ 93,700 $ 57,157 $ 61,378
Full service customer facilities......... 22 22 21 19 15
</TABLE>
-------------------------
(1) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(2) Non-performing loans consist of nonaccrual loans and troubled debt
restructurings. Non-performing assets consist of non-performing loans and
foreclosed properties, which consist of real estate acquired by foreclosure
or deed-in-lieu thereof.
(3) Capital ratios are those of St. Francis Bank, F.S.B. only.
(4) Performance ratios for the year ended September 30, 1996 include the
effects of the one-time special SAIF assessment of $4.2 million.
Performance ratios for the year ended September 30, 2000 include the
effects of the additional ESOP expense of $7.1 million. See Note 15 to the
Notes to Consolidated Financial Statements included under Item 8 of this
Annual Report on Form 10-K.
37
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a bank holding company engaged in the financial services business
serving southeastern Wisconsin through its wholly-owned subsidiary, the Bank. In
January 1999, the Company completed the acquisition of the stock of Reliance
Bancshares, Inc., which was subsequently merged into the Bank.
The earnings of the Company depend on its level of net interest income and other
operating income offset by general and administrative expenses and the level of
low income housing credits. Net interest income is a function of the Company's
net interest spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of average ratio of interest-earning assets
as compared to interest-bearing liabilities. Other operating income consists
primarily of loan servicing fees, deposit charges, gains on sales of loans and
securities, income from the operation of affordable housing properties and
commissions on insurance, annuity and brokerage products. General and
administrative expenses consist primarily of employee compensation and benefits,
occupancy and equipment costs, expenses from operation of affordable housing
properties, data processing and advertising expenses. The Company's affordable
housing subsidiary generates tax credits which reduce the Company's federal
income tax expense.
The Company's operations include four strategic business segments: Retail
Banking, Commercial Banking, Mortgage Banking and Investments. Management
evaluates the financial performance of each segment primarily based on the
individual segments' direct contribution to the Company's net income.
Information regarding the net interest income, other operating income, profit
and average assets for the fiscal years ended September 30, 2000, 1999 and 1998
is set forth in Note 18 to the Notes to Consolidated Financial Statements
included under Item 8 of this Annual Report on Form 10-K.
The Company's operating results are significantly affected by general economic
conditions and the monetary, fiscal and regulatory policies of governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds likewise are heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Company's market areas.
FINANCIAL CONDITION
Total assets at September 30, 2000 were $2.49 billion, an increase of $17
million from $2.47 billion at September 30, 1999. The primary area of growth was
an increase of $183.9 million in loans receivable offset by a decline of $142.0
million in mortgage-backed and related securities available for sale.
Mortgage-backed and related securities, including securities available for sale,
decreased to $805.0 million at September 30, 2000 from $959.4 million at
September 30, 1999, which represented 32.3% and 38.7% of total assets,
respectively. In fiscal 2000, the Company began reducing the size of its
mortgage-backed securities portfolios which management anticipates will continue
to be an ongoing strategic initiative of the Company in fiscal 2001. As part of
this effort, the Company has reduced the size of the mortgage-backed securities
and investment securities portfolios by $157 million and used the funds
generated from the repayment of principal on such portfolios to fund the growth
in the Company's loan portfolio.
Net loans receivable, including loans held for sale, increased $183.4 million to
$1.30 billion at September 30, 2000 from $1.12 billion at September 30, 1999. In
addition to the Company's efforts to grow its loan portfolio, the Company has
continued to diversify its loan portfolio and as a result, the increase included
increases in commercial real estate and commercial and agriculture. The
Company's one- to four-family portfolio also increased in fiscal 2000. The
generally higher interest rate environment during the current year impacted the
amount and type of loans originated during fiscal 2000 compared with fiscal
1999. Gross commercial real estate and multi-family loans increased by $24.3
million to $436.8 million. One to four family home mortgage loans increased
$110.1 million to $404.5 million. As interest rates rose during the current
year, originations of one- to four-family mortgage loans shifted from fixed-rate
products to adjustable-rate ARM products, which the Company retained in its loan
portfolio. It is anticipated that a majority of these loans may eventually
convert to a fixed-rate product and be sold into the secondary market.
Commercial loans increased $28.6 million to $152.5 million, reflecting the
Company's
38
<PAGE> 39
continued commitment to this area also. Home equity lines of credit increased
$31.7 million to $188.3 million. Consumer loans decreased $23.1 million to
$124.9 million. The decrease in consumer loans is due to a decline in
originations, accelerated repayments of consumer loans and the discontinuance of
the Company's indirect auto loan program during the current year.
The Company originated $97.6 million of commercial real estate and multi-family
loans for the year ended September 30, 2000 compared with $210.2 million for the
year ended September 30, 1999. Commercial loan originations decreased to $101.7
million loans for the year ended September 30, 2000 compared with $114.5 million
in the prior year. One- to four-family and residential construction loan
originations decreased to $178.4 million for the year ended September 30, 2000
compared with $334.4 million in the prior year. The Company originated $132.0
million of home equity loans for the year ended September 30, 2000 compared to
$113.8 million for the year ended September 30, 1999. Consumer loan originations
decreased to $51.5 million loans for the year ended September 30, 2000 compared
with $103.0 million in the prior year. The generally higher interest rate
environment during the current year impacted the amount and type of loans
originated during fiscal 2000 compared with fiscal 1999. The decrease in
originations was due to this change in interest rates and was not part of a
strategic initiative of the Company during fiscal 2000.
Real estate held for investment decreased to $27.1 million at September 30,
2000, from $28.4 million at September 30, 1999, consisting of 12 affordable
housing projects within the state of Wisconsin, which qualify for tax credits
under Section 42 of the Internal Revenue Code.
Deposits decreased $12.4 million to $1.47 billion at September 30, 2000 from
$1.48 billion at September 30, 1999. The decrease in deposits was due primarily
to decreases of $24.1 million in passbook accounts and $20.1 million in
certificates of deposit offset by increases of $8.7 million in money market
demand account deposits and $23.1 million in checking accounts. At September 30,
2000, certificates of deposits included $341.3 million in brokered certificates
of deposit compared with $421.8 million at September 30, 1999, a decrease of
$80.5 million. The brokered deposits are generally used to fund the Company's
loan growth, with terms from three months to ten years in maturity. The majority
of the money market demand accounts are tied to a national money market fund
index and compete with money market funds. The level of deposit flows during any
given period is heavily influenced by factors such as the general level of
interest rates as well as alternative yields that investors may obtain on
competing instruments, such as money market mutual funds.
Advances and other borrowings increased to $864.7 million at September 30, 2000
from $834.7 million at September 30, 1999. The Company uses wholesale funding
sources, primarily advances from the FHLB, to fund that part of loan growth not
funded by growth in retail deposits.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL
Net income for the year ended September 30, 2000 decreased to $11.1 million
compared with $16.7 million for the year ended September 30, 1999. In fiscal
2000, the Company made a voluntary acceleration of loan principal to the
Company's Employee Stock Ownership Plan ("ESOP"). Net income was reduced $6.3
million for the year ended September 30, 2000 by the additional ESOP
compensation expense. The remaining principal balance of the ESOP loan was
repaid during the quarter ended June 30, 2000 and the additional ESOP expense
ended with that quarter. Net income for the year ended September 30, 2000,
excluding the additional ESOP expense, was higher than the previous year
primarily due to a $1.6 million increase in net interest income before provision
for loan losses and a decrease of $1.6 million in general and administrative
expenses, partially offset by an increase of $600,000 in the provision for loan
losses and a $2.1 million decrease in other operating income.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $1.6 million or
3.2% to $53.9 million for the year ended September 30, 2000 compared to $52.3
million for the year ended September 30, 1999. The increase was due to an
increase of $318.7 million in average earning assets, partially offset by a
decrease in the net interest margin to 2.24% in 2000 from 2.51% in 1999. While
the Company has adopted interest rate risk policies in an effort to protect net
interest income from significant increases or decreases in interest rates, the
Company's net income could still be affected by a narrowing of its net interest
rate spread.
39
<PAGE> 40
Total interest income increased $29.1 million or 20.0% to $174.7 million for the
year ended September 30, 2000 compared to $145.6 million for the year ended
September 30, 1999. The increase in interest income was primarily the result of
increases of $20.5 million in interest on loans, $5.6 million in interest on
mortgage-backed and related securities and $3.2 million in interest in debt and
equity securities. The increase in interest on loans was due to an increase in
the average balance of loans to $1.2 billion for the year ended September 30,
2000, compared to $992.8 million for the year ended September 30, 1999,
partially offset by a decrease in the average yield on loans which decreased to
8.09% for the year ended September 30, 2000 from 8.11% for the year ended
September 30, 1999. The increase in interest on interest mortgage-backed and
related securities was due to an increase in the average balance to $899.7
million for the year ended September 30, 2000, compared to $869.1 million for
the year ended September 30, 1999, as well as an increase in the average yield
on mortgage-backed and related securities to 6.47% for the year ended September
30, 2000 from 6.05% for the year ended September 30, 1999. The increase in
interest on debt and equity securities was due to an increase in the average
balance to $222.1 million for the year ended September 30, 2000, compared to
$177.7 million for the year ended September 30, 1999, as well as an increase in
the average yield on debt and equity securities to 5.88% for the year ended
September 30, 2000 from 5.53% for the year ended September 30, 1999. The
increase in the average yields is due primarily to the higher interest rate
environment in effect during the year as compared to historical rates.
Total interest expense increased $27.4 million or 29.4% to $120.7 million for
the year ended September 30, 2000 compared to $93.3 million for the year ended
September 30, 1999. Interest expense on deposits increased $15.1 million or
26.3% to $72.5 million for the year ended September 30, 2000 compared to $57.4
million for the year ended September 30, 1999. The average balance of deposits
increased to $1.43 billion for the year ended September 30, 2000, from $1.29
billion for the year ended September 30, 1999. The increases in the balances of
deposits are due to growth in retail deposit products. The average cost of
deposits increased to 5.05% for the year ended September 30, 2000, from 4.46%
for the year ended September 30, 1999. Brokered deposits decreased to $341.3
million during the year compared to $421.8 million in 1999 at weighted average
stated rates of 6.44% and 6.08%, respectively. The higher cost of the brokered
certificates reflects the use of longer-term callable brokered deposits. The
Company then, in effect, lowers the cost of the deposits through the use of
interest rate swaps to rates approximating short-term rates. This funding then
matches the interest rate characteristics of the related asset, which is
generally a short-term adjusting mortgage-backed security. As part of a
continuing strategy, the Company continues to offer deposit products that
compete more effectively with money market funds and other non-financial deposit
products. Such accounts have generally changed the Company's traditional mix of
deposit accounts to one that is more adjustable to current interest rates such
as the money market demand account. This has resulted in passbook and
certificate of deposit accounts representing a lower percentage of the Company's
deposit portfolio other than brokered certificates.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $600,000 or 30.7% to $2.5 million for
the year ended September 30, 2000 compared with $1.9 million for the year ended
September 30, 1999. For the year ended September 30, 2000, net charge-offs were
$1.5 million compared with $397,000 for the year ended September 30, 1999. Net
charge-offs for the year ended September 30, 2000 included a $782,000 charge-off
on a commercial real estate credit that had been in non-performing status since
1997 and had been fully reserved for in prior periods. The allowance for loan
losses totaled $10.4 million and $9.4 million at September 30, 2000 and 1999,
respectively, representing 0.76% and 0.75% of total gross loans, respectively.
The amount of non-performing loans was $13.0 million or 0.95% of gross loans at
September 30, 2000, compared to $2.8 million or 0.23% of gross loans at
September 30, 1999. The provision for loan loss is established based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy.
OTHER OPERATING INCOME
Other operating income decreased $2.1 million or 12.8% to $14.2 million for the
year ended September 30, 2000 compared to $16.3 million for the year ended
September 30, 1999. The decrease was primarily due to decreases in gains on
sales of mortgage loans, a gain on the sale of real estate held for sale and
income from the Company's affordable housing subsidiary, partially offset by
increases in loan servicing and deposit fee income. Gains on the sale of
mortgage loans decreased to $1.1 million for the year ended September 30, 2000
compared with $2.8 million for the prior year. The level of gains on loans is
highly dependent on the interest rate environment and resulting level of
origination of mortgage loans. The recent increase in interest rates on mortgage
loans has resulted in a
40
<PAGE> 41
lower level of loan originations and also in a higher proportion of adjustable
rate mortgage loans which the Company retains in its own portfolio. The Company
generally realizes less gain on the sale of loans during periods of rising
interest rates. Income from the operations of the Company's affordable housing
subsidiary (which represents primarily rental income) decreased to $3.0 million
from $3.7 million for the years ended September 30, 2000 and 1999, respectively.
This was due to the sale of 13 affordable housing properties on which the
Company realized gains of $1.2 million for the year ended September 30, 1999.
There was no such gain in the current fiscal year. Loan servicing and loan
related fees increased to $2.7 million from $2.0 million for the years ended
September 30, 2000 and 1999, respectively. Deposit fees and service charges
increased to $4.9 million for the year ended September 30, 2000 compared with
$4.2 million in the prior year. The Company has been increasing its mix of
deposit accounts that generate various fee incomes such as overdraft fees and
ATM surcharges.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, excluding the additional ESOP expense,
decreased $1.6 million or 3.5% to $42.0 million for the year ended September 30,
2000, compared to $43.6 million for the year ended September 30, 1999. The
primary cause for the decrease in the current year was a decline in affordable
housing expenses due to a sale of a portion of the Company's affordable housing
projects in the previous year and to a decline in compensation and employee
benefits. Considering the actual effect of the additional ESOP expense of $7.1
million for the year ended September 30, 2000, general and administrative
expenses increased to $49.1 million compared to $43.6 million in the prior year.
However, the entire ESOP loan principal was repaid in fiscal 2000 and management
anticipates the absence of the expense going forward will have a positive
influence on earnings.
INCOME TAX EXPENSE
Income tax expense decreased by $1.0 million to $5.4 million for the year ended
September 30, 2000 compared to $6.4 million for the year ended September 30,
1999. The Company's effective tax rate was 32.5% for the year ended September
30, 2000, compared to 27.8% for the year ended September 30, 1999. The Company's
effective tax rate is lower than the combined federal and state tax rates
primarily due to the effect of the tax credits earned by the Company's
affordable housing subsidiary. The increase in the effective tax rate in the
current year is due primarily to the fact that the majority of the ESOP expense
is non-deductible for tax purposes and because of a decrease in the tax credits
earned by the Company's affordable housing subsidiary, as a result of the sale
of 13 of the properties in the prior year. Income tax credits decreased to $2.6
million for the year ended September 30, 2000, compared to $3.0 million in the
prior year. The Company is currently carrying forward tax credits that it has
not utilized on its tax returns.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL
Net income for the year ended September 30, 1999 increased $1.9 million or 12.8%
to $16.7 million from $14.8 million for the year ended September 30, 1998.
Factors causing the change in net income included a $10.4 million increase in
net interest income before provision for loan losses, a $2.6 million decrease in
other operating income offset by a decrease of $.4 million in the provision for
loan losses, an increase of $1.7 million in general and administrative expenses
and an increase of $4.6 million in income tax expenses.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $10.4 million or
24.9% to $52.3 million for the year ended September 30, 1999 compared to $41.8
million for the year ended September 30, 1998. The increase was due to an
increase of $522.0 million in average earning assets, partially offset by a
decrease in the net interest margin to 2.51% in 1999 from 2.68% in 1998. While
the Company has adopted interest rate risk policies in an effort to protect net
interest income from significant increases or decreases in interest rates, the
Company's net income could still be affected by a narrowing of its net interest
rate spread.
Total interest income increased $27.6 million or 23.4% to $145.6 million for the
year ended September 30, 1999 compared to $117.9 million for the year ended
September 30, 1998. The increase in interest income was primarily the result of
increases of $12.7 million in interest on loans, $9.4 million in interest on
mortgage-backed and related securities and $5.6 million in interest in debt and
equity securities. The increase in interest on loans was due to an increase in
the average balance of loans to $992.8 million for the year ended September 30,
1999, compared to $800.8 million for the year ended September 30, 1998,
partially offset by a decrease in the average yield on loans which decreased to
8.11% for the year ended September 30, 1999, from 8.46% for the year ended
September 30,
41
<PAGE> 42
1998. The increase in interest on interest mortgage-backed and related
securities was due to an increase in the average balance to $869.1 million for
the year ended September 30, 1999, compared to $643.2 million for the year ended
September 30, 1998, partially offset by a decrease in the average yield on
mortgage-backed and related securities which decreased to 6.05% for the year
ended September 30, 1999, from 6.72% for the year ended September 30, 1998. The
increase in interest on debt and equity securities was due to an increase in the
average balance to $177.7 million for the year ended September 30, 1999,
compared to $73.6 million for the year ended September 30, 1998, partially
offset by a decrease in the average yield on debt and equity securities which
decreased to 5.53% for the year ended September 30, 1999, from 5.82% for the
year ended September 30, 1998. The increase in the average balance of loans
includes the acquisition of $25.7 million in net loans from Reliance, but is due
primarily to the Company's efforts to increase its emphasis on commercial and
consumer lending. The increase in the average balances of mortgage-backed and
related securities and debt and equity securities is due primarily to the
Company's efforts to fully leverage its capital. The decrease in the average
yields is due primarily to the lower interest rate environment in effect during
the year as compared to historical rates. As loans and securities repay and/or
mature, they are replaced in the Company's portfolios by new loans and
securities, which generally have lower interest rates than those previously put
in the portfolio.
Total interest expense increased $17.2 million or 22.6% to $93.3 million for the
year ended September 30, 1999 compared to $76.1 million for the year ended
September 30, 1998. Interest expense on deposits increased $5.1 million or 9.8%
to $57.4 million for the year ended September 30, 1999 compared to $52.3 million
for the year ended September 30, 1998. The average balance of deposits increased
to $1.29 billion for the year ended September 30, 1999, from $1.06 billion for
the year ended September 30, 1998. The increases in the balances of deposits are
due to growth in retail deposit products and an increase in brokered
certificates of deposit. The average cost of deposits decreased to 4.46% for the
year ended September 30, 1999, from 4.94% for the year ended September 30, 1998.
Brokered deposits increased to $421.8 million during the year compared to $214.9
million in 1998 at weighted average stated rates of 6.08% and 6.15%,
respectively. The higher cost of the brokered certificates reflects the use of
longer-term callable brokered deposits to fund the Company's leverage program.
The Company then, in effect, lowers the cost of the deposits through the use of
interest rate swaps to rates approximating short-term rates. This funding then
matches the interest rate characteristics of the related asset, which is
generally a short-term adjusting mortgage-backed security. As part of a
continuing strategy, the Company continues to offer deposit products that
compete more effectively with money market funds and other non-financial deposit
products. Such accounts have generally changed the Company's traditional mix of
deposit accounts to one that is more adjustable to current interest rates such
as the money market demand account. This has resulted in passbook and
certificate of deposit accounts representing a lower percentage of the Company's
deposit portfolio other than brokered certificates.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $.4 million or 16.5% to $1.9 million for
the year ended September 30, 1999 compared with $2.3 million for the year ended
September 30, 1998. Net charge-offs for the year ended September 30, 1999 were
$397,000 compared with $972,000 for the year ended September 30, 1998. The
allowance for loan losses totaled $9.4 million and $7.5 million at September 30,
1999 and 1998, respectively, representing 0.75% and 0.77% of total gross loans,
respectively. The amount of non-performing loans was $2.8 million or 0.23% of
gross loans at September 30, 1999, compared to $2.9 million or 0.29% of gross
loans at September 30, 1998. The provision for loan loss is established based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy.
OTHER OPERATING INCOME
Other operating income decreased $2.6 million or 16.1% to $16.3 million for the
year ended September 30, 1999 compared to $18.9 million for the year ended
September 30, 1998. The decrease was primarily due to decreases in gains on
sales of mortgage loans, gains on securities, income from the Company's
affordable housing subsidiary and other income, partially offset by a gain on
the sale of real estate held for sale and increases in deposit fee income. Gains
on the sale of mortgage loans decreased to $2.8 million for the year ended
September 30, 1999 compared with $4.4 million for the prior year. The level of
gains on loans is highly dependent on the interest rate environment and
resulting level of origination of mortgage loans. The recent increase in
interest rates on mortgage loans has resulted in a lower level of loan
originations and also in a higher proportion of adjustable rate mortgage loans
which the Company retains in its own portfolio. The Company generally realizes
less gain on the sale of loans than during periods of rising interest rates.
Losses on investments and mortgage-backed and related securities were
42
<PAGE> 43
$253,000 for the year ended September 30, 1999, compared to gains of $1.2
million for the year ended September 30, 1998. The Company does not consider
gains on the sale of securities as a predictable source of earnings, as such
sales are based on the Company's ongoing review of the individual securities
within the Company's available for sale portfolio whereby securities may be sold
and replaced with ones that offer a different combination of interest income,
interest rate risk or credit risk than the security sold. Income from the
operations of the Company's affordable housing subsidiary (which represents
primarily rental income) decreased to $3.7 million from $5.1 million for the
years ended September 30, 1999 and 1998, respectively. This was due to sale of
13 affordable housing properties on which the Company realized gains of $1.2
million for the year ended September 30, 1999. Deposit fees and service charges
increased to $4.2 million for the year ended September 30, 1999 compared with
$3.5 million in the prior year. The Company has been increasing its mix of
deposit accounts that generate various fee incomes such as overdraft fees and
ATM surcharges. Other operating income for the year ended September 30, 1998
includes $795,000 related to a refund of state income taxes related to a prior
year's tax audit. The interest portion of the refund is included in other
operating income while the portion that is a refund of previous taxes paid
reduces income tax expense.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.8 million or 4.4% to $43.6
million for the year ended September 30, 1999, compared to $41.8 million for the
year ended September 30, 1998. The increase in general and administrative
expenses was due primarily to increases in compensation and benefits and office
building and equipment expenses, partially offset by a decrease in affordable
housing expenses. The compensation, office building and equipment expenses
increased due to the Company's increasing level of banking assets, the addition
of physical branch locations and expansion of newer lines of business. In
particular, the Company has expanded its commercial lending capabilities and put
in place an investment products division. Included in these cost areas are the
costs of the Year 2000 issue. The decrease in the affordable housing expenses is
due to the sale of 13 affordable housing properties. Included in other general
and administrative expenses for the year ended September 30, 1998 is $684,000
relating to a settlement of a lawsuit involving a contractor that went out of
business before completing home improvement work on properties on which the Bank
was the lender.
INCOME TAX EXPENSE
Income tax expense increased by $4.6 million to $6.4 million for the year ended
September 30, 1999 compared to $1.8 million for the year ended September 30,
1998. The Company's effective tax rate was 27.8% for the year ended September
30, 1999, compared to 11.0% for the year ended September 30, 1998. The Company's
effective tax rate is significantly lower than the combined federal and state
tax rates due to the effect of the tax credits earned by the Company's
affordable housing subsidiary. The increase in the effective tax rate is due to
the aforementioned refund of state income taxes of $780,000 included in the
prior year, and the decrease in tax credits earned by the Company's affordable
housing subsidiary due to the sale of 13 properties in the current year. Income
tax credits decreased to $3.0 million for the year ended September 30, 1999,
compared to $4.2 million in the prior year. The Company is currently carrying
forward tax credits that it has not utilized on its tax returns. The decision to
dispose of several properties will allow the Company to utilize the tax credits
sooner on its consolidated federal tax return.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
consolidated average statements of financial condition and the consolidated
statements of income for the years ended September 30, 2000, 1999 and 1998, and
reflects the average yield on assets and average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively, for the years
shown. Average balances are derived principally from average daily balances and
include non-accruing loans. The yields and costs include fees which are
considered adjustments to yields. The amount of interest income resulting from
the recognition of loan fees was $520,000, $630,000 and $453,000 for the years
ended September 30, 2000, 1999 and 1998, respectively. Interest income on
non-accruing loans is reflected in the year that it is collected. Such amounts
are not material to net interest income or net change in net interest income in
any year. Non-accrual loans are included in the average balances and do not have
a material effect on the average yield. Tax-exempt investments are immaterial
and the tax-equivalent method of presentation is not included in the schedule.
Interest rate swaps, which are accounted for as a hedge of the cost of various
liabilities, are included in the category of the liability being hedged.
43
<PAGE> 44
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------------------------------------------------------------
Average Balance Sheet 2000 1999
----------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits.............. $ 1,381 $ 75 5.43 % $ 14,466 $ 734 5.07 %
Trading account securities............................. 654 59 9.02 350 26 7.43
Debt and equity securities............................. 222,070 13,065 5.88 177,732 9,833 5.53
Mortgage-backed and related securities................. 899,651 58,250 6.47 869,073 52,605 6.05
Loans:
First mortgage....................................... 805,125 62,674 7.78 593,473 47,213 7.96
Home equity.......................................... 172,312 15,407 8.94 144,657 11,852 8.19
Consumer............................................. 139,725 11,793 8.44 146,321 12,444 8.50
Commercial and agricultural.......................... 130,166 11,048 8.49 108,310 8,958 8.27
---------- --------- ---------- ---------
Total loans........................................ 1,247,328 100,922 8.09 992,761 80,467 8.11
Federal Home Loan Bank stock.......................... 31,041 2,283 7.35 29,027 1,880 6.48
---------- --------- ---------- ---------
Total earning assets............................. 2,402,125 174,654 7.27 2,083,409 145,545 6.99
--------- ---------
Valuation allowances................................... (42,966) (16,877)
Cash and due from banks................................ 31,649 34,118
Other assets........................................... 112,013 113,695
----------- ----------
Total assets..................................... $2,502,821 $2,214,345
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts......................................... $ 76,485 $ 500 0.65 % $ 71,995 $ 831 1.15 %
Money market demand accounts......................... 364,326 17,330 4.76 351,849 14,767 4.20
Passbook............................................. 102,547 2,184 2.13 125,403 3,277 2.61
Certificates of deposit.............................. 890,341 52,451 5.89 736,747 38,500 5.23
---------- --------- ---------- ---------
Total interest-bearing deposits.................... 1,433,699 72,465 5.05 1,285,994 57,375 4.46
Advances and other borrowings.......................... 843,186 48,248 5.72 713,345 35,889 5.03
Advances from borrowers for taxes and insurance........ 6,486 18 0.28 5,296 18 0.34
---------- --------- ---------- ---------
Total interest-bearing liabilities............... 2,283,371 120,731 5.29 2,004,635 93,282 4.65
--------- ---------
Non-interest bearing deposits.......................... 74,686 70,903
Other liabilities...................................... 16,924 11,894
Shareholders' equity................................... 127,840 126,913
---------- ----------
Total liabilities and shareholders' equity............. $2,502,821 $2,214,345
========== ==========
Net interest income.................................... $ 53,923 $ 52,263
========== ==========
Net yield on interest-earning assets................... 2.24 % 2.51 %
Interest rate spread................................... 1.98 2.33
Ratio of earning assets to interest-bearing liabilities 105.20 103.93
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------------------------------------
Average Balance Sheet 1998
--------------------------------
Average
Average Yield/
Balance Interest Cost
--------------------------------
(In thousands)
<S> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits.............. $ 21,370 $ 1,177 5.51 %
Trading account securities............................. 1,047 78 7.45
Debt and equity securities............................. 73,604 4,282 5.82
Mortgage-backed and related securities................. 643,243 43,207 6.72
Loans:
First mortgage....................................... 466,027 38,045 8.16
Home equity.......................................... 132,402 11,847 8.95
Consumer............................................. 118,209 10,523 8.90
Commercial and agricultural.......................... 84,117 7,314 8.70
---------- ---------
Total loans........................................ 800,755 67,729 8.46
Federal Home Loan Bank stock.......................... 21,418 1,436 6.70
---------- ---------
Total earning assets............................. 1,561,437 117,909 7.55
---------
Valuation allowances................................... (7,582)
Cash and due from banks................................ 29,292
Other assets........................................... 116,901
----------
Total assets..................................... $1,700,048
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts......................................... $ 63,935 $ 861 1.35 %
Money market demand accounts......................... 282,199 13,866 4.91
Passbook............................................. 128,046 4,187 3.27
Certificates of deposit.............................. 584,583 33,344 5.70
---------- ---------
Total interest-bearing deposits.................... 1,058,763 52,258 4.94
Advances and other borrowings.......................... 431,129 23,779 5.52
Advances from borrowers for taxes and insurance........ 5,569 26 0.47
---------- ---------
Total interest-bearing liabilities............... 1,495,461 76,063 5.09
---------
Non-interest bearing deposits.......................... 60,676
Other liabilities...................................... 12,896
Shareholders' equity................................... 131,015
----------
Total liabilities and shareholders' equity............. $1,700,048
==========
Net interest income.................................... $ 41,846
==========
Net yield on interest-earning assets................... 2.68 %
Interest rate spread................................... 2.47
Ratio of earning assets to interest-bearing liabilities 104.41
</TABLE>
44
<PAGE> 45
RATE/VOLUME ANALYSIS
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volumes of interest-earning assets and interest-bearing liabilities and
the interest rate earned or paid on them.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), (iii) changes attributable to the combined
impact of volume and rate (changes in the rate multiplied by the changes in the
volume) and (iv) the net change.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- --------------------------------------
Rate/ Rate/
(In thousands) Rate Volume Volume Net Rate Volume Volume Net
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
overnight deposits.......... $ 52 $ (664) $ (47) $ (659) $ (93) $ (380) $ 30 $ (443)
Trading account securities.. 5 23 5 33 - (52) - (52)
Debt and equity securities.. 623 2,453 156 3,232 (210) 6,058 (297) 5,551
Mortgage-backed and related
securities................. 3,665 1,851 129 5,645 (4,271) 15,169 (1,500) 9,398
Loans:
Mortgage.................. (1,015) 16,838 (362) 15,461 (971) 10,404 (265) 9,168
Home equity............... 1,082 2,266 207 3,555 (999) 1,096 (92) 5
Consumer.................. (94) (561) 4 (651) (470) 2,503 (112) 1,921
Commercial and agriculture 235 1,808 47 2,090 (357) 2,104 (103) 1,644
--------- -------- -------- -------- -------- ------- -------- --------
Gross loans receivable.. 208 20,351 (104) 20,455 (2,797) 16,107 (572) 12,738
Federal Home Loan Bank stock 255 130 18 403 (49) 510 (17) 444
--------- -------- -------- -------- -------- ------- -------- --------
Change in interest income 4,808 24,144 157 29,109 (7,420) 37,412 (2,356) 27,636
Interest-bearing liabilities:
Deposits:
NOW accounts.............. (361) 52 (22) (331) (123) 109 (16) (30)
Money market demand
accounts................... 1,971 524 70 2,565 (2,022) 3,422 (499) 901
Passbook.................. (606) (597) 110 (1,093) (841) (86) 17 (910)
Certificates of deposit... 4,903 8,026 1,022 13,951 (2,796) 8,679 (727) 5,156
--------- -------- -------- -------- -------- -------- -------- ---------
Total deposits.......... 5,907 8,005 1,180 15,092 (5,782) 12,124 (1,225) 5,117
Advances and other borrowings 4,929 6,532 897 12,358 (2,089) 15,566 (1,367) 12,110
Advances from borrowers for
taxes and insurance.......... (3) 4 (1) - (7) (1) - (8)
--------- -------- -------- -------- -------- -------- -------- ---------
Change in interest
expense................. 10,833 14,541 2,076 27,450 (7,878) 27,689 (2,592) 17,219
--------- -------- -------- -------- -------- -------- -------- ---------
Change in net interest
income.................. $ (6,025) $ 9,603 $(1,919) $ 1,659 $ 458 $ 9,723 $ 236 $10,417
========= ======== ======== ======== ======== ======== ======== =========
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Company's profitability, like that of most financial institutions, depends
to a large extent upon its net interest income, which is the difference between
interest earned on its interest-earning assets, such as loans and investments,
and its interest expense paid on interest-bearing liabilities, such as deposits
and borrowings.
The Company maintains a high level of short-term savings deposits, including
passbook savings, NOW checking accounts and money market deposit accounts. These
accounts typically react more quickly to changes in market interest rates than
the Company's investments in mortgage-backed and related securities and mortgage
loans because of the shorter maturity and repricing characteristics of deposits.
As a result, sharp increases in interest rates may adversely affect earnings
while decreases in interest rates may beneficially affect earnings.
45
<PAGE> 46
In an attempt to manage vulnerability to interest rate changes, management
monitors the Company's interest rate risks. The Company has established its
investment strategies through an Asset/Liability Committee, which reports to the
Board of Directors. The Committee generally meets monthly and reviews the
Company's interest rate risk position, maturing securities and borrowings,
interest rates and programs for raising deposits, including retail and brokered
and nonbrokered wholesale deposits, and originating and purchasing of loans, and
develops policies dealing with these issues. The Company seeks primarily to
manage its interest rate risk through structuring its balance sheet by investing
in a variety of different types of financial instruments in order to reduce its
vulnerability to changes in interest rates and to enhance its income. The
Company's assets and liabilities maturing and repricing within one year
generally result in a negative one-year gap, which occurs when the level of
liabilities maturing or repricing within one year are greater than the level of
assets maturing or repricing within the same period of time. If interest rates
were to rise significantly, and for a prolonged period, the Company's operating
results could be adversely affected. The Company attempts to maintain a negative
one-year gap of less than 15% of total assets. If in the estimation of
management, the one-year gap exceeded or was soon to exceed that limit, actions
would be taken to reduce the Company's exposure to rising interest rates.
Generally, the Company uses the following strategies to reduce its interest rate
risk: (i) the Company seeks to originate and hold a variety of ARMs or other
mortgage loans with short- to medium-term average lives or terms and invests in
primarily adjustable-rate mortgage-backed and related securities with short- to
medium-term average lives; (ii) the Company seeks to lengthen the maturities of
deposits when deemed cost effective through the pricing and promotion of
certificates of deposit with terms of one to five years, and periodically
utilizes deposit marketing programs offering maturity and repricing terms
structured to complement the repricing and maturity characteristics of the
existing asset/liability mix; (iii) the Company has utilized longer term
borrowings, principally secured from the FHLB, in order to manage its assets and
liabilities and enhance earnings; and (iv) the Company is utilizing its capital
position to increase earning assets by investing primarily in agency or private
issue REMIC securities with short and medium terms of two to five years and
financing the purchases with FHLB advances or brokered deposits that generally
match the expected average lives of the respective securities.
The Company continues to monitor its interest rate risk as that risk relates to
its strategies. At September 30, 2000, total interest-bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $541.0 million, representing a
negative cumulative one-year gap ratio of 21.7%, compared to a negative
cumulative one-year gap ratio of 16.9% at September 30, 1999. The negative gap
position is due primarily to the short term effect of the amount of fixed rate
puttable FHLB advances coming due within the next year which the Company plans
to extend as they come due. Subsequent to September 30, 2000, the Company took
several steps to lower its negative one-year gap to under 15% and will continue
to do so in the future. The primary step taken was to lengthen the maturity
structure of several of its funding sources including FHLB advances and brokered
certificates of deposit. The Company also tried to adjust the maturity structure
of ARM loans by originating 3-year ARM loans versus 5-year ARM loans when
possible.
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 upon 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 results in the reinvestment of such proceeds at market rates which
are lower than current rates.
46
<PAGE> 47
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 2000:
<TABLE>
<CAPTION>
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Loans: (2)
Residential.................... $ 81,216 $ 72,989 $ 180,868 $ 64,039 $ 27,675 $ 426,787
Commercial..................... 170,616 86,725 113,501 128,336 57,138 556,316
Consumer....................... 191,162 21,924 27,861 63,920 9,332 314,199
Mortgage-backed and related
securities.......................... 3,224 7,462 9,748 6,575 79 27,088
Assets available for sale:
Mortgage loans................. 8,066 - - - - 8,066
Fixed rate mortgage related.... 28,790 86,129 199,131 113,423 27,039 454,512
Variable rate mortgage related 323,406 - - - - 323,406
Investment securities.......... 63,212 995 90,629 21,669 37,343 213,848
Trading account securities.......... - - - - - -
Other assets........................ 31,388 - - 510 - 31,898
Impact of interest rate swaps....... 10,000 (10,000) - - - -
---------- -------- -------- -------- -------- -----------
Total.......................... $911,079 $266,224 $621,738 $398,472 $158,606 $ 2,356,119
========== ======== ======== ======== ======== ===========
Interest-bearing liabilities:
Deposits: (3)
NOW accounts................... $ 6,482 $ 19,448 $ 29,015 $ 13,025 $ 10,610 $ 78,580
Passbook savings accounts...... 3,544 10,634 19,762 13,083 44,521 91,544
Money market deposit accounts.. 91,324 271,839 3,760 1,354 761 369,038
Certificates of deposit........ 84,556 288,924 135,103 159,046 178,018 845,647
Borrowings (4)...................... 503,579 75,000 211,097 75,000 - 864,676
Impact of interest rate swaps ...... 390,000 (27,000) (53,000) (115,000) (195,000) -
---------- -------- -------- --------- -------- -----------
Total.......................... $1,079,485 $638,845 $345,737 $ 146,508 $ 38,910 $ 2,249,485
========== ======== ======== ========= ======== ===========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities........ $ (168,406) $(372,621) $276,001 $251,964 $119,696 $ 106,634
========== ========= ======== ======== ======== =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities........ $ (168,406) $(541,027) $(265,026) $(13,062) $106,634
========== ========= ========= ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets............. (6.76%) (21.70%) (10.63%) (0.52%) 4.28%
========== ========= ========= ======== =======
</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 $65.6 million at September 30,
2000.
(3) Although the Company's NOW accounts, passbook savings accounts and money
market deposit accounts generally are subject to immediate withdrawal,
management considers a certain portion of such accounts to be core deposits
having significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments. NOW
accounts, passbook savings accounts and money market deposit accounts are
assumed to be withdrawn at annual rates of 37%, 17% and 88%, respectively,
of the declining balance of such accounts during the period shown. The
withdrawal rates used are higher than the Company's historical rates but
are considered by management to be more indicative of expected withdrawal
rates in a rising interest rate environment. If all the Company's NOW
accounts, passbook savings accounts and money market deposit accounts had
been assumed to be repricing within one year, the one-year cumulative
deficiency of interest-earning assets to interest-bearing liabilities would
have been $676.9 million or 27.2% of total assets. Brokered deposits with a
call option are included in the period in which they are due rather than in
the period of their modified duration since they are currently out of the
money.
(4) Fixed rate puttable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due.
Borrowings include fixed rate puttable FHLB advances of $115 million
maturing within three months, $75 million maturing in four to twelve
months, $210 million maturing in one to three years and $75 million
maturing in three to five years.
47
<PAGE> 48
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain 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 ARM 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. In addition, the proportion of
ARM loans and mortgage-backed and related securities in the Company's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to the exercise of conversion options and refinance
activity. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
In order to measure earnings sensitivity the Corporation utilizes a dynamic gap
analysis. The dynamic gap analysis involves analyzing the impact on contractual
repricing and maturity characteristics for rate sensitive assets, liabilities,
and off balance sheet instruments adjusted for the anticipated impact on
repricing, prepayment, and option features for different interest rate scenarios
(various parallel yield curve shifts). A dynamic consolidated gap position is
then analyzed for the impact on net interest income in the various environments.
The Corporation's consolidated one year negative gap is -21.70% as of September
30, 2000. The projected sensitivity on net interest income for an immediate and
parallel upward yield curve shift of 100 and 200 basis points is -9% and -18%
respectively.
The Corporation further measures interest rate risk by analyzing the impact of
changing interest rates on the Corporation's market value portfolio equity
(market value adjusted capital). The market value portfolio equity analysis
involves analyzing the market value of all rate sensitive assets and liabilities
under different interest rate and prepayment environments. The change in the
market value portfolio equity for changes in interest rates is measured against
its current base case. This sensitivity is monitored and compared to desired
internal levels and current industry standards. The consolidated market value
portfolio equity sensitivity to an immediate and parallel upward yield curve
shift of up 100 and 200 basis points is - 16% and -36% respectively.
The Company enters into interest rate exchange agreements ("swaps") from time to
time in order to reduce the interest rate risk associated with certain
liabilities. The agreements have been both fixed-pay, floating-receive swaps
whereby the Company pays interest at a fixed rate and receives interest at a
floating rate based on a notional amount of principal, locking in a fixed cost
of funds and fixed-receive, floating-pay swaps whereby the Company receives
interest at a fixed rate and pays interest at a floating rate based on a
notional amount of principal, locking in a floating cost of funds. The net
interest income or expense resulting from the differential between exchanging
floating rate and fixed rate interest payments is recorded on a current basis.
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. Generally,
the swaps have been designed to more accurately match the interest cash flows of
certain liabilities used to fund specific assets to the interest rate
characteristics of those assets. At September 30, 2000 and 1999, the Company had
interest rate swaps outstanding with a notional amount of $400.0 million and
$350.0 million, respectively. $410.0 million is the largest aggregate notional
amount of the Company's interest rate swaps at any one time over the past five
years.
At September 30, 2000, the Company had a $10 million in fixed pay-floating
receive agreement with a maturity date of 2001. The agreement has a fixed
interest rate of 7.05% and a variable interest rate of 7.56%. At September 30,
2000, the Company had $390 million in fixed receive-floating pay agreements with
maturity dates ranging from 2001 to 2009 and call dates ranging from 2000 to
2001. The agreements have fixed interest rates ranging from 5.85% to 7.13% and
variable interest rates ranging from 5.70% to 6.68%.
48
<PAGE> 49
For the years ended September 30, 2000, 1999 and 1998, the Company realized net
interest income on interest rate exchange agreement activity of $1.1 million,
$2.8 million and $1.9 million, respectively. While this activity resulted in net
interest income in fiscal years 2000, 1999 and 1998, the Company effectively
matched the related funding costs of certain assets with the interest rate
characteristics of those assets. The Company's Investment Policy limits the
notional amount of outstanding interest rate exchange agreements to $450.0
million. Any notional amounts of interest rate exchange agreements in excess of
$450.0 million must be approved by the Company's Board of Directors.
The Company also utilizes financial futures or options to manage anticipated
increases in interest rates and the resulting decline in the market prices of
its mortgage loan production. The options provide a practical floor and cap on
portfolio market values for moderate interest rate movements while the forward
contracts are used to offset actual and anticipated on- and off-balance sheet
positions of the Company. These options result in a certain amount of potential
interest rate and market value risk exposure for the Company. The amount of the
actual exposure is determined by the exercise of these options. The Company
generally sells options for settlement no more than four months forward. An
option's likelihood of exercise is dependent upon the relation of the market
price of the underlying security to the strike price of the option. The strategy
is not meant to offset losses that could be incurred during a substantial
interest rate move and actually may result in additional losses on the
instruments themselves which is beyond the losses the Company would have
incurred had the management techniques not been utilized. The combined effect of
the Company's option, forward commitment and loan swap activity is included in
the income statement as part of securities gains/(losses). The Company realized
gains on that combined activity of $19,000 and $95,000, respectively, for the
years ended September 30, 2000 and 1999 and realized losses of $699,000 for the
year ended September 30, 1998. The notional amount of options and forward
contracts outstanding varies and is a function of the current lending activity
of salable mortgage loans. In order to limit the risks which may be associated
with such financial options or futures, the Company's Investment Policy limits
the amount of outstanding sold puts or calls used to manage the Company's
trading portfolio to $50.0 million.
49
<PAGE> 50
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
September 30, 2000.
<TABLE>
<CAPTION>
More than More than More than More than
Within One Year Two Years Three Years Four Years
One Year to Two Years to Three Years to Four Years to Five Years
------------- ---------------- --------------- --------------- ---------------
Interest Earning Assets (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Residential...... $ 4.5 8.82% $ 1.2 7.94% $ 3.3 8.18% $ 3.5 7.33% $ 21.8 7.29%
Commercial....... 104.8 8.73% 26.7 8.85% 37.7 8.09% 29.7 8.39% 63.7 7.79%
Consumer......... 18.9 8.73% 32.3 9.54% 116.2 8.90% 82.5 8.39% 32.4 9.03%
Mortgage-backed
securities:
Fixed rate....... 125.6 6.37% 104.4 6.43% 104.4 6.51% 60.0 6.74% 60.0 6.58%
Adjustable rate.. 58.2 7.09% 45.3 7.09% 42.0 7.09% 38.8 7.09% 35.6 7.09%
Debt and equity
securities......... 64.2 5.78% 45.3 5.78% 45.3 5.78% 21.7 5.78% 37.3 5.78%
Other................ 31.4 7.25% - - - - - - - -
------ ----- ----- ------ ------
Total interest
earning assets..... $ 407.6 7.19% $ 255.2 7.09% $ 348.9 7.47% $ 236.2 7.50% $ 250.8 7.22%
======= ======= ======= ======= =======
Interest Bearing Liabilities
Deposits:
NOW accounts..... $ 25.9 0.50% $ 14.5 0.50% $ 14.5 0.50% $ 6.5 0.50% $ 6.5 0.50%
Passbooks........ 13.9 0.75% 9.9 0.75% 9.9 0.75% 6.5 0.75% 6.5 0.75%
Money market..... 363.2 5.22% 1.9 5.22% 1.9 5.22% 0.7 5.22% 0.7 5.22%
Certificates..... 373.5 6.01% 123.7 6.47% 11.4 6.24% 91.2 6.24% 67.9 6.23%
Borrowings
Fixed rate....... 616.0 5.99% 80.0 5.65% 25.0 5.02% - - - -
Adjustable rate.. 143.7 6.81% - - - - - - - -
------- ------- ------- ------- -------
Total interest
bearing
liabilities.......... $1,536.2 5.75% $ 230.0 5.55% $ 62.7 3.53% $ 104.9 5.54% $ 81.6 5.33%
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Fair
Over Market
Five Years Total Value
---------------- ----------------- --------
Interest Earning Assets
Loans:
<S> <C> <C> <C> <C> <C>
Residential...... $ 400.6 7.50% $ 434.9 7.51% $ 436.4
Commercial....... 293.7 7.71% 556.3 8.03% 558.4
Consumer......... 32.0 9.60% 314.3 8.91% 315.3
Mortgage-backed
securities:
Fixed rate....... 27.1 6.50% 481.5 6.49% 467.4
Adjustable rate.. 103.5 7.09% 323.4 7.09% 313.0
Debt and equity
securities......... - - 213.8 5.78% 203.3
Other................ 0.5 5.15% 31.9 7.22% 31.9
------ --------- --------
Total interest
earning assets..... $ 857.4 7.57% $ 2,356.1 7.39% $2,325.7
======= ========= ========
Interest Bearing Liabilities
Deposits:
NOW accounts..... $ 10.6 0.50% $ 78.5 0.50% $ 65.8
Passbooks........ 44.8 0.75% 91.5 0.75% 73.0
Money market..... 0.7 5.22% 369.1 5.22% 367.1
Certificates..... 178.0 6.57% 845.7 6.24% 836.1
Borrowings
Fixed rate....... - - 721.0 5.92% 721.1
Adjustable rate.. - - 143.7 6.81% 143.7
------- --------- --------
Total interest
bearing
liabilities.......... $ 234.1 5.18% $ 2,249.5 5.58% $2,206.8
======= ========= ========
</TABLE>
50
<PAGE> 51
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
September 30, 1999.
<TABLE>
<CAPTION>
More than More than More than More than
Within One Year Two Years Three Years Four Years
One Year to Two Years to Three Years to Four Years to Five Years
------------- ---------------- --------------- --------------- ---------------
Interest Earning Assets (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
commercial loans:
Fixed rate....... $ 76.3 8.13% $ 49.9 8.07% $ 14.5 8.09% $ 20.6 8.09% $ 21.5 8.07%
Adjustable rate.. 146.7 8.15% 77.8 8.15% 50.3 8.10% 61.4 8.00% 72.5 8.10%
Consumer loans:
Fixed rate....... 13.4 8.30% 21.6 8.47% 13.9 8.52% 15.2 8.52% 19.4 8.52%
Adjustable rate.. 30.9 8.53% 22.5 8.53% 51.3 8.53% 27.0 8.53% 16.0 8.53%
Mortgage-backed
securities:
fixed rate....... 241.2 6.37% 128.3 6.43% 128.4 6.60% 42.0 6.74% 37.6 6.78%
adjustable rate.. 68.6 6.14% 54.1 6.15% 46.9 6.15% 43.3 6.16% 39.7 6.16%
Debt and equity
securities......... 75.9 5.36% 48.0 6.02% 48.0 5.90% 22.3 6.30% 22.3 6.40%
Other................ 34.3 5.25% - - - - - - - -
------- ------- ------- ------- -------
Total interest
earning assets..... $ 687.3 6.89% $ 402.2 7.11% $ 353.3 7.08% $ 231.8 7.37% $ 229.0 7.44%
======= ======= ======= ======= =======
Interest Bearing Liabilities
Deposits:
NOW accounts..... $ 26.0 0.50% $ 13.4 0.50% $ 13.4 0.50% $ 5.3 0.50% $ 5.3 0.50%
Passbooks........ 14.9 1.00% 11.4 1.00% 11.3 1.00% 7.8 1.00% 7.8 1.00%
Money market..... 370.2 3.74% 6.9 3.74% 6.9 3.74% 1.7 3.74% 1.7 3.74%
Certificates..... 455.0 5.18% 73.1 5.41% 7.3 5.45% 4.2 5.74% 91.4 6.24%
Borrowings
Fixed rate....... 328.4 5.13% 290.0 4.93% 25.0 5.02% - - - -
Adjustable rate.. 161.3 5.70% 30.0 5.53% - - - - - -
-------- ------- ------- ------- -------
Total interest
bearing
liabilities.......... $1,355.8 4.70% $ 424.8 4.79% $ 63.9 3.27% $ 19.0 2.15% $ 106.2 5.53%
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Fair
Over Market
Five Years Total Value
---------------- ----------------- --------
Interest Earning Assets
<S> <C> <C> <C> <C> <C>
Mortgage and
commercial loans:
Fixed rate....... $ 51.3 8.21% $ 234.1 8.12% $ 236.5
Adjustable rate.. 176.0 8.35% 584.8 8.18% 590.6
Consumer loans:
Fixed rate....... 72.3 9.07% 155.8 8.75% 156.2
Adjustable rate.. - - 147.7 8.53% 148.7
Mortgage-backed
securities:
fixed rate....... 20.8 6.75% 598.4 6.50% 590.3
adjustable rate.. 108.3 6.18% 360.9 6.16% 349.1
Debt and equity
securities......... - - 216.5 5.83% 210.9
Other................ 0.8 5.15% 35.1 5.25% 35.1
------ ------- ---------
Total interest
earning assets..... $ 429.5 7.82% $2,333.1 7.23% $2,317.4
======= ======== ========
Interest Bearing Liabilities
Deposits:
NOW accounts..... $ 7.0 0.50% $ 70.4 0.50% $ 65.6
Passbooks........ 32.5 1.00% 85.7 1.00% 76.3
Money market..... 1.2 3.74% 388.6 3.74% 388.6
Certificates..... 234.7 6.46% 865.7 5.66% 860.1
Borrowings
Fixed rate....... - - 643.4 5.03% 637.8
Adjustable rate.. - - 191.3 5.67% 191.3
------ -------- --------
Total interest
bearing
liabilities.......... $ 275.4 5.65% $ 2,245.1 4.81% $2,219.7
======= ========= ========
</TABLE>
51
<PAGE> 52
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings from the FHLB,
proceeds from principal and interest payments on loans and principal and
interest payments on mortgage-backed and related securities and on debt and
equity securities. Although maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows, mortgage prepayments and
prepayments on mortgage-backed and related securities are influenced
significantly by general interest rates, economic conditions and competition.
Mortgage loan and mortgage security prepayments were generally higher during
1998 and 1999 because of the generally lower level of interest rates throughout
those years.
The ratio of liquid assets to deposits and short-term borrowings required by the
OTS is currently 5.0%. The Bank's liquidity ratio was 9.2% and 7.6% at September
30, 2000 and 1999, respectively. The Bank adjusts its liquidity levels in order
to meet various funding needs and to meet its asset and liability management
objectives.
The Bank's most liquid assets are cash and cash equivalents and highly liquid,
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At September 30, 2000 and 1999, liquid assets of the Bank (as defined in the OTS
regulations) were $202.3 million and $125.0 million, respectively.
Excess funds generally are invested in short-term investments such as federal
funds or overnight deposits at the FHLB. The Company has found brokered
certificates of deposit to be an efficient source and a cost-effective method,
relative to local retail market deposits, of meeting the Company's funding
needs. Management believes that a significant portion of its retail deposits
will remain with the Company, and in the case of brokered deposits, may be
replaced with similar type accounts even should the level of interest rates
change. However, in the event of a significant increase in market interest
rates, the cost of obtaining replacement brokered deposits would increase as
well. Whenever the Company requires funds beyond its ability to generate them
internally, additional sources of funds are available and obtained from
borrowings from the FHLB. Funds also may be available through reverse repurchase
agreements wherein the Company pledges mortgage-backed securities. The Company
utilizes its borrowing capabilities on a regular basis. At September 30, 2000,
FHLB advances totaled $532.0 million or 22.5% of total liabilities and at
September 30, 1999, FHLB advances were $607.5 million or 25.9% of total
liabilities. At September 30, 2000, the Company had a borrowing capacity
available of $93.7 million from the FHLB. At September 30, 2000, reverse
repurchase agreements totaled $246.0 million or 10.4% of total liabilities
compared with $177.7 million at September 30, 1999. The Company's reverse
repurchase agreements are generally short-term, with maturities of less than 90
days. In a rising interest rate environment, such short-term borrowings present
the risk that upon maturity, the borrowings will have to be replaced with higher
rate borrowings. The Company generally has matched such borrowings to specific
assets and has relatively little liquidity risk due to the fact that the assets
and borrowings mature at approximately the same time.
The amount of principal repayments on loans and mortgage securities are heavily
influenced by the general level of interest rates in the economy. Funds received
from principal repayments on mortgage securities for the years ended September
30, 2000 and 1999, were $115.7 million and $282.0 million, respectively. Funds
received from principal repayments on loans for the years ended September 30,
2000 and 1999, were $399.9 million and $456.9 million, respectively. In addition
to principal repayments, the Company sells mortgage loans to government agencies
(primarily FNMA) and to institutional investors. Total mortgage loan sales to
FNMA and others were $117.7 million and $200.3 million for the years ended
September 30, 2000 and 1999, respectively.
Through both origination and purchase, the Company primarily reinvests funds
received back into loans receivable and mortgage-backed and related securities.
Loan originations totaled $561.1 million and $853.6 million for the years ended
September 30, 2000 and 1999, respectively. Purchases of mortgage-backed and
related securities totaled zero and $608.0 million for the years ended September
30, 2000 and 1999, respectively. During the years ended September 30, 2000 and
1999, the Company repurchased approximately 769,400 and 480,000 shares of its
common stock in share repurchase programs at a total cost of approximately $11.2
million and $9.0 million, respectively.
At September 30, 2000 and 1999, the Company had outstanding loan commitments
including lines of credit of $307.0 million and $268.8 million, respectively.
The Company had no commitments to purchase loans outstanding at either of these
dates. The Company anticipates it will have sufficient funds available to meet
its current loan
52
<PAGE> 53
commitments, including loan applications received and in process prior to the
issuance of firm commitments. Certificates of deposit, including brokered
certificates, which are scheduled to mature in one year or less at September 30,
2000 and 1999, were $373.5 million and $455.1 million, respectively. Management
believes that a significant portion of such deposits will remain with the
Company.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation.
CURRENT ACCOUNTING DEVELOPMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133", and SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", was adopted by the Company on October 1, 2000. This standard
establishes new rules for the recognition and measurement of derivatives,
including derivative instruments embedded in other contracts. It requires all
derivatives to be recorded as either assets or liabilities in the balance sheet
at fair value. Changes in the fair value of derivatives, except for certain
derivatives qualifying as cash flow hedges, are required to be included in
earnings in the period of the change. Adoption of this standard is not expected
to materially effect the results of operations or financial position of the
Company.
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities"--a replacement of FASB
Statement No. 125. This statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. This Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. This Statement is to
be applied prospectively with certain exceptions. Therefore, earlier or
retroactive application of this Statement is not permitted. Adoption of this
standard is not expected to materially effect the results of operations or
financial position of the Company.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein pursuant to Item 305 of Regulation S-K is
contained in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
reference.
53
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
St. Francis Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of St. Francis Capital Corporation and Subsidiary (the "Company") as of
September 30, 2000 and 1999, and the related consolidated statements of income,
changes in shareholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended September 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of St. Francis Capital
Corporation and Subsidiary as of September 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Milwaukee, Wisconsin
October 20, 2000
54
<PAGE> 55
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
---------------------------
(In thousands, except share data) 2000 1999
--------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks................................................... $ 33,777 $ 29,074
Federal funds sold and overnight deposits................................. 970 3,488
---------- -----------
Cash and cash equivalents................................................. 34,747 32,562
---------- -----------
Assets available for sale, at fair value:
Debt and equity securities (notes 3 and 9)............................ 213,848 216,649
Mortgage-backed and related securities (notes 4 and 9)................ 777,918 919,879
Mortgage loans held for sale, at lower of cost or market (note 5)......... 8,066 8,620
Securities held to maturity, at amortized cost:
Debt securities (fair values of $522 and $834,
respectively) (note 3)............................................ 510 810
Mortgage-backed and related securities (fair values of $26,479
and $39,250, respectively) (notes 4 and 9)........................ 27,088 39,475
Loans receivable, net (notes 5 and 9)..................................... 1,297,302 1,113,391
Federal Home Loan Bank stock, at cost..................................... 30,418 30,827
Accrued interest receivable (note 6)...................................... 14,171 14,090
Foreclosed properties..................................................... 241 371
Real estate held for investment........................................... 27,145 28,402
Premises and equipment, net (note 7)...................................... 30,283 32,924
Other assets (notes 5 and 11)............................................. 31,346 38,199
----------- -----------
Total assets.............................................................. $ 2,493,083 $ 2,476,199
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 8)......................................................... $ 1,471,881 $ 1,484,303
Short term borrowings (note 9)............................................ 758,581 588,790
Long term borrowings (note 9)............................................. 106,095 245,948
Advances from borrowers for taxes and insurance........................... 10,667 8,904
Accrued interest payable and other liabilities (notes 8 & 15)............. 14,936 16,740
----------- -----------
Total liabilities......................................................... 2,362,160 2,344,685
----------- -----------
Commitments and contingencies (notes 2 and 16)............................ -- --
Shareholders' equity:
Preferred stock $.01 par value:
Authorized, 6,000,000 shares
None issued........................................................... -- --
Common stock $.01 par value:
Authorized 24,000,000 shares
Issued 14,579,240 shares
Outstanding, 9,437,197 and 10,156,770 shares, respectively............ 146 146
Additional paid-in-capital................................................ 88,799 82,426
Unearned ESOP compensation (note 15)...................................... -- (2,260)
Retained earnings, substantially restricted (note 12)..................... 130,399 123,193
Accumulated other comprehensive loss...................................... (18,923) (13,057)
Treasury stock, at cost (5,142,043 and 4,422,470 shares, respectively)
(note 14)............................................................... (69,498) (58,934)
----------- -----------
Total shareholders' equity................................................ 130,923 131,514
----------- -----------
Total liabilities and shareholders' equity................................ $ 2,493,083 $ 2,476,199
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
55
<PAGE> 56
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------
(In thousands, except per share data) 2000 1999 1998
------------------------------------- ---------- --------- --------
<S> <C> <C> <C>
Interest and dividend income:
Loans (note 5)............................................ $ 100,922 $ 80,467 $ 67,729
Mortgage-backed and related securities.................... 58,250 52,605 43,207
Debt and equity securities................................ 13,065 9,833 4,282
Federal funds sold and overnight deposits................. 75 734 1,177
Federal Home Loan Bank stock.............................. 2,283 1,880 1,436
Trading account securities................................ 59 26 78
--------- -------- --------
Total interest and dividend income.............................. 174,654 145,545 117,909
Interest expense:
Deposits (note 8)......................................... 72,465 57,375 52,258
Advances and other borrowings............................. 48,266 35,907 23,805
--------- -------- --------
Total interest expense.......................................... 120,731 93,282 76,063
--------- -------- --------
Net interest income before provision for loan losses............ 53,923 52,263 41,846
Provision for loan losses (note 5).............................. 2,509 1,920 2,300
--------- -------- --------
Net interest income............................................. 51,414 50,343 39,546
--------- -------- --------
Other operating income (expense), net:
Loan servicing and loan related fees...................... 2,734 2,016 2,125
Depository fees and service charges....................... 4,933 4,228 3,524
Securities gains (losses) (notes 3 and 4)................. 12 (253) 1,243
Gain on sales of loans (note 5)........................... 1,133 2,806 4,367
Insurance annuity and brokerage commissions............... 1,412 1,733 1,200
Gain (loss) on foreclosed properties...................... 36 (18) (4)
Income from real estate held for investment............... 3,014 3,716 5,059
Gain on sale of real estate held for sale................. - 1,225 -
Other income.............................................. 931 833 1,394
--------- -------- --------
Total other operating income, net............................... 14,205 16,286 18,908
--------- -------- --------
General and administrative expenses:
Compensation and other employee benefits.................. 19,293 19,950 18,054
ESOP expense.............................................. 8,176 1,696 1,620
Occupancy expenses, including depreciation................ 4,471 4,196 3,302
Furniture and equipment, including depreciation........... 4,465 4,357 3,380
Real estate held for investment expenses.................. 3,223 3,816 5,280
Other general and administrative expenses (note 10)....... 9,504 9,548 10,195
--------- -------- --------
Total general and administrative expenses....................... 49,132 43,563 41,831
--------- -------- --------
Income before income tax expense................................ 16,487 23,066 16,623
Income tax expense (note 11).................................... 5,364 6,410 1,826
--------- -------- --------
Net income...................................................... $ 11,123 $ 16,656 $ 14,797
========= ======== ========
Basic earnings per share (note 13).............................. $ 1.13 $ 1.78 $ 1.51
========= ======== ========
Diluted earnings per share (note 13)............................ $ 1.12 $ 1.70 $ 1.43
========= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
56
<PAGE> 57
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income
<TABLE>
<CAPTION>
Accumulated
Shares of Other
Common Additional Unearned Comprehensive
Stock Common Paid-In ESOP Retained Income/ Treasury
Outstanding Stock Capital Compensation Earnings (Loss) Stock Total
----------- ---------- ---------- ------------ ---------- ------------- --------- ----------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997... 10,453,996 146 73,468 (3,088) 101,469 1,046 (44,511) 128,530
Net income...................... - - - - 14,797 - - 14,797
Change in unrealized gain on
securities available for sale. - - - - - 163 - 163
Reclassification adjustment for
gains realized in net income.. - - - - - (1,243) - (1,243)
Incomes taxes................... - - - - - 415 - 415
---------
Comprehensive income............ 14,132
Cash dividend - $0.28 per share. - - - - (2,912) - - (2,912)
Purchase of treasury stock...... (1,045,976) - - - - - (21,160) (21,160)
Exercise of stock options, net.. 167,346 - 296 - (992) - 1,768 1,072
Amortization of unearned
compensation.................. - - 1,473 410 - - - 1,883
----------- ------- --------- ---------- ---------- ------------ --------- ---------
BALANCE AT SEPTEMBER 30, 1998... 9,575,366 146 75,237 (2,678) 112,362 381 (63,903) 121,545
Net income...................... - - - - 16,656 - - 16,656
Change in unrealized loss on
securities available for sale. - - - - - (22,381) - (22,381)
Reclassification adjustment for
losses realized in net income. - - - - - 253 - 253
Incomes taxes................... - - - - - 8,690 - 8,690
---------
Comprehensive income............ 3,218
Cash dividend - $0.32 per share. - - - - (3,162) - - (3,162)
Shares of common stock issued
for acquisition............... 734,564 - 5,556 - - - 9,727 15,283
Purchase of treasury stock...... (479,974) - - - - - (8,988) (8,988)
Exercise of stock options, net.. 326,814 - 88 - (2,663) - 4,230 1,655
Amortization of unearned
compensation............... - - 1,545 418 - - - 1,963
----------- ------- --------- ---------- ---------- ------------ --------- ---------
BALANCE AT SEPTEMBER 30, 1999... 10,156,770 $ 146 $ 82,426 $ (2,260) $ 123,193 $ (13,057) $(58,934) $131,514
Net income...................... - - - - 11,123 - - 11,123
Change in unrealized loss on
securities available for sale. - - - - - (9,168) - (9,168)
Reclassification adjustment for
gains realized in net income.. - - - - - (12) - (12)
Incomes taxes................... - - - - - 3,314 - 3,314
---------
Comprehensive income............ 5,257
Cash dividend - $0.36 per share. - - - - (3,578) - - (3,578)
Purchase of treasury stock...... (769,388) - - - - - (11,226) (11,226)
Exercise of stock options, net.. 49,815 - 10 - (339) - 662 333
Amortization of unearned
compensation.................. - - 6,363 2,260 - - - 8,623
----------- ------- --------- ---------- ---------- ----------- ----------- --------
BALANCE AT SEPTEMBER 30, 2000... 9,437,197 $ 146 $ 88,799 $ - $ 130,399 $ (18,923) $ (69,498) $130,923
=========== ======= ========= ========== ========== =========== =========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
57
<PAGE> 58
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
2000 1999 1998
----------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 11,123 $ 16,656 $ 14,797
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses.................................... 2,509 1,920 2,300
Depreciation, accretion and amortization..................... 7,116 8,492 8,415
Deferred income taxes........................................ 2,211 5,256 (836)
Securities (gains) losses.................................... (12) 253 (1,243)
Originations of loans held for sale.......................... (118,267) (188,169) (209,642)
Proceeds from sales of loans held for sale................... 119,954 206,219 214,775
ESOP expense................................................. 8,623 1,963 1,883
Gain on sales of loans....................................... (1,133) (2,806) (4,367)
Gain on sale of real estate held for sale.................... - (1,225) -
Other, net................................................... 1,092 3,795 (10,906)
----------- ----------- ----------
Net cash provided by operating activities........................ 33,216 52,354 15,176
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity... 300 1,004 2,016
Proceeds from maturities of mortgage-backed and related
securities held to maturity................................ - 3,909 -
Principal repayments on mortgage-backed and related
securities held to maturity.................................. 12,387 19,703 3,762
Purchases of mortgage-backed securities available for sale..... - (608,028) (556,456)
Proceeds from sales of mortgage-backed securities
available for sale........................................... 29,105 47,494 229,046
Principal repayments on mortgage-backed securities
available for sale........................................... 103,318 262,256 314,123
Purchase of debt and equity securities available for sale...... - (238,259) (135,422)
Proceeds from sales of debt and equity securities available
for sale..................................................... 2,757 94,722 71,213
Proceeds from maturities of debt and equity securities
available for sale............................................. 402 35,688 11,395
Net cash used for acquisitions................................. - (4,286) -
Purchases of Federal Home Loan Bank stock...................... (2,591) (16,774) (4,450)
Redemption of Federal Home Loan Bank stock..................... 3,000 9,554 1,840
Purchases of loans............................................. (90,067) (76,072) (67,446)
Increase in loans, net of loans held for sale.................. (93,844) (170,325) (74,811)
Proceeds from sale of real estate held for sale................ - 21,997 -
Increase in real estate held for investment.................... (210) (232) (1,783)
Purchases of premises and equipment, net....................... (396) (3,683) (10,492)
----------- ----------- -----------
Net cash used in investing activities............................ (35,839) (621,332) (217,465)
----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
58
<PAGE> 59
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------
2000 1999 1998
------------ -------------- ------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits............................ (12,422) 250,877 129,738
Proceeds from advances and other borrowings.................... 1,260,093 2,795,147 758,618
Repayments on advances and other borrowings.................... (1,298,494) (2,612,188) (688,604)
Increase in securities sold under agreements to repurchase..... 68,339 147,102 14,435
Increase (decrease) in advances from borrowers for taxes
and insurance................................................ 1,763 351 (1,010)
Dividends paid................................................. (3,578) (3,162) (2,912)
Stock option transactions...................................... 333 1,655 1,072
Purchase of treasury stock..................................... (11,226) (8,988) (21,160)
----------- ----------- -----------
Net cash provided by financing activities.......................... 4,808 570,794 190,177
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents................... 2,185 1,816 (12,112)
Cash and cash equivalents:
Beginning of year............................................ 32,562 30,746 42,858
----------- ----------- -----------
End of year.................................................. $ 34,747 $ 32,562 $ 30,746
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................................... $ 120,874 $ 92,542 $ 76,461
Income taxes................................................. 178 1,703 4,459
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and
financing activities:
Mortgage loans secured as mortgage-backed securities......... $ 13,021 $ 9,461 $ 19,373
Transfer from loans to foreclosed properties................. 929 871 560
Transfer of mortgage loans to mortgage loans held for sale... 16,911 44,263 69,143
Transfer of real estate held for investment to real estate
held for sale............................................ - - 20,772
Acquisitions:
Assets acquired.......................................... - $ 42,866 -
Common stock issued for acquisition..................... - 15,283 -
Cash paid for purchase of stock.......................... - $ (10,132) -
Cash acquired............................................ - 5,846 -
----------- ----------- -----------
Net cash used for acquisitions........................... - $ (4,286) -
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
59
<PAGE> 60
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of St. Francis Capital Corporation and
subsidiary (the "Company") conform to generally accepted accounting principles
and to general practice within the banking industry. The Company provides a full
range of banking and related financial services to individual and corporate
customers through its network of bank affiliates. The Company is subject to
competition from other financial institutions and is regulated by federal and
state banking agencies and undergoes periodic examinations by those agencies.
The following is a description of the more significant of those policies that
the Company follows in preparing and presenting its consolidated financial
statements. In preparing the consolidated financial statements in conformity
with generally accepted accounting principles, management is required to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary, St. Francis Bank, F.S.B. ("Bank"), the Bank's
subsidiaries, SF Investment Corp. ("SF Investment"), SF Insurance Services
Corp., St. Francis Mortgage Corp ("SFMC") and St. Francis Equity Properties
("SFEP") and limited partnerships which are all more than 50% owned by SFEP. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, interest-bearing deposits with the Federal
Home Loan Bank-Chicago ("FHLB") and other financial institutions and federal
funds sold.
(c) Trading Account Securities
Trading account securities include debt securities which are held for resale in
anticipation of short-term market movements. Trading account securities are
stated at fair value. Gains and losses, both realized and unrealized, are
included in securities gains/(losses).
(d) Securities Held to Maturity and Available For Sale
Management determines the appropriate classification of debt and equity
securities at the time of purchase. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held to maturity securities are stated at amortized
cost.
Debt securities not classified as held to maturity, or debt and marketable
equity securities not classified as trading are classified as available for
sale. Available for sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity and accumulated other comprehensive income(loss).
The cost of debt securities classified as held to maturity or available for sale
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of mortgage-backed and related securities, over the estimated
life of the security. Such amortization is based on a level-yield method and is
included in interest income from the respective security. Interest and dividends
are included in interest and dividend income from investments. Realized gains
are included in securities gains(losses). The cost of securities sold is based
on the specific identification method.
In determining if declines in value in mortgage-backed and related securities
are other than temporary, management estimates future cash flows to be generated
by pools of loans underlying the securities. Included in this evaluation are
such factors as i) estimated loan prepayment rates, ii) a review of
delinquencies, foreclosures, repossessions and recovery rates relative to the
underlying mortgage loans collateralizing each security, iii) the level of
available subordination or other credit enhancements, iv) an assessment of the
servicer of the underlying mortgage portfolio and v) the rating assigned to each
security by independent national rating agencies.
60
<PAGE> 61
(e) Loans Held For Sale
Mortgage loans held for sale generally consist of certain fixed-rate and
adjustable-rate first mortgage loans. Mortgage loans held for sale are carried
at the lower of cost (less principal payments received) or market value, as
determined by outstanding commitments from investors or current quoted investor
yield requirements on an aggregate basis.
(f) Loans and Fees and Income on Loans
Loans are carried at the outstanding principal amount reduced by purchased
discount, deferred fees, unearned insurance premiums, loans in process and the
allowance for loan losses. Loans sold with recourse are derecognized at the time
of sale. The estimated liability related to recourse provisions is periodically
evaluated with increases charged to expense. Loans for which management has the
intent and ability to hold for the foreseeable future or until maturity or
repayment are carried at their unpaid principal balances. Interest on loans is
recorded as income in the period earned.
Loans are normally placed on non-accrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is management's practice to
place such loans on non-accrual status immediately, rather than delaying such
action until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal.
A loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Company defines impaired loans as
commercial, commercial real estate and multi-family loans that are classified as
"doubtful" or "loss". A loan may also be defined as impaired if it has risk
characteristics that are unique to an individual borrower. Large groups of
homogeneous loans, such as residential one- to four-family, home equity and
consumer loans are collectively evaluated for impairment.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amounts amortized as an adjustment of the related
loan's yield. These amounts are amortized to income using the level yield
method, over the contractual life of the related loans. Discounts on purchased
loans are amortized using a method which approximates level yield. Unamortized
discounts on purchased loans which prepay are amortized immediately.
Loan origination fees and costs associated with loans sold are deferred and
recognized at the time of sale as a component of gain or loss on the sale of
loans. Fees for the servicing of loans are recognized as income when earned.
(g) Mortgage Servicing Rights
The Bank recognizes as a separate asset the rights to service mortgage loans for
others. The value of mortgage servicing rights is amortized in relation to the
servicing revenue expected to be earned. For the purpose of evaluating
impairment of mortgage servicing rights, serviced loans are stratified based
upon certain predominant risk characteristics including loan type, note rate,
prepayment trends and external market factors.
(g) Intangibles
The excess of the purchase price over the fair value of net assets of
subsidiaries acquired consists primarily of goodwill that is being amortized on
a straight-line method. Goodwill is amortized to operating expense over periods
of 15 to 25 years. The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at
61
<PAGE> 62
the lower of the carrying amount or fair value, less costs to sell.
During 1999, the Company recorded additional goodwill of $3.2 million. At
September 30, 2000, the Company had recorded goodwill of $18.4 million and
accumulated amortization of $3.8 million. Goodwill, net of accumulated
amortization, at September 30, 2000 and 1999 was $14.6 million and $15.8
million, respectively.
(h) Allowance for Loan Losses
The allowance for loan losses is maintained at a level adequate to provide for
loan losses through charges to operating expense. The allowance is based upon
past loan loss experience and other factors which, in management's judgment,
deserve current recognition in estimating loan losses. Such other factors
considered by management include growth and composition of the loan portfolio,
the determination as to the classification of loans, the relationship of the
allowance for loan losses to outstanding loans and economic conditions. In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties which collateralize
loans. With respect to loans which are deemed impaired, the calculation of
allowance levels is based upon the discounted present value of expected cash
flows received from the debtor or other measures of value such as market prices
or collateral values.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination.
(i) Financial Options
Interest rate swaps, forward and future commitments and contracts and option
contracts purchased or sold may be used from time to time to manage interest
rate exposure by hedging specific assets or liabilities. Realized and unrealized
gains and losses on these instruments are deferred and amortized over the life
of the hedged assets and liabilities. Financial instruments which do not meet
the criteria for hedge accounting are marked to market and any gains or losses
are recognized in the income statement as securities gains/(losses).
Fees received on options written are deferred at the time the fees are received
and recognized in other operating income at the earlier of the settlement or the
expiration of the contract.
(j) Foreclosed Properties
Foreclosed properties (which were acquired by foreclosure or by deed in lieu of
foreclosure) are initially recorded at the lower of the carrying value of the
related loan balance or the fair market value of the real estate acquired less
the estimated costs to sell the real estate at the date title is received. Costs
relating to the development and improvement of the property are capitalized.
Income and expenses incurred in connection with holding and operating the
property are charged to expense. Valuations are periodically performed by
management and independent third parties and an allowance for loss is
established by a charge to expense if the carrying value of a property exceeds
its fair value less estimated costs to sell.
(k) Real Estate Held for Investment
Real estate held for investment represents multi-family rental property
(affordable housing projects) that SFEP owns, operates and develops as a limited
partner. The properties are recorded at cost less accumulated depreciation. The
Company evaluates the recoverability of the carrying value on a regular basis.
If the recoverability was determined to be in doubt, a valuation allowance would
be established by way of a charge to expense. Depreciation expense is provided
on a straight-line basis over the estimated useful life of the assets.
Expenditures for normal repairs and maintenance are charged to expense as
incurred.
The financial condition, results of operations and cash flows of each LLP or LLC
is consolidated in the
62
<PAGE> 63
Company's financial statements. The operations of the properties are not
expected to contribute significantly to the Company's net income before income
taxes. However, the properties do contribute in the form of income tax credits,
which lower the Company's effective tax rate. Once established, the credits on
each property last for ten years and are passed through from the LLP or LLC to
SFEP and reduce the consolidated federal tax liability of the Company.
(l) Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization expense are provided on a
straight-line basis over the estimated useful lives of the assets. The cost of
leasehold improvements is amortized on the straight-line basis over the lesser
of the term of the respective lease or the estimated economic life of the
improvements.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. When properties are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in income.
(m) Federal Home Loan Bank Stock
The Company's investment in FHLB stock meets the minimum amount required by
current regulation and is carried at cost which is its redeemable (fair) value
since the market for this stock is limited.
(n) Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return.
Federal income tax expense is allocated to each subsidiary based on an
intercompany tax sharing agreement. Each subsidiary files separate state and
local income or franchise tax returns.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to the differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
Affordable housing tax credits are recognized as a reduction of income tax
expense in the year they are available to be used in the Company's consolidated
income tax return.
(o) Stock-based Compensation Plans
The Company has various stock based compensation plans that authorize the
granting of stock options, restricted stock, and other stock based awards to
eligible employees. As permitted, the Company has elected not to follow the
recognition provisions of SFAS No. 123, "Accounting for Stock Based
Compensation," which requires a fair-value based method of accounting for stock
options and equity awards, but follows APB No. 25, "Accounting for Stock Issued
to Employees," and related interpretations to account for its stock based
compensation plans. Pursuant to the disclosure requirements of SFAS No. 123, the
Company has included in Note 15 the effect of the fair value of employee
stock-based compensation plans on net income and earnings per share on a pro
forma basis as if the fair value based method of accounting defined in SFAS No.
123 was applied.
(p) Future Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133", and SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", was adopted by the Company on October 1, 2000. This standard
establishes new rules for the recognition and measurement of derivatives,
including derivative instruments embedded in other contracts. It requires all
derivatives to be recorded as either assets or liabilities in the balance sheet
at fair value. Changes in the fair value of derivatives, except for certain
derivatives qualifying as cash flow hedges, are required to be included in
earnings in the period of the change. Adoption of this standard is not expected
to materially effect the results of operations or financial position of the
Company.
63
<PAGE> 64
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" -- a replacement of FASB
Statement No. 125. This statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. This Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. This Statement is to
be applied prospectively with certain exceptions. Therefore, earlier or
retroactive application of this Statement is not permitted. Adoption of this
standard is not expected to materially effect the results of operations or
financial position of the Company.
(q) Reclassification
Certain amounts for prior years have been reclassified to conform to the 2000
presentation.
(r) Stock Split
All share and per share amounts in the financial statements and footnotes have
been restated to give effect to the two-for-one stock split effective April 19,
1999.
(2) ACQUISITION
In January 1999, the Company completed the acquisition of Reliance Bancshares,
Inc. ("Reliance") 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 $5.20 in cash in accordance with
elections made by Reliance shareholders and subject to certain specified
allocation and proration procedures. The Company issued 734,564 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 are included in the Company's consolidated financial statements
from the date of acquisition. The acquisition of Reliance added $42.9 million in
assets, including additions of $25.7 million to net loans and $16.6 million to
deposits.
The excess of cost over the fair value of net assets acquired of $3.2 million is
accounted for as goodwill and is being amortized over twenty five years using
the straight-line method.
64
<PAGE> 65
(3) DEBT AND EQUITY SECURITIES
The following is a summary of available for sale and held to maturity debt and
equity securities:
<TABLE>
<CAPTION>
Gross Unrealized
--------------------------
Amortized
(In thousands) Cost Gains (Losses) Fair Value
--------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
At September 30, 2000:
Available for sale:
U.S. Treasury obligations and obligations of
U.S. Government agencies............... $218,116 $ - $ (5,937) $212,179
Corporate notes and bonds.................. 99 - - 99
Marketable equity securities .............. 1,746 - (176) 1,570
------------ ------------ ------------ ------------
$219,961 $ - $ (6,113) $213,848
============ ============ ============ ============
Held to maturity:
State and municipal obligations........... $ 510 $ 12 $ - $ 522
------------ ------------ ------------ ------------
$ 510 $ 12 $ - $ 522
============ ============ ============ ============
At September 30, 1999:
Available for sale:
U.S. Treasury obligations and obligations of
U.S. Government agencies............... $218,520 $ 1 $ (6,215) $212,306
Corporate notes and bonds.................. 1,099 1 - 1,100
Marketable equity securities .............. 3,503 - (260) 3,243
------------ ------------ ------------ ------------
$223,122 $ 2 $ (6,475) $216,649
============ ============ ============ ============
Held to maturity:
State and municipal obligations........... $ 810 $ 24 $ - $ 834
------------ ------------ ------------ ------------
$ 810 $ 24 $ - $ 834
============ ============ ============ ============
</TABLE>
The amortized cost and fair value of debt and equity securities available for
sale and held to maturity at September 30, 2000, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
Amortized
(In thousands) Cost Fair Value
-------------- ---------- -------------
<S> <C> <C>
Less than one year.................................... $ 53,065 $ 52,782
Greater than one year but less than five years........ 95,182 93,142
Greater than five years but less than ten years....... 60,478 57,751
Greater than ten years................................ 10,000 9,125
-------------- ---------------
218,725 212,800
Marketable equity securities.......................... 1,746 1,570
-------------- ---------------
$ 220,471 $ 214,370
============== ===============
</TABLE>
During the years ended September 30, 2000, 1999 and 1998, proceeds from the sale
of available for sale debt and equity securities were $2.8 million, $94.7
million and $71.2 million, respectively. The gross realized gains on such sales
totaled zero, $58,000 and $209,000 in 2000, 1999 and 1998, respectively. The
gross realized losses on such sales totaled zero, $85,000 and $1.7 million in
2000, 1999 and 1998, respectively. There were no sales of held to maturity debt
securities in 2000, 1999 and 1998.
65
<PAGE> 66
(4) MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of available for sale mortgage-backed and related
securities and held to maturity mortgage-backed and related securities:
<TABLE>
<CAPTION>
Gross Unrealized
-----------------------------
Amortized
(In thousands) Cost Gains (Losses) Fair Value
--------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
At September 30, 2000:
Available for sale:
Participation certificates:
FNMA................................ $ 29,038 $ -- $ (1,100) $ 27,938
FHLMC............................... 758 4 -- 762
Private issue....................... 43,803 102 (1,211) 42,694
REMICs:
FNMA................................ 28,248 8 (727) 27,529
FHLMC............................... 130,470 12 (5,820) 124,662
Private issue....................... 570,178 22 (15,903) 554,297
CMO residual............................ 36 -- -- 36
------------ ------------- ------------ -------------
$ 802,531 $ 148 $ (24,761) $ 777,918
============ ============= ============ =============
Held to maturity:
REMICs:
Private issue....................... $ 27,088 $ -- $ (609) $ 26,479
------------ ------------- ------------ -------------
$ 27,088 $ -- $ (609) $ 26,479
============ ============= ============ =============
At September 30, 1999:
Available for sale:
Participation certificates:
FNMA................................ $ 31,454 $ 15 $ (1,134) $ 30,335
FHLMC............................... 1,022 -- (7) 1,015
Private issue....................... 70,969 398 (1,875) 69,492
REMICs:
GNMA................................ 2,134 -- (1) 2,133
FNMA................................ 42,435 51 (417) 42,069
FHLMC............................... 164,407 37 (2,771) 161,673
Private issue....................... 622,497 122 (9,493) 613,126
CMO residual............................ 36 -- -- 36
------------ ------------- ----------- -------------
$ 934,954 $ 623 $ (15,698) $ 919,879
============ ============= =========== =============
Held to maturity:
REMICs:
FNMA................................ $ 364 $ -- $ (1) $ 363
Private issue....................... 39,111 21 (245) 38,887
------------ ------------- ----------- -------------
$ 39,475 $ 21 $ (246) $ 39,250
============ ============= =========== =============
</TABLE>
During the years ended September 30, 2000, 1999 and 1998, proceeds from the sale
of available for sale mortgage-backed and related securities were $29.1 million,
$47.5 million and $229.0 million, respectively. The gross realized gains on such
sales totaled $47,000, $119,000 and $4.4 million in 2000, 1999 and 1998,
respectively. The gross realized losses on such sales totaled $54,000, $439,000
and $930,000 in 2000, 1999 and 1998, respectively. There were no sales of held
to maturity mortgage-backed and related securities in 2000, 1999 and 1998.
At September 30, 2000 and 1999, $486.6 million and $484.2 million, respectively,
of mortgage-related securities were pledged as collateral for FHLB advances.
66
<PAGE> 67
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
(In thousands) 2000 1999
--------------- ------------- -------------
<S> <C> <C>
First mortgage - one- to four-family.................................. $ 404,505 $ 294,438
First mortgage - residential construction.............................. 62,260 103,100
First mortgage - multi-family......................................... 130,002 160,593
Commercial real estate................................................ 306,778 251,914
Home equity........................................................... 188,349 156,695
Commercial and agriculture............................................ 152,526 123,899
Consumer secured by real estate........................................ 80,881 89,991
Interim financing and consumer loans.................................. 13,307 13,744
Indirect autos......................................................... 30,722 44,299
Education............................................................. 1,615 984
------------- -------------
Total gross loans................................................... 1,370,945 1,239,657
------------- -------------
Less:
Loans in process.................................................... 54,679 106,960
Unearned insurance premiums......................................... 194 634
Deferred loan and guarantee fees (costs)............................ (359) (41)
Purchased loan discount............................................. 659 737
Allowance for loan losses........................................... 10,404 9,356
------------- -------------
Total deductions.................................................... 65,577 117,646
------------- -------------
Total loans receivable................................................ 1,305,368 1,122,011
Less: First mortgage loans held for sale............................. 8,066 8,620
------------- -------------
Loans receivable, net................................................. $ 1,297,302 $ 1,113,391
============= =============
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
(In thousands) 2000 1999 1998
--------------- -------------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of year............................ $ 9,356 $ 7,530 $ 6,202
Provision charged to expense.......................... 2,509 1,920 2,300
Charge-offs........................................... (1,563) (447) (999)
Recoveries............................................. 102 50 27
Acquired bank's allowance............................. - 303 -
------------- ------------- -------------
Balance at end of year.................................. $ 10,404 $ 9,356 $ 7,530
============= ============= =============
</TABLE>
Non-performing loans totaled approximately $13.0 million and $2.8 million at
September 30, 2000 and 1999, respectively. Non-performing loans at September 30,
2000 includes a $10 million commercial loan in which the Company participates
with a group of other lenders. Non-performing loans at September 30, 1999
included a single commercial real estate loan collateralized by a shopping
center mortgage with a balance of $798,000. Impaired loans totaled $12.1 million
and $809,000 at September 30, 2000 and 1999, respectively. These loans had
associated reserves of $1.6 million and $400,000 at September 30, 2000 and 1999,
respectively. During 2000 and 1999, the average balance of impaired loans was
$6.4 million and $923,000, respectively. Interest income on impaired loans for
the years ended September 30, 2000, 1999 and 1998 was $881,000, $48,000 and
$63,000, respectively. Interest income on impaired loans is recognized only to
the extent that payments are expected to exceed the amount of principal due on
the loans.
67
<PAGE> 68
The effect of non-performing loans on interest income is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
(In thousands) 2000 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C>
Interest at original contractual rate.................. $ 1,138 $ 274 $ 388
Interest collected..................................... 848 150 161
-------------- -------------- --------------
Net reduction of interest income..................... $ 290 $ 124 $ 227
============== ============== ==============
</TABLE>
Mortgage servicing rights are included in the accompanying consolidated
statements of financial condition. The fair value of capitalized mortgage
servicing rights approximates the carrying amount at September 30, 2000, 1999
and 1998. Changes in capitalized mortgage servicing rights are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------
(In thousands) 2000 1999 1998
--------------- ------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.................................. $ 4,729 $ 3,301 $ 1,802
Servicing rights capitalized.............................. 665 2,316 2,158
Amortization of servicing rights.......................... (819) (888) (659)
------------- ------------- -------------
Balance at end of year........................................ $ 4,575 $ 4,729 $ 3,301
============= ============= =============
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans are summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
(In thousands) 2000 1999 1998
--------------- ------------ ------------ -------------
<S> <C> <C> <C>
Mortgage loans underlying pass-through securities - FNMA.... $ 92,039 $ 95,937 $ 133,586
Mortgage loan portfolios serviced for:
FNMA.................................................... 370,132 357,060 252,059
FHLMC.................................................. - - 603
WHEDA................................................... 31,698 26,469 20,834
Other investors......................................... 4,072 4,648 6,596
------------- ------------- -------------
Total loans serviced for others......................... $ 497,941 $ 484,114 $ 413,678
============= ============= =============
Custodial escrow balances maintained in connection with the
foregoing loan servicing and included in demand deposits.. $ 13,785 $ 12,724 $ 15,301
============= ============= =============
</TABLE>
At September 30, 2000, 1999 and 1998, mortgage loan portfolios serviced for FNMA
includes $28.1 million, $17.1 million and $35.6 million, respectively of
mortgage loans sold with recourse.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
(In thousands) 2000 1999
--------------- -------------- --------------
<S> <C> <C>
Mortgage-backed and related securities............................... $ 3,740 $ 4,469
Loans receivable..................................................... 7,096 6,333
Debt and equity securities............................................ 2,752 2,792
Federal Home Loan Bank stock......................................... 583 496
-------------- --------------
$ 14,171 $ 14,090
============== ==============
</TABLE>
68
<PAGE> 69
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment, at cost, follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
(In thousands) 2000 1999
--------------- -------------- --------------
<S> <C> <C>
Land and land improvements........................................... $ 4,654 $ 4,618
Office buildings and improvements.................................... 19,256 19,274
Furniture, fixtures and equipment.................................... 21,242 21,188
Leasehold improvements............................................... 4,978 4,654
------------- -------------
50,130 49,734
Accumulated depreciation and amortization........................ (19,847) (16,810)
------------- -------------
$ 30,283 $ 32,924
============= =============
</TABLE>
Range of depreciable lives:
Office buildings and improvements 5 - 40 years
Furniture, fixtures and equipment 5 - 10 years
Leasehold improvements 5 - 40 years
(8) DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------
(In thousands) 2000 1999
---------------- -------------------------------------- ----------------------------------------
Average Average
Stated Stated
Rate Amount Percent Rate Amount Percent
------------- ------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing.. -- $ 87,072 5.9% -- $ 73,906 5.0%
Interest bearing...... 0.80% 78,580 5.3 1.14% 68,621 4.6
Passbook accounts........ 1.95 91,544 6.2 2.29 115,638 7.8
Money market
demand accounts....... 5.26 369,038 25.1 4.29 360,360 24.3
Certificates............. 6.25 845,647 57.5 5.66 865,778 58.3
------------ ---------- ------------ ----------
Total deposits........... 5.07% $ 1,471,881 100.0% 4.58% $ 1,484,303 100.0%
============ ========== ============ ==========
</TABLE>
The certificates category above includes approximately $341.3 million and $421.8
million of brokered deposits at average stated rates of 6.44% and 6.08% at
September 30, 2000 and 1999, respectively. Original maturities of brokered
certificates range from three months to ten years and include certificates that
are callable at the option of the Company.
69
<PAGE> 70
Aggregate annual maturities of certificate accounts at September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
Average
Stated
Maturities during year ended September 30: Amount Rate
------------------------------------------
--------------- ------------
(In thousands)
<S> <C> <C>
2001............................................... $ 373,526 6.02%
2002............................................... 123,711 6.47
2003............................................... 11,790 6.22
2004............................................... 90,763 6.24
2005............................................... 67,892 6.24
Thereafter......................................... 177,965 6.60
---------------
$ 845,647
===============
</TABLE>
At September 30, 2000, $330.9 million of certificates are callable at the option
of the Company. Certificates, net of brokered deposits, include approximately
$63.1 million and $59.8 million in denominations of $100,000 or more at
September 30, 2000 and 1999, respectively.
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
(In thousands) 2000 1999 1998
--------------- -------------- -------------- -------------
<S> <C> <C> <C>
Demand deposits............................................. $ 500 $ 831 $ 861
Money market demand accounts................................ 17,330 14,767 13,867
Passbook accounts........................................... 2,184 3,277 4,186
Certificates of deposit.................................... 52,451 38,500 33,344
-------------- -------------- -------------
$ 72,465 $ 57,375 $ 52,258
============== ============== =============
</TABLE>
Accrued interest payable on deposits totaled approximately $5.5 million and $6.7
million at September 30, 2000 and 1999, respectively.
70
<PAGE> 71
(9) SHORT AND LONG TERM BORROWINGS
Advances and other borrowings consist of the following:
<TABLE>
<CAPTION>
(In thousands) Weighted Average
Interest Rate Maturity/Call Date
-------------------------
September 30, in fiscal September 30,
------------------------- ------------------------
Description 2000 1999 year ended 2000 1999
--------------------------------- ------------- ---------- ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Reverse repurchase agreements.... - % 5.35 % 2000 $ - $ 177,654
6.59 - 2001 245,993 -
Retail repurchase agreements..... - 4.34 2000 - 790
4.45 - 2001 2,905 -
Bank line of credit.............. - 6.62 2000 - 21,000
7.90 - 2001 36,000 -
Advances from Federal Home
Loan Bank Of Chicago.......... 6.96 5.89 Open Line Advance 2,000 32,500
- 5.08 2000 - 330,046
5.64 4.84 2001 425,000 190,000
5.59 4.65 2002 80,000 30,000
5.02 5.02 2003 25,000 25,000
Federal Funds Purchased.......... 6.96 6.00 Daily overnight 45,000 25,000
Federal Reserve Bank
Treasury tax & loan advances... 6.41 5.11 Daily overnight 1,683 1,800
Mortgages payable................ 7.98 8.04 Various 1,095 948
----------- -----------
$ 864,676 $ 834,738
Less: short term borrowings...... 758,581 588,790
----------- -----------
Long term borrowings............. $ 106,095 $ 245,948
=========== ===========
</TABLE>
The Company is required to maintain as collateral unencumbered mortgage loans
and mortgage-related securities such that the outstanding balance of FHLB
advances does not exceed 60% of the book value of this collateral. In addition,
these notes are collateralized by all FHLB stock. At September 30, 2000 and
1999, $392.1 million and $283.2 million, respectively, of mortgage loans and
$486.6 million and $484.2 million, respectively, of mortgage-related securities
were pledged as collateral for FHLB advances. The variable rate advances are
tied to the one-month and three-month LIBOR indices. FHLB advances are subject
to a prepayment penalty if they are repaid prior to maturity. The maximum amount
of borrowings from the FHLB at any month end during the years ended September
30, 2000 and 1999 was approximately $634.4 million and $645.1 million,
respectively. The approximate average amount outstanding was $572.8 million and
$580.8 million for those same years. The weighted average interest rate was
5.42% and 4.94% during those years. The table above is presented at maturity
date or call date, whichever is earlier. Included in the FHLB advances that
mature in fiscal year 2001 are $370.0 million of convertible fixed rate advances
("CFA"). A CFA is an advance that allows the FHLB to demand repayment prior to
the stated maturity date in accordance with its contractual terms. At September
30, 2000, the $370.0 million of outstanding CFA's have a maturity of 2004 to
2006 and are puttable by the FHLB during fiscal year 2001 and quarterly
thereafter.
The Federal Reserve Bank advances are collateralized by agency debt with a
carrying value of $2.0 million at September 30, 2000 and 1999.
71
<PAGE> 72
Securities sold under agreements to repurchase averaged $211.6 million and
$125.2 million based on average daily balances during the years ended September
30, 2000 and 1999, respectively. The maximum amount outstanding at any month-end
was $260.6 million and $205.0 million during those years, respectively. The
average balances are calculated based on daily balances. Securities sold under
agreements to repurchase were delivered for escrow to the broker-dealer who
arranged the transactions.
Federal funds purchased averaged $31.1 million and $2.2 million for the years
ended September 30, 2000 and 1999, respectively. The maximum outstanding at any
month-end was $49.5 million and $25.0 million during those years, respectively.
The Bank line of credit averaged $26.4 million and $24.8 million for the years
ended September 30, 2000 and 1999, respectively. The maximum amount outstanding
at any month-end was $36.0 million and $30.0 million, respectively. The line of
credit allows for individual advances of one to six months at rates tied to
equivalent term LIBOR indices and is collateralized by the stock of the Bank.
The line of credit allows for up to $40.0 million in borrowings.
(10) OTHER GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
(In thousands) 2000 1999 1998
--------------- ------------- ------------- -----------
<S> <C> <C> <C>
Federal deposit insurance premiums............................ $ 386 $ 722 $ 643
Data processing.............................................. 1,690 1,734 1,741
Advertising.................................................. 815 1,194 1,435
Stationery, printing and office supplies..................... 646 680 784
Telephone and postage........................................ 1,658 1,433 1,223
Insurance and surety bond premiums............................ 219 143 108
Professional fees and services................................ 678 410 582
Supervisory assessment........................................ 397 310 284
Amortization of intangible assets............................. 1,231 1,192 1,080
Organization dues and subscriptions........................... 143 201 132
Consumer lending.............................................. 190 161 203
Miscellaneous ................................................ 1,451 1,368 1,980
------------- ------------- -------------
$ 9,504 $ 9,548 $ 10,195
============= ============= =============
</TABLE>
(11) INCOME TAXES
Income tax expense (benefit) in the consolidated statements of income consists
of the following:
<TABLE>
<CAPTION>
(In thousands) Federal State Total
-------------- ------------ ------------- ------------
<S> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000
Current...................................................... $ 3,076 $ 77 $ 3,153
Deferred..................................................... 2,233 (22) 2,211
------------ ------------- ------------
$ 5,309 $ 55 $ 5,364
============ ============= ============
YEAR ENDED SEPTEMBER 30, 1999
Current...................................................... $ 1,143 $ 11 $ 1,154
Deferred..................................................... 4,252 1,004 5,256
------------ ------------- ------------
$ 5,395 $ 1,015 $ 6,410
============ ============= ============
YEAR ENDED SEPTEMBER 30, 1998
Current...................................................... $ 3,360 $ (698) $ 2,662
Deferred..................................................... (1,180) 344 (836)
------------ ------------- ------------
$ 2,180 $ (354) $ 1,826
============ ============= ============
</TABLE>
72
<PAGE> 73
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>
Years Ended September 30,
--------------------------------------------
(In thousands) 2000 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C>
Federal income tax expense at statutory rate of 35%...... $ 5,770 $ 8,073 $ 5,818
State income taxes, net of Federal income tax benefit.... 36 662 (241)
Tax exempt interest...................................... (117) (136) (146)
Non-deductible compensation.............................. 2,071 449 424
Acquisition intangible amortization...................... 227 230 247
Affordable housing credits............................... (2,609) (2,969) (4,176)
Other, net............................................... (14) 101 (100)
------------- ------------- -------------
$ 5,364 $ 6,410 $ 1,826
============= ============= =============
</TABLE>
Included in other assets are net deferred tax assets of $7.1 million and $6.3
million at September 30, 2000 and 1999, respectively. The tax effects of
temporary differences that give rise to significant portions of deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
September 30,
---------------------------------
(In thousands) 2000 1999
-------------- -------------- --------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses................................................ $ 3,677 $ 3,013
Deferred interest and fee income......................................... 545 362
Net operating losses..................................................... 1,540 1,178
Valuation adjustments and reserves....................................... 47 47
Accrued expenses......................................................... 281 541
Deferred compensation.................................................... 584 742
Non-qualified stock option exercise...................................... 10 88
Low income housing credit carryover...................................... 4,822 3,891
-------------- --------------
Gross deferred tax asset................................................. 11,506 9,862
Less valuation allowance................................................. (1,116) (875)
-------------- --------------
Net deferred tax asset................................................... 10,390 8,987
DEFERRED TAX LIABILITIES:
Fixed asset tax basis adjustments........................................ (1,389) (1,344)
FHLB stock tax basis adjustment.......................................... (980) (307)
Unrealized gains on available for sale securities........................ (492) (543)
Other.................................................................... (456) (530)
-------------- --------------
Gross deferred tax liability............................................. (3,317) (2,724)
-------------- --------------
Net deferred tax asset .................................................. $ 7,073 $ 6,263
============== ==============
</TABLE>
At September 30, 2000 and 1999, deferred tax assets include approximately $30.0
million and $22.9 million of various state net operating loss carry forwards
respectively, which begin to expire in 2007 and are reduced by the valuation
allowance to the extent full realization is in doubt. At September 30, 2000 and
1999, deferred tax assets include low income housing credits of $1.0 million in
each year which can be carried forward for 15 years and $3.8 million and $2.9
million, respectively, which can be carried forward for 20 years. The credits
will begin to expire in 2013.
73
<PAGE> 74
(12) SHAREHOLDERS' EQUITY
In accordance with federal regulations, at the time the Bank converted from a
federal mutual savings bank to a federal stock savings bank, the Bank
established a liquidation account equal to its retained earnings of $63.0
million to provide a limited priority claim for the benefit of qualifying
depositors who maintain their deposit accounts at the Bank after conversion. The
liquidation account is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
unlikely event of a complete liquidation of the Bank, and only in such event,
each eligible account holder would receive from the liquidation account a
liquidation distribution based on his or her proportionate share of the then
remaining qualifying deposits. At September 30, 2000, the balance of the
liquidation account was approximately $17.7 million. Under current regulations,
the Bank is not permitted to pay dividends on its stock if the effect would
reduce its regulatory capital below the liquidation account.
Office of Thrift Supervision ("OTS") regulations also provide that an
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, and after prior notice but without
approval by the OTS, make capital distributions during the calendar year of up
to 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year.
Any additional capital distributions would require prior regulatory approval.
During the year ended September 30, 2000, the Bank paid dividends to the Company
totaling $5.0 million. As of September 30, 2000, retained earnings of the Bank
of approximately $31.2 million were free of restriction and available for
dividend payments.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its shareholders. However, the Company's source of
funds for future dividends may depend upon dividends from the Bank.
Under the Internal Revenue Code and the Wisconsin Statutes, for tax years
beginning before 1996, the Company was permitted to deduct an annual addition to
a reserve for bad debts. This amount differed from the provision for loan losses
recorded for financial accounting purposes. Under prior law, bad debt deductions
for income tax purposes were included in taxable income of later years only if
the bad debt reserves were used for purposes other than to absorb bad debt
losses. Because the Company did not intend to use the reserve for purposes other
than to absorb losses, no deferred income taxes were provided. Shareholders'
equity at September 30, 2000 includes approximately $21.9 million, for which no
federal or state income taxes were provided. Under SFAS No. 109, deferred income
taxes have been provided on certain additions to the tax reserve for bad debts.
The Small Business Job Protection Act of 1996 repealed the bad debt reserve
method for tax years beginning after 1995. The Bank will not be required to
recapture into income any of the restricted amounts previously deducted except
in the unlikely event of a partial or complete liquidation of the Bank or if
nondividend distributions to shareholders exceed current and accumulated
earnings and profits.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
74
<PAGE> 75
Management believes, as of September 30, 2000, that the Company and the Bank
meet all capital adequacy requirements to which they are subject.
As of September 30, 2000 and 1999, the most recent notification from the OTS
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. A well-capitalized institution significantly exceeds
the required minimum level for each relevant capital measure. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The following table summarizes the Bank's capital ratios and the ratios required
by federal regulations:
<TABLE>
<CAPTION>
To Be Adequately To Be Well
Capitalized Under Capitalized Under
Prompt Corrective Prompt Corrective
Actual Action Provisions Action Provisions
---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
As of September 30, 2000:
Tangible capital.............. $ 169,261 6.78% > or = $ 99,893 > or = 4.0% > or = $ 124,866 > or = 5.0%
Core capital ................. 169,261 6.78% > or = 99,893 > or = 4.0% > or = 124,866 > or = 5.0%
Tier 1 risk-based capital..... 169,261 10.92% > or = 61,995 > or = 4.0% > or = 92,993 > or = 6.0%
Total risk-based capital...... 179,330 11.57% > or = 123,991 > or = 8.0% > or = 154,989 > or = 10.0%
As of September 30, 1999:
Tangible capital.............. $ 144,222 5.82% > or = $ 99,136 > or = 4.0% > or = $ 123,921 > or = 5.0%
Core capital ................. 144,222 5.82% > or = 99,136 > or = 4.0% > or = 123,921 > or = 5.0%
Tier 1 risk-based capital..... 144,222 9.98% > or = 57,803 > or = 4.0% > or = 86,704 > or = 6.0%
Total risk-based capital...... 153,578 10.63% > or = 115,606 > or = 8.0% > or = 144,507 > or = 10.0%
</TABLE>
Unrealized gains and losses on securities available for sale are not included in
the above tangible, core and risk-based capital amounts. At September 30, 2000,
if all available for sale securities were sold and the unrealized losses were
recognized, the Bank's capital ratios would exceed those required to be well
capitalized.
On September 25, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles shareholders to buy one one-hundredth of a share of the Company's
preferred stock at an exercise price of $150. Rights do not become exercisable
until eleven business days after any person or group has acquired, commenced, or
announced its intention to commence a tender or exchange offer to acquire 15% or
more of the Company's common stock, or in the event a person or group owning 10%
or more of the Company's common stock is deemed to be "adverse" to the Company.
If the rights become exercisable, holders of each right, other than the
acquiror, upon payment of the exercise price, will have the right to purchase
the Company's common stock (in lieu of preferred shares) having a value equal to
two times the exercise price. If the Company is acquired in a merger, share
exchange or other business combination or 50% or more of its consolidated assets
or earning power are sold, rights holders, other than the acquiring or adverse
person or group, will be entitled to purchase the acquiror's shares at a similar
discount. If the rights become exercisable, the Company may also exchange
rights, other than those held by the acquiring or adverse person or group, in
whole or in part, at an exchange ratio of one share of the Company's common
stock per right held. Rights are redeemable by the Company at any time until
they are exercisable at the exchange rate of $.01 per right. Issuance of the
rights has no immediate dilutive effect, does not currently affect reported
earnings per share, is not taxable to the Company or its shareholders, and will
not change the way in which the Company's shares are traded. The rights expire
ten years from the date of issuance.
75
<PAGE> 76
(13) EARNINGS PER SHARE
Basic earnings per share of common stock for the years ended September 30, 2000,
1999 and 1998, have been determined by dividing net income for the year by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share of common stock for the years ended September 30,
2000, 1999 and 1998, have been determined by dividing net income for the year by
the weighted average number of shares of common stock outstanding during the
year, adjusted for the dilutive effect of outstanding stock options. Total
shares outstanding for earnings per share calculation purposes have been reduced
by the ESOP shares that have not been committed to be released.
The computation of earnings per common share for the years ended September 30 is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income for the year................... $11,123,000 $16,656,000 $14,797,000
=========== =========== ===========
Common shares issued...................... 14,579,240 14,579,240 14,579,240
Weighted average treasury shares.......... 4,655,160 4,736,967 4,241,506
Weighted average unallocated
ESOP shares............................ 120,772 482,252 565,156
----------- ----------- -----------
Weighted average common shares
outstanding during the year............ 9,803,308 9,360,021 9,772,578
Effect of dilutive stock options
outstanding........................... 172,185 438,501 610,170
----------- ----------- -----------
Diluted weighted average common shares
outstanding during the year............ 9,975,493 9,798,522 10,382,748
=========== =========== ===========
Basic earnings per share.................. $ 1.13 $ 1.78 $ 1.51
=========== =========== ===========
Diluted earnings per share................ $ 1.12 $ 1.70 $ 1.43
=========== =========== ===========
</TABLE>
(14) STOCK REPURCHASE PROGRAM
On April 22, 1999, the Company announced a share repurchase program for its
common stock whereby the Company may purchase up to 5% of the outstanding common
stock, or approximately 505,000 shares, commencing April 29, 1999 and concluding
before September 30, 2000, depending upon market conditions. The repurchased
shares became treasury shares and are to be used for the exercise of stock
options under the stock option plan and for general corporate purposes. The
share repurchase program was completed on June 30, 2000 at an average price of
$14.43 per share. This was the tenth such repurchase program that the Company
has undertaken. At September 30, 2000, an aggregate of 6,711,304 shares had been
repurchased in all such repurchase programs at an average price of $13.19. On
June 30, 2000, the Company announced a share repurchase program for its common
stock whereby the Company may purchase up to 5% of the outstanding stock, or
approximately 485,000 shares. The repurchase program was authorized to start
June 30, 2000. At September 30, 2000, 264,400 shares had been repurchased at an
average price of $14.89 per share.
(15) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS:
The Company has a defined contribution pension plan which covers substantially
all employees who are at least 21 years of age and have completed 1,000 hours or
more of service each year. Company contributions
76
<PAGE> 77
are based on a set percentage of each participant's compensation for the plan
year. Plan expense for the years ended September 2000, 1999 and 1998 was
approximately $96,000, $180,000 and $285,000, respectively.
The Company also has a defined contribution savings plan for substantially all
employees. The plan is qualified under Section 401(k) of the Internal Revenue
Code. Participation in the plan requires that an employee be at least 21 years
of age and have completed 1,000 hours or more of service each year. Participants
may elect to defer a portion of their compensation (between 2% and 10%) and
contribute this amount to the plan. Under the plan, the Company will match the
contribution made by each employee up to fifty percent of 4% of the eligible
employee's annual compensation. Plan expense for the years ended September 30,
2000, 1999 and 1998 was approximately $229,000, $228,000 and $179,000,
respectively.
The aggregate benefit payable to any employee of both defined contribution plans
is dependent upon the rates of contribution, the earnings of the fund and the
length of time such employee continues as a participant.
OFFICER DEFERRED COMPENSATION PLAN:
The Company has deferred compensation plans covering certain officers of the
Company. These arrangements provide for monthly payments to be made upon
retirement or reaching certain age levels for periods of 10 to 15 years. A
liability is recorded for the present value of the future payments under these
agreements, amounting to $891,000 and $1.1 million, respectively at September
30, 2000 and 1999. The Company owns insurance policies on the lives of these
officers, which have cash surrender values of approximately $2.0 million at
September 30, 2000 and 1999, and are intended to fund these benefits. Plan
expense for the years ended September 30, 2000, 1999 and 1998 was approximately
$58,000, $61,000 and $56,000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN:
In conjunction with the conversion of the Bank to a stock savings bank, an
employee stock ownership plan ("ESOP") was adopted covering all employees of the
Company who have attained age 21 and completed one year of service during which
they work at least 1,000 hours. The ESOP borrowed $4.9 million from the Company
and purchased 981,296 common shares issued in the conversion. The debt bears a
variable interest rate based on the borrower's prime lending rate, which was
8.25% at September 30, 1999. The balance of this loan was $3.1 million at
September 30, 1999. The Bank makes annual contributions to the ESOP equal to the
ESOP's debt service less dividends received by the ESOP. All dividends received
by the ESOP are used to pay debt service. The ESOP shares initially were pledged
as collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the debt of the ESOP is recorded as
debt and the shares pledged as collateral are reported as unearned ESOP shares
in the statement of financial position. As shares are released from collateral,
the Company reports compensation expense equal to the current market price of
the shares. The excess of the current market price of shares released over the
cost of those shares is credited to paid-in-capital. As shares are released they
become outstanding for earnings-per-share computations. Dividends on allocated
ESOP shares are recorded as a reduction of shareholders' equity; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest.
The Company made a voluntary acceleration of the repayment of all of the
remaining loan principal to its ESOP plan during the year ended September 30,
2000. The increased payments resulted in additional ESOP expense of $7.1 million
for the year ended September 30, 2000. All shares have been allocated at
September 30, 2000. ESOP compensation expense for the years ended September 30,
2000, 1999 and 1998 was $8.2 million, $1.7 million and $1.6 million,
respectively.
77
<PAGE> 78
The following is a summary of ESOP shares at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Shares
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Allocated shares....................... 981,296 467,076
Shares released for allocation......... - 62,252
Unreleased shares...................... - 451,968
---------- ----------
Total ESOP shares...................... 981,296 981,296
========== ==========
Fair value of unreleased shares
at September 30,.................. $ - $9,294,000
========== ==========
</TABLE>
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 September 30, 2000, 4,800 shares were reserved for future grants. Further
information concerning the options is as follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
---------- --------------
<S> <C> <C>
Shares under option
September 30, 1997......................................... 1,313,132 $ 5.00 - 19.38
Options granted.......................................... 73,334 19.19
Options canceled......................................... (49,500) 14.50
Options exercised........................................ (173,346) 5.00 - 14.50
---------- --------------
September 30, 1998......................................... 1,163,620 5.00 - 19.38
Options granted.......................................... 785,264 15.62 - 21.31
Options canceled......................................... (41,550) 14.50 - 20.25
Options exercised........................................ (341,652) 5.00 - 18.50
---------- --------------
September 30, 1999......................................... 1,565,682 5.00 - 21.31
Options granted.......................................... 189,548 13.88 - 22.00
Options canceled......................................... (4,800) 18.88
Options exercised........................................ (50,282) 5.00 - 15.62
---------- --------------
September 30, 2000......................................... 1,700,148 5.00 - 22.00
========== ==============
Options exercisable at September 30, 2000 818,625 $ 5.00 - 21.31
========== ==============
</TABLE>
78
<PAGE> 79
The following table summarizes information about stock options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------------
Weighted Weighted
Exercise Number Average Average Number Average
Price Range Outstanding Exercise Price Life* Outstanding Exercise Price
------------------- -- --------------- ---------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
$5.00 114,260 $5.00 2.71 114,260 $5.00
$8.38 17,000 $8.38 3.83 8,502 $8.38
$13.13-$14.50 736,572 $14.31 7.37 439,751 $14.50
$15.62-$18.50 130,082 $16.26 8.21 130,082 $16.26
$18.88 497,800 $18.88 8.41 10,000 $18.88
$19.19-$22.00 204,434 $19.91 7.78 116,030 $19.57
-------------- --------------
1,700,148 818,625
============== ==============
</TABLE>
*Average contractual life remaining in years
For purposes of providing the pro forma disclosures required under SFAS No. 123,
"Accounting for Stock-Based Compensation," the fair value of stock options
granted was estimated using the Black-Scholes option pricing model. The per
share weighted-average fair value of stock options granted during 2000 and 1999
was $4.37 and $5.51, respectively, on the date of grant with the following
weighted-average assumptions used for grants in 2000 and 1999, respectively:
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
----------------- ---------------- -----------------
<S> <C> <C> <C>
Expected dividend yield............................. 3.05% 1.84% 1.55%
Risk-free interest rates............................ 5.99% 5.95% 5.82%
Expected lives...................................... 10 years 10 years 10 years
Expected volatility................................. 15% 15% 15%
</TABLE>
Had compensation cost for the Company's stock-based plans been determined in
accordance with SFAS No. 123, net income and earnings per share would have been
reduced to the pro forma amounts indicated below. This pro forma net income
reflects only options granted in the fiscal years 1997 through 2000. Therefore,
the full impact of calculating compensation cost under SFAS No. 123 is not
reflected in the pro-forma net income and earnings per share amounts.
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
---------------- ----------------- ----------------
<S> <C> <C> <C>
Net Income As reported............. $ 11,123,000 $ 16,656,000 $ 14,797,000
Pro forma............... $ 10,349,000 $ 15,935,000 $ 14,510,000
Basic earnings per share As reported............. $ 1.13 $ 1.78 $ 1.51
Pro forma............... $ 1.05 $ 1.70 $ 1.49
Diluted earnings per share As reported............. $ 1.12 $ 1.70 $ 1.43
Pro forma............... $ 1.04 $ 1.63 $ 1.40
</TABLE>
79
<PAGE> 80
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER COMMITMENTS
The Company is 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 reflected in the consolidated financial statements.
<TABLE>
<CAPTION>
Contractual or Notional
Amount(s)
September 30,
-----------------------------
2000 1999
----------- ----------
(In thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk, are as follows:
Commitments to extend credit:
Fixed-rate loans................................. $ 4,790 $ 959
Variable-rate loans.............................. 42,293 50,043
Mortgage loans sold with recourse................... 28,148 17,053
Guarantees under IRB issues........................ 32,582 24,484
Commercial letters of credit........................ - 2,695
Interest rate swap agreements...................... 400,000 350,000
Unused and open-ended lines of credit:
Consumer......................................... 199,515 176,958
Commercial....................................... 60,408 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 September 30,
2000 have interest rates ranging from 7.75% to 8.625%. Because some commitments
expire without being drawn upon, the total commitment amounts do not necessarily
represent cash requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counterparty. The Company generally extends credit on a
secured basis. Collateral obtained consists primarily of one- to four-family
residences and other residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans that are
sold to secondary market agencies, primarily FNMA, with the servicing of these
loans being retained by the Company. The Company receives a larger servicing
spread on those loans being serviced then 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 for an industrial development revenue bond issue
("IRB"). The IRBs are issued by municipalities to finance real estate owned by a
third party. Potential loss on a guarantee is the notional amount of the
guarantee less the value of the real estate collateral. At September 30, 2000,
appraised values of the real estate collateral exceeded the amount of the
guarantees.
80
<PAGE> 81
Interest rate swap agreements generally involve the exchange of fixed and
variable rate interest 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
pay-floating receive agreements were entered into as hedges of the interest
rates on debt securities. The fixed receive-floating pay agreements were entered
into as hedges of the interest rates on fixed rate certificates of deposit.
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 earning
assets and interest-bearing liabilities.
At September 30, 2000, the Company had a $10 million in fixed pay-floating
receive agreement with a maturity date of 2001. The agreement has a fixed
interest rate of 7.05% and a variable interest rate of 7.56%. At September 30,
2000, the Company had $390 million in fixed receive-floating pay agreements with
maturity dates ranging from 2001 to 2009 and call dates ranging from 2000 to
2001. The agreements have fixed interest rates ranging from 5.85% to 7.13% and
variable interest rates ranging from 5.70% to 6.68%.
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 September 30, 2000, the gross unrealized gains and losses of
$211,000 and $8.1 million, respectively, equal the fair value loss of the
interest rate swaps of $7.9 million. At September 30, 1999, the gross unrealized
gains and losses of $167,000 and $8.6 million, respectively, equal the fair
value of the interest rate swaps of $8.4 million.
The unused and open consumer lines of credit are conditional commitments issued
by the Company for extensions of credit such as home equity, auto, credit card
or other similar consumer type financing. Furthermore, the unused and open
commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, agricultural
production, equipment or other similar commercial type financing. The credit
risk involved in extending lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for these
commitments may include, but may not be limited to, real estate, investment
securities, equipment, accounts receivable, inventory and Company deposits.
The Company's primary business activities include granting residential mortgage
and consumer loans to customers located within the proximity of their branch
locations, primarily within the State of Wisconsin. Approximately $79.4 million
of commercial real estate and multi-family loans are outside Wisconsin as of
September 30, 2000.
In the normal course of business, various legal proceedings involving the
Company are pending. Management, based upon advice from legal counsel, does not
anticipate any significant losses as a result of these actions.
The Company leases 17 offices under agreements which expire at various dates
through August 2056, with twelve leases having renewable options. Rent expense
under these agreements totaled approximately $1.2 million, $1.1 million and
$804,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
81
<PAGE> 82
The future minimum rental commitments as of September 30, 2000 under these
leases for the next five years and thereafter, are as follows:
<TABLE>
<CAPTION>
Years Ended September 30, Amount
------------------------- ----------------
<S> <C>
(In thousands)
2001............................... $ 1,162
2002............................... 1,087
2003............................... 1,057
2004............................... 805
2005............................... 501
2006 and thereafter................ 8,176
</TABLE>
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS No. 107), requires disclosure of fair
value information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
materially affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent, and should not be interpreted to represent, the
underlying value of the Company.
The following table presents the estimates of fair value of financial
instruments at September 30, 2000:
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
-------------- ------------ -----------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents................................................... $ 34,747 $ 34,747
Debt and equity securities.................................................. 214,358 214,370
Mortgage-backed and related securities...................................... 805,006 804,397
Mortgage loans held for sale................................................ 8,066 8,075
Loans receivable............................................................ 1,297,302 1,302,130
Federal Home Loan Bank stock................................................ 30,418 30,418
Financial Liabilities:
Certificate accounts........................................................ 845,647 845,647
Other deposit accounts...................................................... 626,234 626,234
Advances and other borrowings............................................... 864,676 864,762
</TABLE>
<TABLE>
<CAPTION>
Contractual
or Notional Carrying Fair
(In thousands) Amount Value Value
-------------- ------------ ------------ -----------
<S> <C> <C> <C>
Off-Balance Sheet Items:
Commitments to extend credit................................... $ 47,083 -- *
Unused and open-ended lines of credit.......................... 259,923 -- *
Interest rate swap agreements.................................. 400,000 $ 920 $ (7,911)
</TABLE>
* Amount is not material.
82
<PAGE> 83
The following table presents the estimates of fair value of financial
instruments at September 30, 1999:
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
-------------- --------- -----------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents................................................... $ 32,562 $ 32,562
Debt and equity securities.................................................. 217,459 217,483
Mortgage-backed and related securities...................................... 959,354 959,129
Mortgage loans held for sale................................................ 8,620 8,620
Loans receivable............................................................ 1,113,391 1,121,574
Federal Home Loan Bank stock................................................ 30,827 30,827
Financial Liabilities:
Certificate accounts........................................................ 865,778 865,778
Other deposit accounts...................................................... 618,525 618,525
Advances and other borrowings............................................... 834,738 834,738
</TABLE>
<TABLE>
<CAPTION>
Contractual
or Notional Carrying Fair
(In thousands) Amount Value Value
-------------- ------------ ---------- ---------
<S> <C> <C> <C>
Off-Balance Sheet Items:
Commitments to extend credit................................. $ 51,002 - *
Unused and open-ended lines of credit........................ 217,813 - *
Interest rate swap agreements................................ 350,000 $ 1,232 $ (8,426)
</TABLE>
* Amount is not material.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximate those
assets' fair values.
DEBT AND EQUITY AND MORTGAGE-BACKED AND RELATED SECURITIES: Fair values for debt
and equity and mortgage-backed and related securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
MORTGAGE LOANS HELD FOR SALE: The fair values for mortgage loans held for sale
are based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
LOANS RECEIVABLE: For variable-rate mortgage loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair values
for commercial real estate loans, rental property mortgage loans, and consumer
and other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
FEDERAL HOME LOAN BANK STOCK: FHLB stock is carried at cost which is its
redeemable (fair) value since the market for this stock is limited.
CERTIFICATE ACCOUNTS: The fair values of fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit. In accordance
with
83
<PAGE> 84
SFAS No. 107, the fair value of liabilities cannot be less than the carrying
value.
OTHER DEPOSITS: The fair values disclosed for other deposits, which include
interest and non-interest checking accounts, passbook accounts and money market
accounts, are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying value amounts).
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: The fair values of the
Company's long-term borrowings are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
OFF-BALANCE SHEET ITEMS: The fair value of the Company's off-balance sheet
instruments are based on quoted market prices and fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the credit standing of the related counterparty.
The fair value of the interest rate swap agreements is based on the present
value of the swap using dealer quotes. These values represent the estimated
amount the Company would receive or pay to terminate the agreements, taking into
account current interest rates and market volatility.
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the Company's long-term
relationships with depositors and the benefit that results from low-cost funding
provided by deposit liabilities .
(18) 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 Company's segments do not include the operations of the
parent holding company, nor the operations of the Bank's operating subsidiaries.
Capital is not allocated to the segments and thus net interest income related to
the free funding associated with capital is not included in the individual
segments. The Company only charges the segments with direct expenses. Costs
associated with administrative and centralized back-office support areas of the
Bank are not allocated to the segments. Income taxes are allocated to the
segments based on the Bank's effective tax rate prior to the consolidation with
its affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits, branch and
ATM network, consumer lending operations, annuity and brokerage services and
call center. The segment includes a much higher level of interest-bearing
liabilities than earning assets. The Company views this segment as a significant
funding vehicle for the other lending segments. The Company's transfer pricing
model has the effect of viewing this segment as a comparison to the cost of
wholesale funds.
The Commercial Banking segment consists of the Bank's commercial, commercial
real estate and multifamily lending operations. It also includes the lending
aspects of the Company's affordable housing subsidiary.
The Mortgage Banking segment consists of the Bank's single-family mortgage
lending operation. Single-family lending consists of three primary operations:
portfolio lending, lending for sale in the secondary market and loan servicing.
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.
84
<PAGE> 85
<TABLE>
<CAPTION>
BUSINESS SEGMENTS Retail Commercial Mortgage Total
(In thousands) Banking Banking Banking Investments Segments
-------------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 2000
Net interest income............... $ 24,658 $ 14,102 $ 6,949 $ 5,961 $ 51,670
Provision for loan losses......... 789 1,447 273 -- 2,509
Other operating income............ 7,170 950 1,777 (3) 9,894
General and administrative expenses 21,189 2,588 3,637 791 28,205
Income tax expense................ 3,713 4,152 1,819 1,948 11,632
-------- --------- -------- ----------- ----------
Segment profit.................... $ 6,137 $ 6,865 $ 2,997 $ 3,219 $ 19,218
======== ========= ======== =========== ==========
Segment average assets............ $312,042 $546,169 $400,558 $1,151,184 $2,409,953
======== ======== ======== ========== ==========
Year ended September 30, 1999
Net interest income............... $ 17,071 $ 12,605 $ 5,658 $ 10,570 $ 45,904
Provision for loan losses......... 506 1,173 241 -- 1,920
Other operating income............ 6,602 925 3,415 (288) 10,654
General and administrative expenses 22,118 2,889 4,377 811 30,195
Income tax expense................ 373 3,469 1,642 3,505 8,989
-------- -------- -------- ---------- ----------
Segment profit.................... $ 676 $ 5,999 $ 2,813 $ 5,966 $ 15,454
======== ======== ======== ========== ==========
Segment average assets............ $291,029 $428,599 $285,434 $1,081,711 $2,086,773
======== ======== ======== ========== ==========
Year ended September 30, 1998
Net interest income............... $ 14,680 $ 8,574 $ 3,750 $ 9,819 $ 36,823
Provision for loan losses......... 1,258 605 437 -- 2,300
Other operating income............ 5,308 1,106 5,259 981 12,654
General and administrative expenses 20,554 2,247 3,777 748 27,326
Income tax expense................ (691) 2,225 1,562 3,336 6,432
-------- -------- -------- ---------- ----------
Segment profit.................... $ (1,133) $ 4,603 $ 3,233 $ 6,716 $ 13,419
======== ======== ======== ========== ==========
Segment average assets............ $250,931 $302,690 $271,038 $ 760,664 $1,585,323
======== ======== ======== ========== ==========
</TABLE>
85
<PAGE> 86
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments..................................... $ 61,564 $ 56,558 $ 49,477
Unallocated transfer pricing credit (primarily on 5,189 9,304 7,783
capital)...............................................
Income from affordable housing subsidiary.............. 3,014 4,941 5,059
Holding company interest expense....................... (1,964) (1,583) (581)
Elimination of intercompany interest income............ (1,093) (1,438) (2,247)
Other.................................................. 1,418 767 1,263
--------- ---------- ----------
Consolidated total revenue............................. $ 68,128 $ 68,549 $ 60,754
========= ========== ==========
PROFIT
Total for segments..................................... $ 19,227 $ 15,454 $ 13,419
Unallocated transfer pricing credit (primarily on 3,113 5,582 4,670
capital)...............................................
Unallocated administrative and centralized support costs (5,536) (5,132) (5,098)
(a)....................................................
Holding company net loss............................... (1,494) (1,462) (746)
Elimination of intercompany interest income............ (656) (863) (1,348)
Affordable housing tax credits......................... 2,609 2,969 4,176
Additional ESOP expense not allocated to segments...... (6,317) - -
Other.................................................. 177 107 (276)
---------- ---------- ----------
Consolidated net income................................ $ 11,123 $ 16,656 $ 14,797
========== ========== ==========
AVERAGE ASSETS
Total for segments..................................... $2,409,953 $2,086,773 $1,585,323
Elimination of intercompany loans...................... (13,390) (15,995) (25,777)
Other assets not allocated............................. 106,528 143,567 140,502
---------- ---------- ----------
Consolidated average assets............................ $2,502,821 $2,214,345 $1,700,048
========== ========== ==========
</TABLE>
(a) After-tax effect of $9.2 million and $8.6 million of general and
administrative expenses for the years ended September 30, 2000 and 1999,
respectively.
86
<PAGE> 87
(19) FINANCIAL INFORMATION OF ST. FRANCIS CAPITAL CORPORATION (PARENT ONLY)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
------------------------
(In thousands) 2000 1999
-------------- ---------- ---------
<S> <C> <C>
ASSETS
Cash, all with Bank........................................................... $ 2,519 $ 2,089
Investment in subsidiaries, at equity......................................... 164,992 150,602
Accrued interest receivable and other assets.................................. 27 391
-------- --------
Total assets............................................................ $167,538 $153,082
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Advances and other borrowings............................................. $ 36,000 $ 21,000
Accrued interest and other liabilities.................................... 615 568
-------- --------
Total liabilities....................................................... 36,615 21,568
-------- --------
Shareholders' equity:
Common stock.............................................................. 146 146
Additional paid-in capital................................................ 88,799 82,426
Accumulated other comprehensive loss...................................... (18,923) (13,057)
Unearned ESOP compensation................................................ - (2,260)
Treasury stock, at cost................................................... (69,498) (58,934)
Retained earnings, substantially restricted............................... 130,399 123,193
-------- --------
Total shareholders' equity.............................................. 130,923 131,514
-------- --------
Total liabilities and shareholders' equity.............................. $167,538 $153,082
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
(In thousands) 2000 1999 1998
-------------- -------- -------- ---------
<S> <C> <C> <C>
Dividends received from Bank................................. $ 5,021 $ 17,133 $ 15,627
Interest and other dividend income........................... 224 351 421
Other income................................................. 49 - -
Interest expense on advances and other borrowings............ (1,964) (1,583) (581)
General and administrative expenses.......................... (608) (994) (828)
-------- -------- --------
Income before income tax expense and equity in
undistributed earnings of subsidiaries.................. 2,722 14,907 14,639
Income tax benefit........................................... (805) (764) (242)
-------- -------- --------
Income before equity in undistributed earnings of
Subsidiaries............................................ 3,527 15,671 14,881
Equity in (distributed) undistributed earnings of subsidiaries 7,596 985 (84)
-------- -------- --------
Net income................................................... $ 11,123 $ 16,656 $ 14,797
======== ======== ========
</TABLE>
87
<PAGE> 88
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
(In thousands) 2000 1999 1998
-------------- -------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 11,123 $ 16,656 $ 14,797
Adjustments to reconcile net income to cash provided
by operations:
Equity in distributed (undistributed) earnings of
subsidiaries............................................ (7,596) (985) 84
Increase (decrease) in liabilities...................... 48 268 (303)
Other, net.............................................. (3,674) 129 (11)
--------- -------- --------
Cash provided by (used in) operations...................... (99) 16,068 14,567
--------- -------- --------
Cash flows from investing activities:
Net cash used for acquisitions............................. - (8,964) -
Proceeds from sales of securities available for sale....... - 997 395
Principal repayments on securities available for sale...... - - 91
--------- -------- --------
Cash provided by (used in) investing activities............ - (7,967) 486
--------- -------- --------
Cash flows from financing activities:
Stock option transactions.................................. 333 1,655 1,072
Proceeds from advances and other borrowings................ 112,000 98,000 39,000
Repayments from advances and other borrowings.............. (97,000) (95,000) (32,000)
Purchase of treasury stock................................. (11,226) (8,988) (21,160)
Dividends paid............................................. (3,578) (3,162) (2,912)
-------- -------- --------
Cash provided by (used in) financing activities............ 529 (7,495) (16,000)
-------- -------- --------
Increase (decrease) in cash................................ 430 606 (947)
Cash at beginning of year.................................. 2,089 1,483 2,430
-------- -------- --------
Cash at end of year........................................ $ 2,519 $ 2,089 $ 1,483
======== ======== ========
</TABLE>
88
<PAGE> 89
(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
For the quarter ended,
------------------------------------------------------------------------------------------
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31,
2000 2000 2000 1999 1999 1999 1999 1998
------------------------------------------------------------------------------------------
(In thousands, except earnings per share and market prices)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $ 44,514 $ 44,102 $ 43,530 $ 42,508 $ 41,086 $ 38,523 $ 35,144 $ 30,792
Interest expense............ 32,095 30,696 29,595 28,345 26,404 24,371 22,244 20,263
------------------------------------------------------------------------------------------
Net interest income........ 12,419 13,406 13,935 14,163 14,682 14,152 12,900 10,529
Provision for loan losses.. 1,003 506 500 500 480 480 480 480
------------------------------------------------------------------------------------------
Net interest income after
provision for loan
losses................. 11,416 12,900 13,435 13,663 14,202 13,672 12,420 10,049
Securities gains/(losses)... 17 (8) 19 (16) (5) 124 (400) 28
Gain on sales of loans held
for sale, net......... 412 363 230 128 262 420 860 1,264
Other operating income..... 3,291 3,502 3,215 3,052 3,205 3,129 3,226 4,173
------------------------------------------------------------------------------------------
Total other operating income 3,720 3,857 3,464 3,164 3,462 3,673 3,686 5,465
General and administrative
expenses............... 10,016 11,165 12,635 15,316 10,777 10,888 10,905 10,993
------------------------------------------------------------------------------------------
Income before income tax
expense............... 5,120 5,592 4,264 1,511 6,887 6,457 5,201 4,521
Income tax expense......... 1,143 1,611 1,305 1,305 2,145 1,978 1,531 756
------------------------------------------------------------------------------------------
Net income................. $ 3,977 $ 3,981 $ 2,959 $ 206 $ 4,742 $ 4,479 $ 3,670 3,765
==========================================================================================
Basic earnings per share (1) $ 0.42 $ 0.40 $ 0.30 $ 0.02 $ 0.49 $ 0.46 $ 0.39 $ 0.43
Diluted earnings per share
(2)....................... $ 0.41 $ 0.40 $ 0.29 $ 0.02 $ 0.47 $ 0.45 $ 0.37 $ 0.41
Weighted average shares --
basic................. 9,574,374 9,834,528 9,956,364 9,850,325 9,693,643 9,658,894 9,322,724 8,767,262
Weighted average shares --
diluted............... 9,687,858 9,917,377 10,084,219 10,218,745 10,091,034 10,031,270 9,792,261 9,263,844
Market Information:
High.................. $ 16.00 $ 15.13 $ 18.69 $ 22.63 $ 21.75 $ 22.00 $ 21.63 $ 21.13
Low................... 13.69 12.75 13.13 17.25 19.50 18.50 18.50 17.25
Close................. 15.38 15.13 14.00 18.63 20.56 21.50 21.44 21.13
</TABLE>
---------------------
(1) Basic earnings per share of common stock have been determined by dividing
net income for the period by the weighted average number of shares of common
stock outstanding during the period.
(2) Diluted earnings per share of common stock 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.
On October 20, 2000, the Company declared a dividend of $0.10 per share on the
Company's common stock for the quarter ended September 30, 2000. The dividend
was payable on November 20, 2000 to shareholders of record as of November 10,
2000. At November 30, 2000, the closing price of the Company's common stock was
$13.38 per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
89
<PAGE> 90
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors is included under
the heading "Election of Directors" in the Company's definitive Proxy Statement,
dated December 20, 2000, relating to the 2000 Annual Meeting of Shareholders
currently scheduled for January 24, 2001, which is incorporated herein by
reference. Information concerning executive officers who are not directors is
contained in Part I of this Form 10-K pursuant to paragraph (b) of Item 401 of
Regulation S-K in reliance on Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the heading "Compensation of
Executive Officers and Directors" in the Company's definitive Proxy Statement,
dated December 20, 2000, relating to the 2000 Annual Meeting of Shareholders
currently scheduled for January 24, 2001, which is incorporated herein by
reference. However, the information set forth under the heading "Compensation
Committee Report" in the Company's definitive Proxy Statement dated December 20,
2000, shall not be deemed to be incorporated by reference by any general
statement into any filing and shall not otherwise be deemed to be filed under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement, dated December 20, 2000, relating to the 2000 Annual Meeting of
Shareholders currently scheduled for January 24, 2001, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the heading "Indebtedness of
Management and Certain Transactions" in the Company's definitive Proxy
Statement, dated December 20, 2000, relating to the 2000 Annual Meeting of
Shareholders currently scheduled for January 24, 2001, which is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following financial statements and financial statement schedules are
included under a separate caption "Financial Statements and Supplementary Data"
in Part II, Item 8 hereof and are incorporated herein by reference:
Independent Auditors' Report
Consolidated Statements of Financial Condition at September 30, 2000
and 1999
Consolidated Statements of Income for the Years Ended September 30,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
90
<PAGE> 91
(A) (2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Consolidated Financial Statements.
(A) (3) EXHIBITS:
<TABLE>
<S> <C> <C>
3.1 Articles of Incorporation of Registrant(1)
3.2 Amended By-laws of Registrant(2)
3.3 Stock Charter of St. Francis Bank, F.S.B.(1)
3.4 By-laws of St. Francis Bank, F.S.B.(1)
3.5 Articles of Amendment to the Articles of Incorporation of Registrant(3)
4.0 Shareholders' Rights Agreement, dated as of September 25, 1997, between the Registrant and Firstar Trust Company(4)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan(1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan(1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan(1)
10.4 Credit Agreement by and between St. Francis Bank, F.S.B. Employee Stock Ownership
Trust and Registrant(1)
10.5 St. Francis Bank, F.S.B. Management Recognition and Retention Plan and Trust(1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock Option Plan(1)
10.7 St. Francis Capital Corporation 1993 Stock Option Plan for Outside Directors(1)
10.8 1986 Deferred Compensation Agreement as amended-Thomas R. Perz(4)
10.9 1987 Deferred Compensation Agreement-Thomas R. Perz(1)
10.10 1988 Deferred Compensation Agreement-Edward W. Mentzer(1)
10.11 2000 St. Francis Bank, FSB Employment Agreement-Thomas R. Perz(5)
10.12 2000 St. Francis Capital Corporation Employment Agreement-Thomas R. Perz(5)
10.13 1996 Amended Employment Agreement-James C. Hazzard(5)
10.14 1997 Amended Employment Agreement-Bradley J. Smith(5)
10.15 1998 Amended Employment Agreement-Jon D. Sorenson(5)
10.16 1998 Amended Employment Agreement-James S. Eckel(5)
10.17 St. Francis Capital Corporation 1997 Stock Option Plan(3)
10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz(3)
11.1 Statement regarding computation of per share earnings See footnote (13) in Part II Item 8
13.1 2000 Summary Annual Report to Shareholders(6)
21.1 Subsidiaries of the Registrant See "Subsidiaries" in Part I Item I
23.1 Consent of KPMG LLP(5)
24.1 Powers of Attorney for certain officers and directors(1)
27.1 Financial Data Schedule(5)
99.1 Proxy Statement for 2000 Annual Meeting of Shareholders(5)
</TABLE>
(1) Incorporated by reference to exhibits filed with the Registrant's Form S-1
Registration Statement declared effective on April 22, 1993. (Registration
Number 33-58680).
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
(5) Filed herewith.
(6) Filed in paper format pursuant to Rule 101(b)(1) of Regulation S-T.
91
<PAGE> 92
(B) REPORTS ON FORM 8-K
None
(C) EXHIBITS
Reference is made to the exhibit index set forth above at (a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
Reference is made to the disclosure set forth above at (a)(1 and 2).
92
<PAGE> 93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Thomas R. Perz
------------------------------------
Thomas R. Perz, Chairman of the
Board, President and Chief
Executive Officer
(Duly Authorized Representative)
Date: December 13, 2000
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrants and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Thomas R. Perz /s/ Jon D. Sorenson
----------------------------------- ------------------------------------
Thomas R. Perz, Chairman of the Jon D. Sorenson, Chief Financial
Board, President, Chief Executive Officer and Treasurer (Principal
Officer and Director (Principal Financial and Accounting Officer)
Executive and Operating Officer)
Date: December 13, 2000 Date: December 13, 2000
-------------------------- --------------------------
/s/ David J. Drury /s/ Edward W. Mentzer
----------------------------------- ------------------------------------
David J. Drury, Director Edward W. Mentzer, Director
Date: December 13, 2000 Date: December 13, 2000
-------------------------- --------------------------
/s/ Jeffrey A. Reigle /s/ Edmund O. Templeton
----------------------------------- ------------------------------------
Jeffrey A. Reigle, Director Edmund O. Templeton, Director
Date: December 13, 2000 Date: December 13, 2000
-------------------------- --------------------------
/s/ Julia H. Taylor
-----------------------------------
Julia H. Taylor, Director
Date: December 13, 2000
--------------------------
</TABLE>
93
