<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
--------- ----------
(2) Yes x No
--------- ----------
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,662,697 at July 31, 2000.
Page 1 of 29 pages
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Unaudited Consolidated Financial Statements................................................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 27
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 28
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 28
ITEM 3. Defaults Upon Senior Securities..................................................................... 28
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 28
ITEM 5. Other Information................................................................................... 28
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 28
SIGNATURES.................................................................................................... 29
</TABLE>
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
June 30, September 30,
2000 1999
----------------- ------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 36,894 $ 29,074
Federal funds sold and overnight deposits.................................... 826 3,488
----------------- ------------------
Cash and cash equivalents.................................................... 37,720 32,562
----------------- ------------------
Assets available for sale, at fair value:
Debt and equity securities............................................... 211,958 216,649
Mortgage-backed and related securities................................... 806,474 919,879
Mortgage loans held for sale, at lower of cost or market..................... 15,027 8,620
Securities held to maturity, at amortized cost:
Debt securities (fair values of $520 and $834, respectively)............. 510 810
Mortgage-backed and related securities (fair values of $28,304
and $39,250, respectively)............................................... 29,128 39,475
Loans receivable, net........................................................ 1,262,516 1,113,391
Federal Home Loan Bank stock, at cost........................................ 29,879 30,827
Accrued interest receivable.................................................. 15,525 14,090
Foreclosed properties........................................................ 354 371
Real estate held for investment.............................................. 27,472 28,402
Premises and equipment, net.................................................. 31,085 32,924
Other assets................................................................. 37,075 38,199
----------------- ------------------
Total assets................................................................. $ 2,504,723 $ 2,476,199
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits..................................................................... $ 1,499,181 $ 1,484,303
Short term borrowings........................................................ 748,973 588,790
Long term borrowings......................................................... 106,108 245,948
Advances from borrowers for taxes and insurance.............................. 7,609 8,904
Accrued interest payable and other liabilities............................... 16,347 16,740
----------------- ------------------
Total liabilities............................................................ 2,378,218 2,344,685
----------------- ------------------
Commitments and contingencies................................................ - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued.............................................................. - -
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 9,715,097 and 10,156,770 shares, respectively............... 146 146
Additional paid-in-capital................................................... 88,539 82,426
Accumulated other comprehensive loss......................................... (24,081) (13,057)
Unearned ESOP compensation................................................... - (2,260)
Treasury stock at cost (4,864,143 and 4,422,470 shares, respectively)........ (65,384) (58,934)
Retained earnings, substantially restricted.................................. 127,285 123,193
----------------- ------------------
Total shareholders' equity................................................... 126,505 131,514
----------------- ------------------
Total liabilities and shareholders' equity................................... $ 2,504,723 $ 2,476,199
================= ==================
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
3
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans.............................................. $74,455 $58,507 $25,849 $20,505
Mortgage-backed and related securities............. 44,074 37,293 14,428 14,383
Debt and equity securities......................... 9,820 6,562 3,257 3,038
Federal funds sold and overnight deposits ......... 48 715 19 129
Federal Home Loan Bank stock ...................... 1,701 1,363 539 465
Trading account securities......................... 42 19 10 3
------------ ------------- ------------- -------------
Total interest and dividend income...................... 130,140 104,459 44,102 38,523
------------ ------------- ------------- -------------
INTEREST EXPENSE:
Deposits........................................... 53,302 41,459 18,236 14,220
Advances and other borrowings...................... 35,334 25,419 12,460 10,151
------------ ------------- ------------- -------------
Total interest expense.................................. 88,636 66,878 30,696 24,371
------------ ------------- ------------- -------------
Net interest income before provision for loan losses.... 41,504 37,581 13,406 14,152
Provision for loan losses............................... 1,506 1,440 506 480
------------ ------------- ------------- -------------
Net interest income..................................... 39,998 36,141 12,900 13,672
------------ ------------- ------------- -------------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees............... 2,063 1,385 859 481
Depository fees and service charges................ 3,675 3,027 1,298 1,104
Securities gains (losses).......................... (5) (248) (8) 124
Gain on sales of loans ............................ 721 2,544 363 420
Insurance, annuity and brokerage commissions....... 1,065 1,299 351 594
Gain (loss) on foreclosed properties............... 1 (34) (13) (1)
Income from affordable housing..................... 2,219 2,956 721 784
Gain on sale of real estate held for sale.......... - 1,225 - -
Other income....................................... 746 670 286 167
------------ ------------- ------------- -------------
Total other operating income, net....................... 10,485 12,824 3,857 3,673
------------ ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits................. 22,955 16,236 5,479 5,843
Office building, including depreciation............ 3,368 3,199 1,198 1,017
Furniture and equipment, including depreciation ... 3,295 3,256 1,173 1,146
Affordable housing expenses........................ 2,339 3,133 774 788
Other general and administrative expenses.......... 7,159 6,962 2,541 2,094
------------ ------------- ------------- -------------
Total general and administrative expenses............... 39,116 32,786 11,165 10,888
------------ ------------- ------------- -------------
Income before income tax expense........................ 11,367 16,179 5,592 6,457
Income tax expense...................................... 4,221 4,265 1,611 1,978
------------ ------------- ------------- -------------
Net income.............................................. $ 7,146 $11,914 $ 3,981 $ 4,479
============ ============= ============= =============
Basic earnings per share................................ $ 0.72 $ 1.29 $ 0.40 $ 0.46
============ ============= ============= =============
Diluted earnings per share.............................. $ 0.71 $ 1.23 $ 0.40 $ 0.45
============ ============= ============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
4
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Shares of
Common Additional Unearned
Stock Common Paid-In ESOP Retained
Outstanding Stock Capital Compensation Earnings
--------------------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C> <C>
Nine months ended June 30, 1999
Balance at September 30, 1998 - as
previously reported.................... 4,787,683 $ 73 $ 75,310 $ (2,678) $ 112,362
2-for-1 stock split declared
March 23, 1999......................... 4,787,683 73 (73) - -
-------------- --------- ----------- ----------- -----------
Balance at September 30, 1998............... 9,575,366 $ 146 $ 75,237 $ (2,678) $ 112,362
Net income.................................. - - - - 11,914
Unrealized loss on securities available
for sale............................... - - - - -
Reclassification adjustment for losses
realized in net income................ - - - - -
Incomes taxes............................... - - - - -
Comprehensive income........................
Cash dividend - $0.24 per share............. - - - - (2,351)
Shares of common stock issued for
acquisition............................ 734,564 - 5,556 - -
Purchase of treasury stock.................. (479,974) - - - -
Exercise of stock options, net.............. 306,814 - 88 - (2,497)
Amortization of unearned compensation....... - - 1,225 315 -
-------------- --------- ----------- ----------- -----------
Balance at June 30, 1999.................... 10,136,770 $ 146 $ 82,106 $(2,363) $ 119,428
============== ========= =========== =========== ===========
Nine months ended June 30, 2000
Balance at September 30, 1999............... 10,156,770 $ 146 $ 82,426 $ (2,260) $ 123,193
Net income.................................. - - - - 7,146
Unrealized loss on securities available
for sale............................... - - - - -
Reclassification adjustment for losses
realized in net income................ - - - - -
Incomes taxes............................... - - - - -
Comprehensive loss..........................
Cash dividend - $0.27 per share............. - - - - (2,715)
Purchase of treasury stock.................. (491,488) - - - -
Exercise of stock options, net.............. 49,815 - - - (339)
Amortization of unearned compensation....... - - 6,113 2,260 -
-------------- --------- ----------- ----------- -----------
Balance at June 30, 2000.................... 9,715,097 $ 146 $ 88,539 $ - $ 127,285
============== ========= =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income/ Treasury
(Loss) Stock Total
---------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C>
Nine months ended June 30, 1999
Balance at September 30, 1998 - as
previously reported.................... $ 381 $(63,903) $ 121,545
2-for-1 stock split declared
March 23, 1999......................... - - -
------------ ---------- -------------
Balance at September 30, 1998............... $ 381 $(63,903) $ 121,545
Net income.................................. - - 11,914
Unrealized loss on securities available
for sale............................... (12,853) - (12,853)
Reclassification adjustment for losses
realized in net income................ 248 - 248
Incomes taxes............................... 4,935 - 4,935
-------------
Comprehensive income........................ 4,244
Cash dividend - $0.24 per share............. - - (2,351)
Shares of common stock issued for
acquisition............................ - 9,727 15,283
Purchase of treasury stock.................. - (8,988) (8,988)
Exercise of stock options, net.............. - 3,963 1,554
Amortization of unearned compensation....... - - 1,540
------------ ---------- -------------
Balance at June 30, 1999.................... $ (7,289) $(59,201) $ 132,827
============ ========== =============
Nine months ended June 30, 2000
Balance at September 30, 1999............... $(13,057) $(58,934) $ 131,514
Net income.................................. - - 7,146
Unrealized loss on securities available
for sale............................... (17,629) - (17,629)
Reclassification adjustment for losses
realized in net income................ 5 - 5
Incomes taxes............................... 6,600 - 6,600
-------------
Comprehensive loss.......................... (3,878)
Cash dividend - $0.27 per share............. - - (2,715)
Purchase of treasury stock.................. - (7,113) (7,113)
Exercise of stock options, net.............. - 663 324
Amortization of unearned compensation....... - - 8,373
------------ ---------- -------------
Balance at June 30, 2000.................... $(24,081) $ (65,384) $ 126,505
============ ========== =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Nine months ended
June 30,
----------------------------------------
2000 1999
------------------ ------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 7,146 $ 11,914
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.................................................... 1,506 1,440
Depreciation, accretion and amortization..................................... 5,387 7,177
Deferred income taxes........................................................ 3,393 1,905
Securities (gains) losses.................................................... 5 248
Originations of loans held for sale.......................................... (81,894) (174,095)
Proceeds from sales of loans held for sale................................... 74,766 180,117
ESOP expense................................................................. 8,373 1,540
Gain on sale of real estate held for sale.................................... - (1,225)
Other, net................................................................... (397) (431)
------------------ ------------------
Total adjustments.................................................................. 11,139 16,676
------------------ ------------------
Net cash provided by operating activities.......................................... 18,285 28,590
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity.................... 300 1,004
Proceeds from maturities of mortgage-backed and related securities.............. - 3,909
Principal repayments on mortgage-backed and related securities held to
maturity...................................................................... 10,347 14,302
Purchases of mortgage-backed securities available for sale...................... - (579,780)
Proceeds from sales of mortgage-backed securities available for sale............ 19,098 42,169
Principal repayments on mortgage-backed securities available for sale........... 79,162 219,694
Purchase of debt and equity securities available for sale....................... - (226,784)
Proceeds from sales of debt and equity securities available for sale............ 1,785 94,722
Proceeds from maturities of debt and equity securities available for sale....... 426 29,710
Net cash used for acquisitions.................................................. - (4,286)
Purchases of Federal Home Loan Bank stock....................................... (2,052) (15,849)
Redemption of Federal Home Loan Bank stock...................................... 3,000 9,554
Purchase of loans............................................................... (65,638) (15,857)
Increase in loans, net of loans held for sale................................... (83,487) (123,660)
Proceeds from sale of real estate held for sale................................. (132) 21,997
Increase in real estate held for investment..................................... - (375)
Purchases of premises and equipment, net........................................ (358) (3,794)
------------------ ------------------
Net cash used in investing activities............................................... (37,549) (533,324)
------------------ ------------------
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
6
<PAGE> 7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Nine months ended
June 30,
----------------------------------------
2000 1999
------------------ ------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................................................... 14,878 251,258
Proceeds from advances and other borrowings.................................... 1,039,552 1,392,615
Repayments on advances and other borrowings.................................... (1,082,112) (1,256,575)
Increase in securities sold under agreements to repurchase..................... 62,903 135,961
Decrease in advances from borrowers for taxes and insurance.................... (1,295) (2,343)
Dividends paid................................................................. (2,715) (2,351)
Stock option transactions...................................................... 324 1,554
Purchase of treasury stock..................................................... (7,113) (8,988)
------------------ ------------------
Net cash provided by financing activities.......................................... 24,422 511,131
------------------ ------------------
Increase in cash and cash equivalents.............................................. 5,158 6,397
Cash and cash equivalents:
Beginning of period.......................................................... 32,562 30,746
------------------ ------------------
End of period................................................................ $ 37,720 $ 37,143
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................................................... $ 88,302 $ 65,019
Income taxes................................................................. 2 1,702
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans secured as mortgage-backed securities......................... $ 9,821 $ 6,961
Transfer from loans to foreclosed properties................................. 840 807
Transfer of mortgage loans to mortgage loans held for sale................... 11,536 39,214
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 Unaudited Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances
of St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included. Operating results
for the three and nine-month periods ended June 30, 2000 are not
necessarily indicative of the results which may be expected for the
entire year ending September 30, 2000. For further information refer to
the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended September
30, 1999.
Certain previously reported balances have been reclassified to conform
with the 2000 presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
The contractual or notional amounts of off-balance sheet financial
instruments are as follows:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
June 30, September 30,
2000 1999
----------------- ------------------
(In thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed-rate loans..................................... $ 5,002 $ 959
Variable-rate loans.................................. 21,038 50,043
Mortgage loans sold with recourse........................ 26,746 17,053
Guarantees under IRB issues.............................. 32,541 24,484
Interest rate swap agreements (notional amount).......... 410,000 350,000
Unused and open-ended lines of credit:
Consumer.............................................. 191,699 176,958
Commercial............................................. 77,438 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 June 30, 2000 have interest rates ranging from
8.125% to 9.5%. 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
8
<PAGE> 9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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 Federal National
Mortgage Association ("FNMA"), with the servicing of these loans being
retained by the Company. The Company's exposure on loans sold with
recourse is the same as if the loans remained in the Company's loan
portfolio. The Company receives a larger servicing spread on those
loans being serviced than it would if the loans had been sold without
recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party. Potential
losses on the letters of credit are the notional amount of the
guarantees less the value of the real estate collateral. At June 30,
2000, appraised values of the real estate collateral exceeded the
amount of the guarantees.
Interest rate swap agreements generally involve the exchange of fixed
and variable rate interest rate payments without the exchange of the
underlying notional amount on which the interest rate payments are
calculated. The notional amounts of these agreements represent the
amounts on which interest payments are exchanged between the
counterparties. The notional amounts do not represent direct credit
exposures. The Company is exposed to credit-related losses in the event
of nonperformance by the counterparties on interest rate payments, but
does not expect any counterparty to fail to meet their obligations. The
fixed pay-floating receive agreements were entered into as hedges on
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-bearing assets and
liabilities.
At June 30, 2000, the Company had $20 million in fixed pay-floating
receive agreements with maturity dates ranging from 2000 to 2001. The
agreements have fixed interest rates ranging from 6.75% to 7.05% and
variable interest rates ranging from 7.22% to 7.66%. At June 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 5.81% to
6.87%.
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 June 30, 2000,
the gross unrealized gains and losses of $242,000 and $13.2 million,
respectively, equals the fair value loss of the interest rate swaps of
$13.0 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 these lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for
these commitments may include, but may not be limited to, real estate,
investment securities, equipment, accounts receivable, inventory, and
Company deposits.
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at
June 30, 2000 were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains (Losses) Value
------------ ------------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and obligations
of U.S. Government Agencies................ $ 218,092 $ - $ (8,418) $ 209,674
Corporate notes and bonds................... 1,000 - - 1,000
Marketable equity securities................ 1,817 - (533) 1,284
------------ ------------ ------------- -------------
TOTAL DEBT AND EQUITY SECURITIES............. $ 220,909 $ - $ (8,951) $ 211,958
============ ============ ============= =============
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC..................................... $ 833 $ - $ (4) $ 829
FNMA...................................... 29,311 - (1,572) 27,739
Private issue............................. 55,675 108 (1,508) 54,275
REMICs:
FHLMC..................................... 136,468 - (6,493) 129,975
FNMA...................................... 31,227 9 (1,037) 30,199
Private issue............................. 583,143 143 (19,865) 563,421
CMO residual................................. 36 - - 36
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................. $ 836,693 $ 260 $(30,479) $ 806,474
============ ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains (Losses) Value
------------ ------------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
DEBT SECURITIES:
State and municipal obligations............ $ 510 $ 10 $ - $ 520
------------ ------------ ------------- -------------
TOTAL DEBT SECURITIES...................... $ 510 $ 10 $ - $ 520
============ ============ ============= =============
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FNMA...................................... $ 17 $ - $ - $ 17
Private issue............................. 29,111 - (824) 28,287
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................ $ 29,128 $ - $ (824) $ 28,304
============ ============ ============= =============
</TABLE>
During the nine month periods ended June 30, 2000 and 1999, gross
proceeds from the sale of securities available for sale totaled
approximately $20.9 million and $136.9 million, respectively. The gross
realized gains on such sales totaled approximately $41,000 and $177,000
for the nine month periods ended June 30, 2000 and 1999, respectively.
The gross realized losses on such sales totaled approximately $53,000
and $506,000 for the nine month periods ended June 30, 2000 and 1999,
respectively.
10
<PAGE> 11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
During the three month periods ended June 30, 2000 and 1999, gross
proceeds from the sale of securities available for sale totaled
approximately zero and $32.8 million, respectively. The gross realized
gains on such sales totaled approximately zero and $47,000 for the
three month periods ended June 30, 2000 and 1999, respectively. The
gross realized losses on such sales totaled approximately zero and
$8,000 for the three month periods ended June 30, 2000 and 1999,
respectively.
At June 30, 2000 and 1999, $497.7 million and $499.8 million,
respectively, of mortgage-related securities were pledged as collateral
for Federal Home Loan Bank ("FHLB") advances.
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
-----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
First mortgage - one- to four-family............................... $ 395,702 $ 294,438
First mortgage - residential construction........................... 70,496 103,100
First mortgage - multi-family...................................... 141,284 160,593
Commercial real estate............................................. 291,610 251,914
Home equity........................................................ 178,675 156,695
Commercial and agriculture......................................... 142,386 123,899
Consumer secured by real estate..................................... 82,045 89,991
Interim financing and consumer loans............................... 14,082 13,744
Indirect auto....................................................... 35,073 44,299
Education.......................................................... 2,204 984
--------------- ----------------
Total gross loans................................................ 1,353,557 1,239,657
--------------- ----------------
Less:
Loans in process.................................................. 65,652 106,960
Unearned insurance premiums...................................... (146) (21)
Deferred loan and guarantee fees................................. 245 614
Purchased loan discount.......................................... 684 737
Allowance for loan losses........................................ 9,579 9,356
--------------- ----------------
Total deductions................................................. 76,014 117,646
--------------- ----------------
Total loans receivable............................................. 1,277,543 1,122,011
Less: First mortgage loans held for sale.......................... 15,027 8,620
--------------- ----------------
Loans receivable, net.............................................. $ 1,262,516 $ 1,113,391
=============== ================
</TABLE>
11
<PAGE> 12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Beginning Balance.................................. $ 9,356 $ 7,530 $ 10,102 $ 8,678
Charge-offs:
Real estate - mortgage........................... (124) (40) (50) (40)
Commercial real estate........................... (782) - (782) -
Commercial loans................................. (49) (11) (49) -
Consumer......................................... (418) (229) (161) (96)
------------- -------------- ------------- --------------
Total charge-offs.................................. (1,373) (280) (1,042) (136)
------------- -------------- ------------- --------------
Recoveries:
Real estate - mortgage........................... 31 - - -
Commercial real estate........................... - - - -
Commercial loans................................. - - - -
Consumer........................................ 59 41 13 12
------------- -------------- ------------- --------------
Total recoveries................................... 90 41 13 12
------------- -------------- ------------- --------------
Net charge-offs.................................... (1,283) (239) (1,029) (124)
------------- -------------- ------------- --------------
Acquired bank's allowance.......................... - 303 - -
Provision.......................................... 1,506 1,440 506 480
------------- -------------- ------------- --------------
Ending balance..................................... $ 9,579 $ 9,034 $ 9,579 $ 9,034
============= ============== ============= ==============
</TABLE>
(7) Earnings Per Share
Basic earnings per share of common stock for the nine and three months
ended June 30, 2000 and 1999, have been determined by dividing net
income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the nine and three month periods ended June 30,
2000 and 1999, have been determined by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options. Book value per share of common stock at June
30, 2000 and September 30, 1999 have been determined by dividing total
shareholders' equity by the number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options at the respective dates. Stock options are
regarded as potential common stock and are, therefore, considered in
per share calculations if not considered to be antidilutive. Total
shares outstanding for earnings per share calculation purposes have
been reduced by the Employee Stock Ownership Plan ("ESOP") shares that
have not been committed to be released. The Company incurred an
additional expense in the nine and three month periods ended June 30,
2000 related to the voluntary acceleration of loan principal owed to
the Company's ESOP, which accounted for a charge to diluted earnings
per share of approximately $0.63 and $0.06, respectively.
12
<PAGE> 13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income for the period........................ $ 7,146,000 $11,914,000 $ 3,981,000 $ 4,479,000
============= ============== ============= ==============
Average common shares issued...................... 14,579,240 14,579,240 14,579,240 14,579,240
Weighted average treasury shares.................. 4,537,722 4,838,923 4,708,281 4,448,474
Unallocated ESOP shares........................... 161,341 492,725 36,431 471,872
------------- -------------- ------------- --------------
Weighted average common shares
outstanding during the period................. 9,880,177 9,247,592 9,834,528 9,658,894
Effect of dilutive stock options outstanding...... 187,894 450,366 82,849 372,376
------------- -------------- ------------- --------------
Diluted weighted average common shares
outstanding................................... 10,068,071 9,697,958 9,917,377 10,031,270
============= ============== ============= ==============
Basic earnings per share.......................... $ 0.72 $ 1.29 $ 0.40 $ 0.46
Diluted earnings per share........................ $ 0.71 $ 1.23 $ 0.40 $ 0.45
The computation of book value per common share is as follows:
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ -------------------
<S> <C> <C>
Common shares outstanding at the end
of the period.......................................... 9,715,097 9,705,600
Incremental shares relating to dilutive stock
options outstanding at the end of the period............ 124,222 370,243
------------------ -------------------
9,839,319 10,075,843
================== ===================
Total shareholders' equity at the end of
the period............................................. $ 126,505,000 $ 131,514,000
Book value per common share............................... $ 12.86 $ 13.05
</TABLE>
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less
than the fair value of the underlying common stock as of the date of
the option grant, and the maximum term cannot exceed ten years. Stock
options awarded to directors may be exercised at any time or on a
cumulative basis over varying time periods, provided the grantee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
13
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
At June 30, 2000, 4,800 shares were reserved for future grants. Further
information concerning the options is as follows:
<TABLE>
<CAPTION>
Nine months ended June 30,
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
Average Average
Exercise Exercise
Options Price Options Price
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period........ 1,565,682 $15.70 1,163,620 $10.76
Granted................................... 189,548 14.09 785,264 18.66
Canceled.................................. (4,800) 18.88 (41,550) 17.25
Exercised................................. (50,282) 6.62 (321,652) 5.50
-------------- ---------------- ------------- -----------------
Outstanding at end of period.............. 1,700,148 $15.78 1,585,682 $15.57
============== ================ ============= =================
Options exercisable....................... 746,785 $5.00 - 21.31 416,408 $5.00 - 19.38
============== ================ ============= =================
</TABLE>
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Federal income tax expense at statutory rate of 35%.... $ 3,979 $ 5,663 $ 1,958 $ 2,260
State income taxes, net of Federal income tax benefit.. 33 437 23 204
Tax exempt interest.................................... (90) (103) (28) (33)
Non-deductible compensation............................ 2,070 337 224 108
Acquisition intangible amortization.................... 161 173 54 56
Affordable housing credits............................. (1,957) (2,316) (663) (662)
Other, net............................................. 25 74 43 45
------------- ------------- ------------ -------------
$ 4,221 $ 4,265 $ 1,611 $ 1,978
============= ============= ============ =============
</TABLE>
Included in other assets is a deferred tax asset of $9.3 million and
$3.3 million at June 30, 2000 and September 30, 1999.
(10) 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 $43.0 million in assets, including additions of $25.7
million to net loans and $16.6 million to deposits.
14
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(11) Current Accounting Developments
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities'" which established new rules for the
recognition and measurement of derivatives and hedging activities. It
requires all derivatives to be recorded on the balance sheet at fair
value, although the timing of recognition in earnings will depend on
the classification of the hedge according to criteria established by
SFAS 133. Changes in the fair value of derivatives that do not meet
these criteria are required to be included in earnings in the period of
the change.
The FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133" in June
1999, which statement deferred the effective date of Statement No. 133.
Statement No. 133, as amended, is now effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, although earlier
adoption is encouraged.
Statement No. 133 generally requires that derivatives embedded in
hybrid instruments be separated from their host contracts and be
accounted for separately as derivative contracts. For instruments
existing at the date of adoption, Statement No. 133, as modified by
Statement No. 137, provides an entity the option of not applying this
provision to such hybrid instruments entered into before January 1,
1999 and not substantially modified thereafter.
The Company will adopt this standard on October 1, 2000 and expects
that it will not materially effect results of operations or financial
position.
(12) Segment Information
The Company's operations include four strategic business segments:
Retail Banking, Commercial Banking, Mortgage Banking and Investments.
Financial performance is primarily based on the individual segments'
direct contribution to Company net income. The segments do not include
the operations of the Company as a holding company, nor the operations
of the Bank's operating subsidiaries. Capital is not allocated to the
segments and thus net interest income related to the free funding
associated with capital is not included in the individual segments. The
Company only charges the segments with direct expenses. Costs
associated with administrative and centralized back-office support
areas of the Bank are not allocated to the segments. Income taxes are
allocated to the segments based on the Bank's effective tax rate prior
to the consolidation with its affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits,
branch and 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.
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
----------------------------------------- -------------- -------------- --------------- -------------- ---------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
----------------------------------------- -------------- -------------- --------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JUNE 30, 2000
Net interest income $ 18,240 $ 10,732 $ 5,347 $ 5,245 $ 39,563
Provision for loan losses 592 710 198 - 1,500
Other operating income 5,318 743 1,235 (8) 7,288
General and administrative expenses 15,816 2,122 2,762 577 21,277
Income taxes 2,706 3,271 1,371 1,764 9,111
-------------- -------------- --------------- -------------- ---------------
Segment profit $ 4,444 $ 5,372 $ 2,252 $ 2,896 $ 14,963
============== ============== =============== ============== ===============
Segment average assets $ 311,857 $ 542,206 $ 391,795 $ 1,168,711 $ 2,414,569
============== ============== =============== ============== ===============
NINE MONTHS ENDED JUNE 30, 1999
Net interest income $ 11,884 $ 8,929 $ 4,130 $ 7,496 $ 32,439
Provision for loan losses 380 880 181 - 1,441
Other operating income 4,823 632 2,958 (335) 8,078
General and administrative expenses 16,761 2,155 3,388 596 22,900
Income taxes (170) 2,310 1,258 2,359 5,757
-------------- -------------- --------------- -------------- ---------------
Segment profit $ 264) $ 4,216 $ 2,261 $ 4,206 $ 10,419
-------------- -------------- --------------- -------------- ---------------
Segment average assets $ 287,435 $ 410,293 $ 277,563 $ 1,030,783 $ 2,006,074
============== ============== =============== ============== ===============
THREE MONTHS ENDED JUNE 30, 2000
Net interest income $ 6,261 $ 3,540 $ 1,784 $ 1,319 $ 12,904
Provision for loan losses 197 237 66 - 500
Other operating income 1,845 369 429 - 2,643
General and administrative expenses 5,228 599 867 188 6,882
Income taxes 1,026 1,178 491 438 3,133
-------------- -------------- --------------- -------------- ---------------
Segment profit (loss) $ 1,654 $ 1,895 $ 789 $ 694 $ 5,032
============== ============== =============== ============== ===============
Segment average assets $ 311,821 $ 556,872 $ 411,021 $ 1,134,869 $ 2,414,583
============== ============== =============== ============== ===============
THREE MONTHS ENDED JUNE 30, 1999
Net interest income $ 4,535 $ 3,231 $ 1,515 $ 3,155 $ 12,346
Provision for loan losses 126 294 61 - 481
Other operating income 1,842 166 647 100 2,755
General and administrative expenses 5,491 762 1,134 211 7,598
Income taxes 258 884 376 1,134 2,652
-------------- -------------- --------------- -------------- ---------------
Segment profit $ 502 $ 1,457 $ 591 $ 1,910 $ 4,460
============== ============== =============== ============== ===============
Segment average assets $ 294,683 $ 455,251 $ 276,039 $ 1,184,527 $ 2,210,500
============== ============== =============== ============== ===============
</TABLE>
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Nine months ended June 30, Three months ended June 30,
2000 1999 2000 1999
--------------- ---------------- --------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments $ 46,851 $ 40,517 $ 15,546 $ 15,191
Unallocated transfer pricing credit (primarily on
capital) 3,978 7,474 1,291 2,412
Income from affordable housing subsidiary 2,219 2,956 721 784
Gain on sale of real estate not allocated to
segments - 1,225 - -
Holding company interest expense (1,295) (1,222) (549) (424)
Elimination of intercompany interest income (824) (1,162) (266) (297)
Other 1,060 617 520 159
--------------- ---------------- --------------- ----------------
Consolidated total revenue $ 51,989 $ 50,405 $ 17,263 $ 17,825
=============== ================ =============== ================
PROFIT
Total for segments $ 14,963 $ 10,419 $ 5,032 $ 4,460
Unallocated transfer pricing credit (primarily on
capital) 2,387 4,484 775 1,447
Unallocated administrative and centralized support
costs (a) (4,447) (3,668) (1,419) (1,414)
Holding company net loss (992) (1,183) (370) (365)
Elimination of intercompany interest income (494) (697) (159) (178)
Gain on sale of real estate not allocated to
segments - 735 - -
Affordable housing tax credits 1,957 2,316 663 662
Additional ESOP expense not allocated to segments (6,317) - (603) -
Other 90 (492) 63 (133)
--------------- ---------------- --------------- ----------------
Consolidated net income $ 7,146 $ 11,914 $ 3,981 $ 4,479
=============== ================ =============== ================
AVERAGE ASSETS
Total for segments $ 2,414,569 $ 2,006,074 $ 2,414,583 $ 2,210,500
Elimination of intercompany loans (13,388) (13,466) (13,388) (12,680)
Other assets not allocated 105,844 138,665 89,696 173,153
--------------- ---------------- --------------- ----------------
Consolidated average assets $ 2,507,025 $ 2,131,273 $ 2,490,891 $ 2,370,973
=============== ================ =============== ================
</TABLE>
(a)After-tax effect of $7.4 million and $6.1 million of general and
administrative expenses for the nine month periods ended June 30,
2000 and 1999, respectively. After-tax effect of $2.4 million and
$2.3 million of general and administrative expenses for the three
month periods ended June 30, 2000 and 1999, respectively.
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operation and business of St. Francis Capital
Corporation (the "Company"). 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.
FINANCIAL CONDITION
The Company's total assets increased $28.5 million or 1.2% to $2.50 billion at
June 30, 2000 from $2.47 billion at September 30, 1999. The primary area of
growth was an increase of $155.5 million increase in loans receivable, including
loans held for sale offset by a decline of $113.4 million in mortgage-backed and
related securities available for sale. Funding the increase in assets was an
increase in deposits of $14.9 million and an increase in advances and other
borrowings of $20.3 million. The Company's ratio of shareholders' equity to
total assets was 5.05% at June 30, 2000, compared to 5.31% at September 30,
1999. The Company's fully dilutive book value per share was $12.86 at June 30,
2000, compared to $13.05 at September 30, 1999.
Loans receivable, including mortgage loans held for sale, increased $155.5
million to $1.28 billion at June 30, 2000 from $1.12 billion at September 30,
1999. The Company has been actively diversifying and growing its loan portfolio
and, as a result, the increase in loans was due to increases in a variety of
lending areas including commercial real estate, single-family mortgage, and
commercial lending. For the nine month period ended June 30, 2000, the Company
originated approximately $425.8 million in loans, as compared to $638.5 million
for the same period in the prior year. Of the $425.8 million in loans
originated, $67.6 million were in commercial loans, $135.3 million were in
consumer and interim financing loans and $222.9 million were in first mortgage
loans. Despite the decrease in originations, the loan portfolio continues to
grow due to a decline in repayments of loans and loans sold.
Mortgage-backed and related securities, including securities available for sale,
decreased $123.8 million to $835.6 million at June 30, 2000 from $959.4 million
at September 30, 1999. The Company has not purchased a mortgage-backed security
during the current fiscal year. It is using the repayments of principal on the
existing portfolio as a funding source for loan growth. This is resulting in a
restructuring of the balance sheet as the amount of securities decreases and the
amount of loans grow.
Deposits increased $14.9 million to $1.499 billion at June 30, 2000 from $1.484
billion at September 30, 1999. The increase in deposits was due primarily to
increases of $13.4 million in certificates of deposit and $17.1 million in
demand deposits. However, slight decreases in other types of deposit products
have partially offset the increases. At June 30, 2000, the Company had
approximately $394.9 million in brokered certificates of deposit compared with
$421.8 million at September 30, 1999. The brokered deposits generally consist of
terms from three months to ten years in maturity with interest rates that
approximate the Company's retail certificate rates. The level of deposit flows
during any given period is heavily influenced by factors such as the general
level of interest rates as well as alternative yields that investors may obtain
on competing instruments, such as money market mutual funds. The Company
believes that the likelihood for retention of brokered certificates of deposit
is more a function of the rate paid on such accounts, as compared to retail
deposits which may be established due to branch location or other undefined
reasons.
Advances and other borrowings decreased by $20.3 million to $855.1 million at
June 30, 2000 from $834.7 million at September 30, 1999. Short term borrowings
increased $160.2 million to $749.0 million at June 30, 2000, compared to $588.8
million at September 30, 1999. At June 30, 2000, $370.0 million of the short
term borrowings were callable FHLB advances with maturities from five to ten
years and are callable by the FHLB after three to six months. Long term
borrowings decreased $139.8 million to $106.1 million at June 30, 2000, compared
to $245.9 million at September 30, 1999. At June 30, 2000, the Company had an
additional borrowing capacity of $101.4 million available from the FHLB.
18
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
At June 30, 2000, the Company had $410.0 million in interest rate swaps
outstanding compared with $350.0 million at September 30, 1999. The swaps are
designed to offset the changing interest payments of some of the Company's
borrowings and brokered certificates. Fixed receive-floating pay swaps totaled
$390.0 million at June 30, 2000 and were entered into to hedge interest rates on
fixed rate certificates of deposits. Fixed receive-floating pay swaps will
provide for a lower interest expense (or interest income) in a falling rate
environment while adding to interest expense in a rising rate environment. Fixed
pay-floating receive swaps totaled $20.0 million at June 30, 2000 and were
entered into as hedges on the interest rates on investment securities. Fixed
pay-floating receive swaps will provide for a lower interest expense (or
interest income) in a rising rate environment while adding to interest expense
in a falling rate environment. During the nine month period ended June 30, 2000,
the Company recorded a net reduction of interest expense of $1.3 million as a
result of the Company's interest rate swap agreements compared with a net
reduction of $1.9 million for the nine month period ended June 30, 1999.
RESULTS OF OPERATIONS
NET INCOME. Net income for both the nine and three month periods ended June 30,
2000 decreased due to an increase in general and administrative expenses as a
result of an additional expense of $7.1 million and $705,000, respectively due
to the voluntary acceleration of loan principal repayment to the Company's
Employee Stock Ownership Plan ("ESOP"). The ESOP loan was repaid in full, and
the ongoing expense eliminated. Net income for the nine month period ended June
30, 2000 decreased to $7.1 million from $11.9 million for the nine month period
ended June 30, 1999. Net income for the nine month period ended June 30, 2000
also decreased due to a decrease in other operating income offset by an increase
in net interest income. Net income for the three month period ended June 30,
2000 was $4.0 million compared to $4.5 million for the three month period ended
June 30, 1999. Net income for the three month period ended June 30, 2000
decreased due to a decrease in net interest income partially offset by a slight
increase in other operating income.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Return on average assets.................. 0.38% 0.75% 0.64% 0.76%
Return on average equity.................. 7.45% 12.77% 12.80% 13.42%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $3.9 million or 10.4% and decreased $746,000 or 5.3% for the nine and
three month periods ended June 30, 2000, respectively, compared to the same
periods in the prior year. The change was due primarily to an increase of $408.7
million and $158.7 million in average earning assets for the nine and three
month periods ended June 30, 2000, respectively. The net interest margin
decreased to 2.30% for the nine month period ended June 30, 2000, compared with
2.52% in the prior year and decreased to 2.24% for the three month period ended
June 30, 2000, compared with 2.53% in the prior year. Over the past year, the
margin has been affected by decreasing interest rate spreads that the Company
has been experiencing in its asset and liability base due primarily to the
rising level of interest rates that has occurred over that period.
Total interest income increased $25.7 million or 24.6% to $130.1 million for the
nine month period ended June 30, 2000, compared to $104.4 million for the nine
month period ended June 30, 1999, and increased $5.6 million or 14.5% to $44.1
million for the three month period ended June 30, 2000, compared to $38.5
million for the three month period ended June 30, 1999. The increase in interest
income was primarily the result of increases in interest on loans and
securities. The increase in interest on loans was primarily the result of an
increase in the average balance of loans to $1.2 billion from $961.1 million for
the nine month period ended June 30, 2000 and 1999, respectively, partially
offset by a decrease in the average yield on loans to 8.06% from 8.14% for the
same period in the prior year. The increase in interest income on loans for the
three month period ended June 30, 2000 compared with the three month period
ended June 30, 1999 was the result of an increase in the average balance of
loans to $1.3 billion from $1.02 billion, in conjunction with an increase in the
average yield on loans to 8.19% from 8.07% for the same period in the prior
year. The increase in the average balance of loans is due primarily to the
Company's recent efforts to grow and diversify its lending base, and in
particular emphasize commercial, consumer and home equity lending. Although
interest rates are generally higher than the previous year, the rates on such
loans being originated during much of the year were lower than the loans in the
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
existing portfolio. As loans repay, they are replaced in the Company's portfolio
by new loans which generally have lower interest rates than the loans previously
put in the portfolio.
The increase in interest income on mortgage-backed and related securities was
due to an increase in the average balance of such securities to $916.6 million
from $827.4 million for the nine month period ended June 30, 2000 and 1999,
respectively, in conjunction with an increase in the average yield on such
securities to 6.42% from 6.03% for the same periods. The slight increase in
interest income on mortgage-backed and related securities for the three month
period ended June 30, 2000 compared with the three month period ended June 30,
1999 was due to an increase in the average yield on such securities to 6.58%
from 5.99%, respectively, offset partially by a decrease in the average balance
of such securities to $882.0 million from $962.4 million for the same periods.
The increase in interest income on debt and equity securities was the result of
an increase in the average balance to $222.9 million from $161.4 million for the
nine month period ended June 30, 2000 and 1999, respectively, in conjunction
with an increase in the average yield on such securities to 5.89% from 5.44% for
the same periods. The increase in interest income on debt and equity securities
was the result of an increase in the average yield on such securities to 5.93%
from 5.50% for the three month period ended June 30, 2000 and 1999,
respectively, partially offset by a slight decrease in the average balance to
$220.9 million from $221.4 million for the same periods.
Total interest expense increased $21.7 million or 32.5% to $88.6 million for the
nine month period ended June 30, 2000, compared to $66.9 million for the nine
month period ended June 30, 1999. For the three month period ended June 30,
2000, total interest expense increased $6.3 million, or 25.6%, to $30.7 million
compared to $24.4 million for the three month period ended June 30, 1999. The
increase in interest expense was the result of increases in the average balances
of deposits and advances and other borrowings, and therefore, the cost. The
average balances of deposits were $1.4 billion for the nine and three month
periods ended June 30, 2000, as compared to $1.24 billion and $1.33 billion for
the same periods in the prior year. The increases in the balances of deposits
are due to the Company's offering of additional deposit products and the use of
brokers to sell certificates of deposit. The average balance of brokered
deposits increased to $434.3 million for the nine months ended June 30, 2000
compared to $255.8 million for the same period in the prior year. The average
cost of deposits increased to 4.93% and 5.15% for the nine and three month
periods ended June 30, 2000, respectively, from 4.46% and 4.30% for the same
periods in the prior year. As part of a continuing strategy, the Company
continues to offer deposit products that compete more effectively with money
market funds and other 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 total deposit portfolio. The
average balance of advances and other borrowings were $853.7 million and $873.5
million for the nine and three month periods ended June 30, 2000, respectively,
as compared to $679.0 million and $823.2 million for the same periods in the
prior year. The average cost of advances and other borrowings increased to 5.53%
and 5.74% for the nine and three month periods ended June 30, 2000,
respectively, from 5.00% and 4.94% for the same periods in the prior year. The
borrowings are primarily adjustable-rate FHLB advances, reverse repurchase
agreements and Federal Funds purchased which have repriced to reflect the
changes in rate levels associated with the respective borrowing rate indexes
from the same period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the nine and three month periods
ended June 30, 2000 and 1999, respectively. Tax-exempt investments are not
material and the tax-equivalent method of presentation is not included in the
schedule.
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
Nine months ended June 30,
-------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight
deposits.............................. $ 1,250 $ 48 5.13 % $ 18,803 $ 715 5.08 %
Trading account securities.............. 641 42 8.75 346 19 7.34
Debt and equity securities.............. 222,858 9,820 5.89 161,420 6,562 5.44
Mortgage-backed and related
securities............................ 916,553 44,074 6.42 827,410 37,293 6.03
Loans:
First mortgage....................... 794,877 46,306 7.78 568,688 33,800 7.95
Home equity........................... 168,660 11,110 8.80 142,178 8,730 8.21
Consumer ............................. 143,192 9,000 8.40 145,183 9,293 8.56
Commercial and agricultural........... 127,031 8,039 8.45 105,033 6,519 8.30
--------------------- ----------------------
Total loans....................... 1,233,760 74,455 8.06 961,082 58,342 8.12
Federal Home Loan Bank stock............ 31,287 1,701 7.26 28,604 1,363 6.37
--------------------- ----------------------
Total earning assets.............. 2,406,349 130,140 7.22 1,997,665 104,294 6.98
--------- --------
Valuation allowances.................... (41,620) (14,128)
Cash and due from banks................. 33,159 33,565
Other assets............................ 109,137 114,171
------------ -------------
Total assets...................... $ 2,507,025 $ 2,131,273
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ......................... $ 76,844 386 0.67 $ 71,532 629 1.18
Money market demand accounts.......... 362,158 12,475 4.60 346,485 10,921 4.21
Passbook.............................. 105,623 1,732 2.19 127,509 2,580 2.71
Certificates of deposit.............. 898,916 38,709 5.75 696,993 27,329 5.24
--------------------- ----------------------
Total interest-bearing deposits.......... 1,443,541 53,302 4.93 1,242,519 41,459 4.46
Advances and other borrowings............ 853,669 35,322 5.53 678,989 25,418 5.01
Advances from borrowers for taxes and
insurance.............................. 5,550 12 0.29 4,499 11 0.33
--------------------- ----------------------
Total interest-bearing
liabilities..................... 2,302,760 88,636 5.14 1,926,007 66,888 4.64
Non interest-bearing deposits............ 73,504 68,950
Other liabilities........................ 2,568 11,548
Shareholders' equity..................... 128,193 124,768
------------ -------------
Total liabilities and shareholders'
equity................................. $ 2,507,025 $ 2,131,273
============ =============
Net interest income...................... $41,504 $37,406
======== ========
Net yield on interest-earning assets..... 2.30 2.50
Interest rate spread..................... 2.08 2.34
Ratio of earning assets to
interest-bearing liabilities............. 104.50 103.72
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight
deposits.............................. $ 1,342 $ 19 5.69 % $ 10,717 $ 129 4.83 %
Trading account securities.............. 541 10 7.43 192 3 6.27
Debt and equity securities.............. 220,872 3,257 5.93 221,374 3,038 5.50
Mortgage-backed and related
securities............................ 881,993 14,428 6.58 962,398 14,383 5.99
Loans:
First mortgage....................... 826,153 16,140 7.86 605,682 11,859 7.85
Home equity........................... 174,698 3,981 9.17 144,532 2,890 8.02
Consumer ............................. 137,136 2,894 8.49 151,021 3,171 8.42
Commercial and agricultural........... 131,999 2,834 8.64 118,277 2,420 8.21
---------------------- -----------------------
Total loans....................... 1,269,986 25,849 8.19 1,019,512 20,340 8.00
Federal Home Loan Bank stock............ 29,855 539 7.26 31,660 465 5.89
---------------------- -----------------------
Total earning assets.............. 2,404,589 44,102 7.38 2,245,853 38,358 6.85
--------- ----------
Valuation allowances.................... (49,808) (16,626)
Cash and due from banks................. 28,413 33,985
Other assets............................ 107,697 107,761
------------ ------------
Total assets...................... $ 2,490,891 $ 2,370,973
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ......................... $ 77,744 127 0.66 $ 74,550 205 1.10
Money market demand accounts.......... 363,178 4,423 4.90 361,389 3,632 4.03
Passbook.............................. 100,211 543 2.18 124,823 723 2.32
Certificates of deposit.............. 882,196 13,143 5.99 766,981 9,660 5.05
---------------------- -----------------------
Total interest-bearing deposits.......... 1,423,329 18,236 5.15 1,327,743 14,220 4.30
Advances and other borrowings............ 873,511 12,456 5.74 823,241 10,159 4.95
Advances from borrowers for taxes and
insurance.............................. 5,968 4 0.27 4,701 2 0.17
---------------------- -----------------------
Total interest-bearing
liabilities..................... 2,302,808 30,696 5.36 2,155,685 24,381 4.54
Non interest-bearing deposits............ 73,374 70,656
Other liabilities........................ (10,396) 10,770
Shareholders' equity..................... 125,105 133,862
------------ ------------
Total liabilities and shareholders'
equity................................. $ 2,490,891 $ 2,370,973
============ ============
Net interest income...................... $ 13,406 $ 13,977
========= =========
Net yield on interest-earning assets..... 2.24 2.50
Interest rate spread..................... 2.02 2.31
Ratio of earning assets to
interest-bearing liabilities............. 104.42 104.18
</TABLE>
21
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance......................... $ 9,356 $ 7,530 $ 10,102 $ 8,678
Provision for loan losses................. 1,506 1,440 506 480
Recoveries................................. 90 41 13 12
Charge-offs............................... (1,373) (280) (1,042) (136)
Acquired bank's allowance................. - 303 - -
------------- ------------- ------------ -------------
Ending balance............................ $ 9,579 $ 9,034 $ 9,579 $ 9,034
============= ============= ============ =============
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period........................ 0.71% 0.78% 0.71% 0.78%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period.................... 368.99% 358.07% 368.99% 358.07%
Ratio of net charge-offs to average
gross loans (annualized)............. 0.14% 0.03% 0.33% 0.05%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for probable losses as of June 30, 2000, based upon its current evaluation of
loan delinquencies, non-performing loans, charge-off trends, economic conditions
and other factors. Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers, among other
matters, the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an accurate provision for loan losses. For
the nine month period ended June 30, 2000, the provision for loan losses was
$1.5 million compared to $1.4 million for the same period in the prior year. The
Company's loan portfolio is becoming increasingly more diversified than in
previous years. The Company has and continues to expect to increase its
commercial, consumer and commercial real estate loan portfolios which are
generally presumed to have more risk than standard single-family mortgage loans.
Charge-offs for the nine and three month periods ended June 30, 2000 were $1.4
million and $1.0 million, respectively, compared to $280,000 and $136,000 for
the nine and three month periods ended June 30, 1999. Charge-offs for the nine
and three month periods ended June 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. The Company believes that the allowance for
loan losses is adequate to provide for anticipated probable losses based upon
current known conditions.
OTHER OPERATING INCOME. Other operating income decreased by $2.3 million to
$10.5 million for the nine month period ended June 30, 2000, compared to the
same period in the prior year. Other operating income increased by $184,000 to
$3.9 million for the three month period ended June 30, 2000, compared to the
same period in the prior year. The following table shows the percentage of other
operating income to average assets for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Other operating income.................... $ 10,485 $ 12,824 $ 3,857 $ 3,673
Percent of average assets (annualized).... 0.56% 0.80% 0.62% 0.62%
</TABLE>
22
<PAGE> 23
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The decrease for the nine month period ended June 30, 2000 was due primarily to
decreases in gains on sales of mortgage loans, income from the Company's
affordable housing subsidiary and gains on the sale of real estate held for
sale, partially offset by increases in depository fees and loan servicing fees.
The increase for the three month period ended June 30, 2000 was due primarily to
increases in depository fees and loan servicing fees partially offset by
decreases in gains on the sale of mortgage loans and income from insurance,
annuity and brokerage commissions. Gains on the sale of mortgage loans decreased
to $721,000 and $363,000 for the nine and three month periods ended June 30,
2000, respectively, compared to gains of $2.5 million and $420,000 for the same
periods in the prior year. The Company's volume of mortgage loan sales were
$74.8 million and $45.6 million for the nine and three month periods ended June
30, 2000, compared to $180.1 million and $48.5 million for the same periods in
the prior year. The higher interest rate environment has decreased the level of
the Company's fixed rate loan production. Income from the operations of the
Company's affordable housing subsidiary (which represents primarily rental
income) decreased to $2.2 million and $721,000 for the nine and three month
periods ended June 30, 2000, compared with $3.0 million and $784,000 for the
same periods in the prior year. During the nine month period ended June 30,
1999, the Company realized gains of $1.2 million on the sale of 13 affordable
housing properties which had been classified as real estate held for sale.
Income from insurance, annuity and brokerage commissions decreased to $1.1
million and $351,000 for the nine and three month periods ended June 30, 2000,
compared with $1.3 million and $594,000 for the same periods in the prior year.
Income from depository fees and service charges increased to $3.7 million and
$1.3 million for the nine and three months ended June 30, 2000, respectively,
compared to $3.0 million and $1.1 million for the same periods in the prior
year. Income from loan servicing increased to $2.1 million and $859,000 for the
nine and three months ended June 30, 2000, respectively, compared to $1.4
million and $481,000 for the same periods in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $6.3 million or 19.3% and $277,000 or 2.5% for the nine and three
month periods ended June 30, 2000, compared to the same periods in the prior
year. The following table shows the percentage of general and administrative
expenses to average assets for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
General and administrative expenses....... $ 39,116 $ 32,786 $ 11,165 $ 10,888
Percent of average assets (annualized).... 2.08% 2.06% 1.80% 1.84%
</TABLE>
The increase in general and administrative expenses is due primarily to the
voluntary acceleration of the expense for the ESOP loan, offset partially by a
decrease in affordable housing expenses resulting from the sale of investments
during the prior year. The Company made a voluntary acceleration of the
repayment of all of the remaining loan principal to its ESOP plan. The increased
payments resulted in additional expense of $7.1 million and $705,000 for the
nine and three month periods ended June 30, 2000.
INCOME TAX EXPENSE. Income tax expense decreased to $4.2 million and $1.6
million for the nine and three month periods ended June 30, 2000, compared to
$4.3 million and $2.0 million for the same periods in the prior year. The
effective tax rate for the nine and three month periods ended June 30, 2000 was
37.13% and 28.81% respectively, compared with 26.36% and 30.63% for the nine and
three month periods ended June 30, 1999. The increase in the effective tax rate
for the nine month period ended June 30, 2000 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 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's
nine month period.
ASSET QUALITY
Total non-performing assets were $3.0 million, or 0.12% of total assets at June
30, 2000, compared with $3.2 million, or 0.13% of total assets at September 30,
1999. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure.
23
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans.............................. $ 2,596 $ 2,840
Foreclosed properties.............................
354 371
----------------- -----------------
Non-performing assets............................. $ 2,950 $ 3,211
================= =================
Non-performing loans to gross loans............... 0.19% 0.23%
Non-performing assets to total assets............. 0.12% 0.13%
</TABLE>
Except as disclosed above, there are no material loans about which management is
aware that there exists serious doubts as to the ability of the borrower to
comply with the loan terms. Management recently increased its assets classified
as Substandard by $10 million to approximately $13.7 million as of June 30, 2000
to reflect concern regarding a commercial loan in which the Company participates
with a group of other lenders. While the borrower is not delinquent under the
terms of the loan, management believed the classification to be a prudent step
to reflect pricing pressures within the borrower's business.
Impaired loans totaled $489,000 at June 30, 2000 compared to $809,000 at
September 30, 1999. These loans had associated impairment reserves of $49,000
and $400,000 at June 30, 2000 and September 30, 1999, respectively.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter interest
rate characteristics. Although management believes that its asset/liability
management strategies have reduced the potential effects of changes in interest
rates on its operations, increases in interest rates may adversely affect the
Company's results of operations because interest-bearing liabilities will
reprice more quickly than interest-earning assets
At June 30, 2000, the Company's estimated cumulative one-year gap between assets
and liabilities was a negative 24.04% of total assets. A negative gap occurs
when a greater dollar amount of interest-bearing liabilities are repricing or
maturing than interest earning assets. The 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. The Company's three-year cumulative gap as of June 30, 2000 was a
negative 15.55% of total assets. With a negative gap position, during periods of
rising interest rates it is expected that the cost of the Company's
interest-bearing liabilities will rise more quickly than the yield on its
interest-earning assets, which will have a negative effect on its net interest
income. Although the opposite effect on net interest income would occur in
periods of falling interest rates, the Company could experience substantial
prepayments of its fixed-rate mortgage loans and mortgage-backed and related
securities in periods of falling interest rates, which would result in the
reinvestment of such proceeds at market rates which are lower than current
rates.
24
<PAGE> 25
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of June 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)
Fixed........................... $ 72,978 $ 28,832 $ 60,766 $ 40,361 $ 49,984 $ 252,921
Variable........................ 218,934 86,495 121,712 121,081 149,952 698,174
Consumer loans (2)................... 201,064 23,242 29,399 48,925 8,791 311,421
Mortgage-backed and related
securities......................... 2,959 6,928 10,074 5,950 3,217 29,128
Assets available for sale:
Mortgage loans.................. 15,027 - - - - 15,027
Fixed rate mortgage related..... 55,952 80,245 188,345 114,175 33,751 472,468
Variable rate mortgage related.. 334,006 - - - - 334,006
Investment securities........... 72,188 3,092 92,808 43,870 - 211,958
Trading account securities.......... - - - - - -
Other assets......................... 30,705 - - 510 - 31.215
Impact of interest rate swaps....... 10,000 - (10,000) - - -
----------------------------------------------------------------------------------
Total........................... $1,013,813 $ 228,834 $ 493,104 $ 374,872 $ 245,695 $2,356,318
==================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts.................... $ 7,007 $ 17,881 $ 27,847 $ 12,500 $ 10,182 $ 75,417
Passbook savings accounts....... 1,881 5,645 12,869 10,424 44,440 75,259
Money market deposit accounts... 91,950 275,851 9,571 4,874 3,328 385,574
Certificates of deposit......... 135,955 278,226 126,384 144,936 193,622 879,123
Borrowings (4)....................... 403,430 270,000 131,651 50,000 - 855,081
Impact of interest rate swaps........ 390,000 (33,000) (28,000) (125,000) (204,000) -
----------------------------------------------------------------------------------
Total........................... $1,030,223 $ 814,603 $ 280,322 $ 97,734 $ 47,572 $2,270,454
==================================================================================
Excess (deficiency) of
interest-earning
assets over interest-bearing
liabilities......................... $ (16,410) $(585,769) $ 212,782 $ 277,138 $ 198,123 $ 85,864
==================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities........ $ (16,410) $(602,179) $(389,397) $(112,259) $ 85,864
====================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets............. (0.66%) (24.04%) (15.55%) (4.48%) 3.43%
====================================================================
</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 $76.0 million at June 30,
2000.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
of 37%, 17% and 88%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher than
the Company's historical rates, but are considered by management to be more
indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $738.2 million or 29.5% of
total assets.
(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 includes fixed rate puttable FHLB advances of $25 million
maturing within three months, $270 million maturing in four to twelve
months, $130 million maturing in one to three years and $50 million
maturing in three to five years.
25
<PAGE> 26
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
actual withdrawals and repayments of assets and liabilities may vary
substantially. Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and liabilities
may have similar maturities to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on other types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans and
mortgage-backed and related securities, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of an actual change in interest rates, actual prepayment
and early withdrawal levels could deviate significantly from those assumed in
calculating the data in the table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $37.7 million and
$32.6 million as of June 30, 2000 and September 30, 1999, respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At June 30, 2000, the Company had
additional borrowing capacity of $101.4 million available from the FHLB.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow Office of Thrift Supervision ("OTS") capital
regulations which require savings institutions to meet two capital standards:
(i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets
and (ii) "risk-based capital" of at least 8% of risk-weighted assets.
The following table summarizes the Bank's capital ratios at the dates indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------- --------- ----------- ------------- --------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Tangible capital.............. $ 164,199 6.53% > $ 100,552 > 4.0% > $125,690 > 5.0%
- - - -
Core capital ................. 164,199 6.53% > 100,552 > 4.0% > 125,690 > 5.0%
- - - -
Tier 1 risk-based capital..... 164,199 10.73% > 61,193 > 4.0% > 91,790 > 6.0%
- - - -
Risk-based capital............ 173,446 11.34% > 122,387 > 8.0% > 152,983 > 10.0%
- - - -
As of September 30, 1999:
Tangible capital.............. $ 144,222 5.82% > $99,136 > 4.0% > $123,921 > 5.0%
- - - -
Core capital ................. 144,222 5.82% > 99,136 > 4.0% > 123,921 > 5.0%
- - - -
Tier 1 risk-based capital..... 144,222 9.98% > 57,803 > 4.0% > 86,704 > 6.0%
- - - -
Risk-based capital............ 153,578 10.63% > 115,606 > 8.0% > 144,507 > 10.0%
- - - -
</TABLE>
The capital of the Company and the Bank exceed all regulatory capital
requirements.
26
<PAGE> 27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
June 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 (Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
Commercial loans:
Fixed rate... $ 75.9 8.38% $ 50.6 8.32% $ 17.7 8.32% $ 17.7 8.36% $ 25.3 8.37%
Adjustable
rate..... 174.5 8.54% 90.8 8.61% 55.9 8.50% 69.8 8.49% 83.8 8.50%
Consumer loans:
Fixed rate... 11.2 8.30% 18.3 8.39% 12.7 8.40% 12.3 8.42% 16.9 8.42%
Adjustable
rate..... 35.5 9.25% 22.6 9.25% 60.5 9.25% 29.0 9.25% 24.0 9.25%
Mortgage-backed
securities:
Fixed rate... 146.1 6.37% 99.2 6.43% 99.2 6.51% 60.1 6.74% 60.1 6.58%
Adjustable
rate..... 63.3 7.00% 49.5 7.00% 42.1 7.00% 40.5 7.00% 37.2 7.00%
Debt and equity
securities..... 75.3 5.78% 46.4 5.78% 46.4 5.78% 21.9 5.78% 21.9 5.78%
Other............ 30.7 5.60% - - - - - - - -
---------- ---------- ---------- ---------- ---------
Total interest
earning assets.. $612.5 7.39% $377.4 7.47% $334.5 7.47% $ 251.3 7.67% $ 269.2 7.69%
========== ========== ========== ========== =========
Interest bearing liabilities
Deposits:
NOW accounts.. $ 24.9 0.50% $ 13.9 0.50% $ 13.9 0.50% $ 6.3 0.50% $ 6.3 0.50%
Passbooks..... 7.5 0.75% 6.4 0.75% 3.9 0.75% 5.2 0.75% 5.2 0.75%
Money market.. 367.8 5.07% 6.1 5.07% 6.1 5.07% 2.4 5.07% 2.4 5.07%
Certificates.. 414.2 5.90% 112.9 6.33% 13.4 6.26% 50.4 5.91% 94.5 6.45%
Borrowings
Fixed rate... 535.6 6.10% 130.0 5.70% 50.0 5.63% - - - -
Adjustable
rate..... 139.5 7.10% - - - - - - - -
---------- ---------- ---------- ---------- ---------
Total interest
bearing
liabilities...... $ 1,489.5 5.76% $269.3 5.56% $ 87.3 4.65% $ 64.3 4.93% $ 108.4 5.80%
========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Fair
Over Market
Five Years Total Value
------------------ ----------------- ---------
<S> <C> <C> <C> <C> <C>
Interest earning assets (Dollars in millions)
Mortgage and
Commercial loans:
Fixed rate....... $ 80.8 8.61% $ 268.0 8.43% $ 252.9
Adjustable rate.. 223.4 8.51% 698.2 8.53% 698.2
Consumer loans:
Fixed rate....... 68.5 9.07% 139.9 8.72% 140.6
Adjustable rate.. - - 171.6 9.25% 170.2
Mortgage-backed
securities:
Fixed rate....... 37.0 6.50% 501.7 6.49% 489.9
Adjustable rate.. 101.3 7.00% 333.9 7.00% 316.6
Debt and equity
securities......... - - 211.9 5.78% 203.3
Other................ 0.5 5.15% 31.2 5.59% 31.2
-------- --------- ---------
Total interest
earning assets..... $ 511.5 8.15% $2,356.4 7.64% $2,302.9
======== ========= =========
Interest bearing liabilities
Deposits:
NOW accounts..... $ 10.2 0.50% $ 75.5 0.50% $ 75.4
Passbooks........ 44.5 0.75% 72.7 0.75% 60.0
Money market..... 3.3 5.07% 388.1 5.07% 386.1
Certificates..... 193.7 6.53% 879.1 6.16% 867.1
Borrowings
Fixed rate....... - - 715.6 5.99% 712.5
Adjustable rate.. - - 139.5 7.10% 139.5
-------- --------- ---------
Total interest
bearing
liabilities...... $ 251.7 5.24% $2,270.5 5.62% $2,240.6
======== ========= =========
</TABLE>
27
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 21, 2000, the Company announced the declaration of a
dividend of $0.09 per share on the Company's common stock for the
quarter ended June 30, 2000. The dividend is payable on August 18,
2000 to shareholders of record as of August 10, 2000. This will be
the twentieth consecutive cash dividend payment since the Company
became a publicly-held company in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share
(See Footnote 7 in "Notes to Unaudited Consolidated
Financial Statements")
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report was filed.
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: August 11, 2000 By: /s/ Jon D. Sorenson
----------------- -----------------------------
Jon D. Sorenson
Chief Financial Officer
29
