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, 2003
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.
Yes x No
--------- ----------
Indicate by check mark whether the registrant is an accelerated filer
(as determined in Rule 12b-2 of the Exchange Act).
Yes x No
--------- ----------
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 9,472,226 at July 31, 2003.
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Unaudited Consolidated Financial Statements................................................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 33
ITEM 4. Controls and Procedures............................................................................. 33
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings................................................................................... 33
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 33
ITEM 3. Defaults Upon Senior Securities..................................................................... 33
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 33
ITEM 5. Other Information................................................................................... 33
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 34
SIGNATURES.................................................................................................... 35
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
June 30, September 30,
2003 2002
------------ -------------
(In thousands, except share data)
ASSETS
Cash and due from banks ............................................. $ 42,005 $ 43,515
Federal funds sold and overnight deposits ........................... 2,162 2,320
------------ ------------
Cash and cash equivalents ........................................... 44,167 45,835
------------ ------------
Assets available for sale, at fair value:
Debt and equity securities ...................................... 64,797 16,596
Mortgage-backed and related securities .......................... 537,934 618,580
Mortgage loans held for sale, at lower of cost or market ............ 83,139 65,006
Securities held to maturity, at amortized cost:
Mortgage-backed and related securities (fair value of $92,015
and $91,318, respectively) ...................................... 91,236 90,246
Loans receivable, net ............................................... 1,215,263 1,257,466
Federal Home Loan Bank stock, at cost ............................... 110,943 90,784
Accrued interest receivable ......................................... 7,862 9,398
Foreclosed properties ............................................... 847 1,908
Real estate held for investment ..................................... 31,650 32,803
Premises and equipment, net ......................................... 30,874 29,824
Goodwill, net ....................................................... 12,891 12,891
Receivable for securities sales ..................................... - 48,089
Other assets ........................................................ 22,738 19,691
------------ ------------
Total assets ........................................................ $ 2,254,341 $ 2,339,117
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ............................................................ $ 1,357,524 $ 1,416,979
Short-term borrowings ............................................... 659,387 605,236
Long-term borrowings ................................................ 8,380 36,827
Advances from borrowers for taxes and insurance ..................... 6,965 9,886
Payable for securities purchases .................................... 11,308 71,544
Accrued interest payable and other liabilities ...................... 16,799 19,564
------------ ------------
Total liabilities ................................................... 2,060,363 2,160,036
============ ============
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, 9,466,206 and 9,350,873 shares, respectively ....... 146 146
Additional paid-in-capital .......................................... 89,846 89,324
Accumulated other comprehensive income .............................. 1,364 1,632
Treasury stock at cost (5,113,034 and 5,228,367 shares,
respectively) ................................................... (70,915) (72,515)
Retained earnings, substantially restricted ......................... 173,537 160,494
------------ ------------
Total shareholders' equity .......................................... 193,978 179,081
------------ ------------
Total liabilities and shareholders' equity .......................... $ 2,254,341 $ 2,339,117
============ ============
See accompanying Notes to Unaudited Consolidated Financial Statements
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans ..................................................... $ 59,645 $ 66,327 $ 18,943 $ 21,524
Mortgage-backed and related securities .................... 14,675 23,075 4,146 7,565
Debt and equity securities ................................ 687 1,365 401 734
Federal funds sold and overnight deposits ................. 20 38 5 3
Federal Home Loan Bank stock .............................. 4,244 2,518 1,701 810
-------- -------- -------- --------
Total interest and dividend income ............................. 79,271 93,323 25,196 30,636
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits .................................................. 20,020 28,465 6,033 8,309
Advances and other borrowings ............................. 22,580 23,189 7,402 7,940
-------- -------- -------- --------
Total interest expense ......................................... 42,600 51,654 13,435 16,249
-------- -------- -------- --------
Net interest income before provision for loan losses ........... 36,671 41,669 11,761 14,387
Provision for loan losses ...................................... 637 2,733 84 913
-------- -------- -------- --------
Net interest income ............................................ 36,034 38,936 11,677 13,474
-------- -------- -------- --------
OTHER OPERATING INCOME, NET:
Loan servicing and loan related fees ...................... 4,865 2,957 1,640 849
Mortgage servicing impairment ............................. (3,855) (900) (1,330) (900)
Depository fees and service charges ....................... 5,548 4,155 2,331 1,383
Securities gains .......................................... 2,645 1,056 1,301 322
Gain on sales of loans .................................... 16,434 7,550 5,858 2,273
Insurance, annuity and brokerage commissions .............. 1,193 1,208 358 397
Gain (loss) on foreclosed properties ...................... (8) 53 (67) 28
Income from real estate held for investment ............... 2,714 2,331 925 782
Other income .............................................. 378 618 43 151
-------- -------- -------- --------
Total other operating income, net .............................. 29,914 19,028 11,059 5,285
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee benefits .................. 22,964 20,222 7,589 6,528
Occupancy expenses, including depreciation ................ 3,843 3,658 1,306 1,260
Furniture and equipment, including depreciation ........... 3,106 2,926 1,034 976
Real estate held for investment expenses .................. 2,884 2,255 1,072 702
Telephone and postage ..................................... 1,364 1,263 444 424
Data processing ........................................... 733 1,307 222 428
Other general and administrative expenses ................. 4,354 4,191 1,670 1,594
-------- -------- -------- --------
Total general and administrative expenses ...................... 39,248 35,822 13,337 11,912
-------- -------- -------- --------
Income before income tax expense ............................... 26,700 22,142 9,399 6,847
Income tax expense ............................................. 7,809 6,157 2,878 1,783
-------- -------- -------- --------
Net income ..................................................... $ 18,891 $ 15,985 $ 6,521 $ 5,064
======== ======== ======== ========
Basic earnings per share ....................................... $ 2.01 $ 1.73 $ 0.69 $ 0.55
======== ======== ======== ========
Diluted earnings per share ..................................... $ 1.92 $ 1.65 $ 0.66 $ 0.52
======== ======== ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements
4
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
(Unaudited)
Shares of Accumulated
Common Additional Other
Stock Common Paid-In Retained Comprehensive Treasury
Outstanding Stock Capital Earnings Income Stock Total
-----------------------------------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding and per share data)
Nine-months ended June 30, 2002
Balance at September 30, 2001 ........... 9,208,244 $ 146 $ 88,826 $ 144,630 $ 1,137 $ (74,264) $ 160,475
Comprehensive income:
Net income ............................ - - - 15,985 - - 15,985
Change in unrealized gain on securities
available for sale ................. - - - - 2,018 - 2,018
Reclassification adjustment for gains
realized in net income ............. - - - - (1,056) - (1,056)
Income taxes .......................... - - - - (283) - (283)
-----------
Comprehensive income .................... 16,664
Cash dividend - $0.45 per share ......... - - - (4,156) - - (4,156)
Purchase of treasury stock .............. (32,479) - - - - (679) (679)
Exercise of stock options, net .......... 166,588 - 483 (450) - 2,310 2,343
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance at June 30, 2002 ................ 9,342,353 $ 146 $ 89,309 $ 156,009 $ 1,816 $ (72,633) $ 174,647
========== ========== ========== =========== =========== =========== ===========
Nine-months ended June 30, 2003
Balance at September 30, 2002 ........... 9,350,873 $ 146 $ 89,324 $ 160,494 $ 1,632 $ (72,515) $ 179,081
Comprehensive income:
Net income ............................ - - - 18,891 - - 18,891
Change in unrealized gain on securities
available for sale ................. - - - - 2,116 - 2,116
Reclassification adjustment for gains
realized in net income ............. - - - - (2,645) - (2,645)
Income taxes .......................... - - - - 261 - 261
-----------
Comprehensive income .................... 18,623
Cash dividend - $0.60 per share ......... - - - (5,633) - - (5,633)
Exercise of stock options, net .......... 115,333 - 522 (215) - 1,600 1,907
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance at June 30, 2003 ................ 9,466,206 $ 146 $ 89,846 $ 173,537 $ 1,364 $ (70,915) $ 193,978
========== ========== ========== =========== =========== =========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Nine-Months ended
June 30,
-------------------------------
2003 2002
------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................... $ 18,891 $ 15,985
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses .............................................................. 637 2,733
Depreciation, accretion and amortization ............................................... 11,659 6,393
Deferred income taxes .................................................................. 1,854 (663)
Securities gains ....................................................................... (2,645) (1,056)
Impairment write-down on mortgage servicing rights ..................................... 3,855 900
Originations of loans held for sale .................................................... (1,036,790) (556,399)
Proceeds from sales of loans held for sale ............................................. 1,035,091 550,441
Gain on sale of loans .................................................................. (16,434) (7,550)
Stock dividends received on Federal Home Loan Bank stock ............................... (5,159) (2,283)
Other, net ............................................................................. (16,165) (11,122)
------------ ------------
Net cash used in operating activities ........................................................ (5,206) (2,621)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed and related securities held to maturity ..................... (64,430) (58,684)
Principal repayments on mortgage-backed and related securities held to maturity .......... 63,640 49,941
Purchases of mortgage-backed and related securities available for sale ................... (868,859) (238,144)
Proceeds from sales of mortgage-backed securities available for sale ..................... 443,595 85,517
Principal repayments on mortgage-backed securities available for sale .................... 492,997 198,560
Purchases of debt and equity securities available for sale ............................... (93,551) (61,264)
Proceeds from sales of debt and equity securities available for sale ..................... 30,591 12,321
Proceeds from maturities of debt and equity securities available for sale ................ 14,997 35,006
Purchases of Federal Home Loan Bank stock ................................................ (15,000) -
Purchase of loans ........................................................................ (451,108) (232,599)
Decrease in loans, net of loans held for sale ............................................ 492,024 205,857
Increase in real estate held for investment .............................................. (90) (6,583)
Proceeds from sale of foreclosed properties .............................................. 2,432 -
Purchases of premises and equipment, net ................................................. (3,102) (2,860)
------------ ------------
Net cash provided by (used in) investing activities .......................................... 43,936 (12,932)
============ ============
See accompanying Notes to Unaudited Consolidated Financial Statements
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
(Unaudited)
Nine-Months ended
June 30,
-------------------------------
2003 2002
------------ ------------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ........................................................... (59,455) (52,934)
Proceeds from advances and other borrowings ........................................ 379,846 172,062
Repayments on advances and other borrowings ........................................ (389,262) (151,337)
Increase in securities sold under agreements to repurchase ......................... 35,120 60,645
Decrease in advances from borrowers for taxes and insurance ........................ (2,921) (3,431)
Dividends paid ..................................................................... (5,633) (4,156)
Stock option transactions .......................................................... 1,907 2,343
Purchase of treasury stock ......................................................... - (679)
------------ ------------
Net cash provided by (used in) financing activities .................................... (40,398) 22,513
------------ ------------
Increase (decrease) in cash and cash equivalents ....................................... (1,668) 6,960
Cash and cash equivalents:
Beginning of period ........................................................... 45,835 38,100
------------ ------------
End of period ................................................................. $ 44,167 $ 45,060
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 42,950 $ 53,262
Income taxes .................................................................. 4,001 8,513
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Transfer from loans to foreclosed properties .................................. $ 1,287 $ 1,559
Transfer of mortgage loans to mortgage loans held for sale .................... 47,840 75,750
See accompanying Notes to Unaudited Consolidated Financial Statements
7
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 accounting principles generally accepted
in the United States of America. 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 nine and three-month periods ended
June 30, 2003 are not necessarily indicative of the results that may be
expected for the entire year ending September 30, 2003. 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, 2002.
Certain previously reported balances have been reclassified to conform
with current year presentation.
(3) Merger with MAF Bancorp, Inc.
On May 21, 2003, St. Francis Capital Corporation and MAF Bancorp, Inc.
("MAF") announced that MAF has agreed to acquire the Company in an
all-stock transaction with a fixed exchange ratio. Based on the closing
price of MAF's common stock on June 30, 2003, the transaction is valued
at approximately $294 million. Pursuant to a definitive agreement
between the two companies, the Company will merge into MAF, with MAF to
be the surviving corporation. As a result of the merger, each issued
and outstanding share of St. Francis Capital Corporation common stock
will be converted into the right to receive 0.79 shares of MAF common
stock. The transaction is subject to regulatory approvals and approval
by the holders of a majority of MAF's common stock and the holders of a
majority of the Company's common stock. The proposed merger is expected
to be completed in the fourth quarter of 2003.
(4) 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.
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The contractual or notional amounts of off-balance sheet financial
instruments are as follows:
Contractual or Notional Amount(s)
June 30, September 30,
2003 2002
------------ -------------
(In thousands)
Commitments to extend credit:
Fixed-rate loans..................................... $ 55,951 $ 69,156
Variable-rate loans.................................. 35,268 41,824
Mortgage loans sold with recourse........................ 30,289 12,334
Guarantees under IRB issues.............................. 29,525 28,675
Standby letters of credit................................ 9,840 7,906
Unused and open-ended lines of credit:
Consumer.............................................. 296,648 273,704
Commercial............................................. 63,576 66,411
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, 2003 have interest rates ranging from
4.25% to 7.875%. Because some commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent cash
requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained
consists primarily of one- to four-family residences and other
residential and commercial real estate and commercial business assets.
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
loss on a guarantee is the notional amount of the guarantee less the
value of the real estate collateral. At June 30, 2003, appraised values
of the real estate collateral exceeded the amount of the guarantees.
Standby letters of credit are conditional commitments that the Company
issues to guarantee the performance of a customer to a third-party. The
guarantees frequently support public and private borrowing
arrangements. The Company receives an initial and annual fee for the
guarantee. The guarantees generally have a term of approximately one
year and may be automatically renewable within a specified period of
time. Potential loss on a guarantee is the notional amount of the
guarantee less the value of the collateral. Since the conditions
requiring the Company to fund letters of credit may not occur, the
Company expects its future cash requirements to be less than the total
outstanding commitments.
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, 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
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(5) Securities
The Company's securities available for sale and held to maturity at
June 30, 2003 were as follows:
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- --------
(In thousands)
DEBT AND EQUITY SECURITIES:
U.S. Treasury obligations and obligations of
U.S. Government Agencies ............................ $ 64,001 $ 299 $ - $ 64,300
Marketable equity securities ............................ 497 - - 497
--------- ---------- ---------- --------
TOTAL DEBT AND EQUITY SECURITIES ......................... $ 64,498 $ 299 $ - $ 64,797
========= ========== ========== ========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FNMA .................................................. $ 69,917 $ 162 $ (193) $ 69,886
Private issue ......................................... 135,642 1,200 (86) 136,756
REMICs:
GNMA .................................................. 779 - (52) 727
FNMA .................................................. 92,277 1,014 - 93,291
FHLMC ................................................. 81,569 163 (329) 81,403
Private issue ......................................... 155,929 688 (782) 155,835
CMO residual ............................................ 36 - - 36
--------- ---------- ---------- --------
TOTAL MORTGAGE-BACKED AND RELATED SECURITIES ............. $ 536,149 $ 3,227 $ (1,442) $537,934
========= ========== ========== ========
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
(In thousands)
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
GNMA .................................................. $ 3,755 $ 188 $ - $ 3,943
REMICs:
FHLMC ................................................. 24,749 356 - 25,105
FNMA .................................................. 18,219 195 (7) 18,407
Private issue ......................................... 44,513 62 (15) 44,560
--------- ----------- ---------- --------
TOTAL MORTGAGE-BACKED AND RELATED SECURITIES ............ $ 91,236 $ 801 $ (22) $ 92,015
========= =========== ========== ========
During the nine-month periods ended June 30, 2003 and 2002, gross
proceeds from the sale of securities available for sale totaled
approximately $474.2 million and $97.8 million, respectively. The gross
realized gains on such sales totaled approximately $2.1 million and
$1.0 million for the nine-month periods ended June 30, 2003 and 2002,
respectively. The gross realized losses on such sales totaled
approximately $75,000 and $50,000 for the nine-month periods ended June
30, 2003 and 2002, respectively.
During the three-month periods ended June 30, 2003 and 2002, gross
proceeds from the sale of securities available for sale totaled
approximately $221.6 million and $53.9 million, respectively. The gross
realized gains on such sales totaled approximately $1.1 million and
$312,000 for the three-month periods ended June 30, 2003 and 2002,
respectively. The
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
gross realized losses on such sales totaled approximately $5,000 and
$48,000 for the three-month periods ended June 30, 2003 and 2002,
respectively.
At June 30, 2003, $354.7 million of mortgage-related securities were
pledged as collateral for Federal Home Loan Bank ("FHLB") advances.
(6) Loans
Loans receivable are summarized as follows:
June 30, September 30,
2003 2002
----------------------------------------------------------------------------------------------------------------------
(In thousands)
First mortgage -- one- to four-family .................................... $ 225,779 $ 251,702
First mortgage -- residential construction ............................... 58,689 62,973
First mortgage -- multi-family ........................................... 155,024 158,320
Commercial real estate ................................................... 397,891 395,473
Home equity .............................................................. 309,670 276,437
Commercial ............................................................... 125,366 148,716
Consumer secured by real estate .......................................... 49,281 56,231
Interim financing and consumer loans ..................................... 31,875 25,055
Indirect auto ............................................................ 1,894 5,598
Education ................................................................ 1,842 917
---------- ----------
Total gross loans .................................................... 1,357,311 1,381,422
---------- ----------
Less:
Loans in process ..................................................... 44,155 43,644
Unearned insurance premiums .......................................... 51 86
Deferred loan and guarantee fees ..................................... 243 607
Purchased loan discount .............................................. 288 401
Allowance for loan losses ............................................ 14,172 14,212
---------- ----------
Total deductions ..................................................... 58,909 58,950
---------- ----------
Total loans receivable ................................................... 1,298,402 1,322,472
Less: First mortgage loans held for sale ................................. 83,139 65,006
---------- ----------
Loans receivable, net .................................................... $1,215,263 $1,257,466
========== ==========
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(7) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Nine-months ended Three-months ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- ---------- --------- ---------
(In thousands)
Beginning balance .......................... $ 14,212 $ 11,686 $ 14,265 $ 13,135
Charge-offs:
Real estate -- mortgage .................. (5) (23) - -
Commercial loans ......................... (324) (137) (71) (27)
Home equity loans ........................ (96) (2) (56) -
Consumer ................................. (293) (454) (58) (122)
--------- ---------- --------- ---------
Total charge-offs .......................... (718) (616) (185) (149)
--------- ---------- --------- ---------
Recoveries:
Real estate - mortgage ................... - 18 - -
Commercial loans ......................... 15 64 - -
Home equity loans ........................ 2 2 1 1
Consumer ................................. 24 18 7 5
--------- ---------- --------- ---------
Total recoveries ........................... 41 102 8 6
--------- ---------- --------- ---------
Net charge-offs ............................ (677) (514) (177) (143)
--------- ---------- --------- ---------
Provision .................................. 637 2,733 84 913
--------- ---------- --------- ---------
Ending balance ............................. $ 14,172 $ 13,905 $ 14,172 $ 13,905
========= ========== ========= =========
(8) Earnings Per Share
Basic earnings per share of common stock for the nine-and three-month
periods ended June 30, 2003 and 2002, 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,
2003 and 2002, 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, 2003 and September 30, 2002, have been determined by dividing total
shareholders' equity by the number of shares of common stock
outstanding at period end 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.
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
Nine-months ended Three-months ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income for the period ........................................ $ 18,891,000 $ 15,985,000 $ 6,521,000 $ 5,064,000
============ ============ ============ ============
Common shares issued ............................................. 14,579,240 14,579,240 14,579,240 14,579,240
Weighted average treasury shares ................................. 5,188,233 5,346,185 5,158,975 5,288,235
------------ ------------ ------------ ------------
Weighted average common shares
outstanding during the period ................................ 9,391,007 9,233,055 9,420,265 9,291,005
Effect of dilutive stock options outstanding ..................... 457,926 471,361 506,855 494,802
------------ ------------ ------------ ------------
Diluted weighted average common shares
outstanding during the period ................................ 9,848,933 9,704,416 9,927,120 9,785,807
============ ============ ============ ============
------------ ------------ ------------ ------------
Basic earnings per share ......................................... $ 2.01 $ 1.73 $ 0.69 $ 0.55
============ ============ ============ ============
------------ ------------ ------------ ------------
Diluted earnings per share ....................................... $ 1.92 $ 1.65 $ 0.66 $ 0.52
============ ============ ============ ============
The computation of book value per common share is as follows:
June 30, September 30,
2003 2002
------------ -------------
Common shares outstanding at the end of the period ................ 9,466,206 9,350,873
Incremental shares relating to dilutive stock
options outstanding at the end of the period ................... 566,386 427,745
------------ -------------
10,032,592 9,778,618
============ =============
Total shareholders' equity at the end of the period ............... $193,978,000 $ 179,081,000
Book value per common share ....................................... $ 19.33 $ 18.31
13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(9) 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 optionee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At June 30, 2003, 62,930 shares were reserved for future grants.
Further information concerning the options is as follows:
Nine-months ended June 30,
----------------------------------------------------------------
2003 2002
----------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
----------------------------------------------------------------
Outstanding at beginning of period ...... 1,428,508 $ 16.12 1,614,898 $ 15.74
Granted ................................. - - - -
Canceled ................................ (2,280) 18.88 (11,302) 17.03
Exercised ............................... (115,333) 11.61 (166,588) 12.32
---------- -------------- ---------- --------------
Outstanding at end of period ............ 1,310,895 $ 16.51 1,437,008 $ 16.12
========== ============== ========== ==============
Options exercisable ..................... 1,038,336 $8.38 -- 22.00 954,998 $5.00 -- 22.00
========== ============== ========== ==============
For purposes of providing the pro forma disclosures required under
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure -- an amendment of FASB Statement No. 123," ("SFAS No.
148") the fair value of stock options granted was estimated using the
Black-Scholes option pricing model. There were no options granted
during the nine and three-month periods ended June 30, 2003 and 2002.
Had compensation cost for the Company's stock-based plans been
determined in accordance with SFAS No. 148, net income and earnings
per share would have been reduced to the pro forma amounts indicated
below. This pro forma net income reflects only options granted in the
fiscal years 1997 through June 30, 2003. Therefore, the full impact of
calculating compensation cost under SFAS No. 148 is not reflected in
the pro-forma net income and earnings per share amounts.
Nine-months ended Three-months ended
June 30, June 30,
-------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------
Net income as reported ........................... $18,891,000 $15,985,000 $6,521,000 $5,064,000
Deduct stock based compensation, net of tax, that
would have been reported if the fair value based
method had been applied ........................ (311,000) (503,000) (104,000) (168,000)
-------------------------------------------------------
Pro forma net income ............................. $18,580,000 $15,482,000 $6,417,000 $4,896,000
=======================================================
Basic earnings per share As reported ........ $ 2.01 $ 1.73 $ 0.69 $ 0.55
Pro forma .......... $ 1.98 $ 1.68 $ 0.68 $ 0.53
Diluted earnings per share As reported ........ $ 1.92 $ 1.65 $ 0.66 $ 0.52
Pro forma .......... $ 1.89 $ 1.60 $ 0.65 $ 0.50
14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(10) 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:
Nine-months ended Three-months ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Federal income tax expense at statutory rate of 35% ..... $ 9,345 $ 7,750 $ 3,289 $ 2,497
State income taxes, net of Federal income tax benefit ... 984 624 354 182
Tax exempt interest ..................................... (18) (50) (1) (16)
ESOP dividend deduction ................................. (282) - (94) -
Affordable housing credits .............................. (2,295) (1,956) (758) (652)
Nondeductible acquisition costs ......................... 88 - 88 -
Other, net .............................................. (13) (211) - (228)
---------- ---------- ---------- ----------
$ 7,809 $ 6,157 $ 2,878 $ 1,783
========== ========== ========== ==========
(11) Derivative and Hedging Activities
The Company utilizes derivative hedging instruments in the course of
its asset/liability management. The hedging instruments primarily used
by the Company are interest rate swap agreements which are used to
convert fixed-rate payments or receipts to variable-rate payments or
receipts and thus hedge the Company's fair market value of the item
being hedged. The items being hedged generally expose the Company to
variability in fair value in rising or declining interest rate
environments. In converting the fixed payment or receipt to a variable
payment or receipt, the interest rate swaps effectively reduce the
variability of the fair market value of the items being hedged.
The Company's mortgage banking activities include the issuance of
commitments to extend residential mortgage loans. When the loan is
originated or purchased, it may be recorded as a mortgage loan held for
sale. The loans held for sale are hedged with forward contracts and a
fair value hedge is designated. The Company is in a short position with
forward contracts, whereby the Company agrees to sell mortgage loans
held for sale at a pre-established price at some future date, and in a
long position with the mortgage loans held for sale. The hedging
relationship is highly effective and hedges changes in the fair value
of the mortgage loans held for sale due to interest rate changes. The
change in fair value of mortgage loans held for sale is included in the
consolidated statements of income.
The Company utilizes interest rate swaps to hedge the fair value of
brokered certificates of deposit ("CDs"). The interest rate swaps that
hedge brokered CDs are matched with the CD as to final maturity,
interest payment dates and call features. The interest rate swaps are a
floating pay-fixed receive instrument and as such, they convert the
fixed rate payment on the brokered CDs to a floating rate and thus
hedge the fair value of the brokered CDs from changes in interest
rates. At June 30, 2003 and September 30, 2002, the Company did not
have any interest rate swaps outstanding.
The Company measures the effectiveness of it's hedges on a periodic
basis. Any difference between the fair value change of the hedge versus
the fair value change of the hedged item is considered to be the
"ineffective" portion of the hedge. The ineffective portion of the
hedge is recorded as an increase or decrease in the related income
statement classification of the item being hedged. If the
ineffectiveness of a hedge exceeds certain levels, the derivative would
no longer be eligible for hedge treatment and future changes in fair
value of the derivative would be recorded on the income statement.
The Company's commitments to originate mortgage loans held-for-sale and
forward loan sale commitments are considered derivatives under the
accounting standards. As such, the change in fair value of such
commitments, are recorded as an adjustment to the gains on the sale of
loans.
(12) Current Accounting Developments
The FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include
15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002. Adoption of this Standard did not materially affect the
results of operations or financial position of the Company.
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation
-- Transition and Disclosure -- an amendment of FASB Statement No. 123"
("SFAS No. 148"). This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure requirements are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS No. 149"). This Statement
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. The amendments set forth in
SFAS No. 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. SFAS No.
149 will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that
warrant separate accounting. SFAS No. 149 is to be applied
prospectively and is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June
30, 2003. Adoption of this Standard is not expected to materially
affect the results of operations or financial position of the Company.
The FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS
No. 150"). This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability. Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
Adoption of this Standard is not expected to materially affect the
results of operations or financial position of the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" which provides new accounting guidance
on when to consolidate a variable interest entity. A variable interest
entity exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or
the equity investors lack one of three characteristics associated with
owning a controlling financial interest. Those characteristics include
the direct or indirect ability to make decisions about an entity's
activities through voting rights or similar rights, the obligation to
absorb the expected loss of an entity if they occur, and the right to
receive the expected residual return of the entity if they occur.
Adoption of this Interpretation is not expected to materially affect
the results of operations or financial position of the Company.
(13) 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 segment's
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 networks, consumer lending operations, annuity and
brokerage services and call center. The segment includes a much higher
level of interest-bearing liabilities than interest-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.
16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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.
-----------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
Banking Banking Banking Investments Segments
-----------------------------------------------------------------------------------------------------------------------
(In thousands)
NINE-MONTHS ENDED JUNE 30, 2003
Net interest income ................... $ 10,764 $ 20,750 $ 7,282 $ (5,728) $ 33,068
Provision for loan losses ............. 153 145 339 - 637
Other operating income ................ 7,647 1,367 12,505 2,644 24,163
General and administrative expenses ... 17,892 2,867 4,938 597 26,294
Income taxes (benefit) ................ 126 6,561 5,098 (1,264) 10,521
-------------------------------------------------------------------------
Segment profit (loss) ................. $ 241 $ 12,544 $ 9,411 $ (2,417) $ 19,778
=========================================================================
Segment average assets ................ $ 382,958 $ 679,137 $ 233,670 $ 757,935 $2,053,700
=========================================================================
NINE-MONTHS ENDED JUNE 30, 2002
Net interest income ................... $ 11,193 $ 18,558 $ 7,187 $ (1,341) $ 35,597
Provision for loan losses ............. 1,134 1,476 123 - 2,733
Other operating income ................ 6,258 812 6,485 1,056 14,611
General and administrative expenses ... 17,011 2,555 3,902 592 24,060
Income taxes (benefit) ................ (236) 5,225 3,297 (299) 7,987
-------------------------------------------------------------------------
Segment profit (loss) ................. $ (458) $ 10,114 $ 6,349 $ (578) $ 15,428
=========================================================================
Segment average assets ................ $ 338,481 $ 664,510 $ 276,696 $ 775,008 $2,054,695
=========================================================================
THREE-MONTHS ENDED JUNE 30, 2003
Net interest income ................... $ 3,431 $ 6,771 $ 2,342 $ (1,961) $ 10,584
Provision for loan losses ............. - - 84 - 84
Other operating income ................ 2,995 362 4,446 1,300 9,103
General and administrative expenses ... 5,943 963 1,574 190 8,670
Income taxes (benefit) ................ 166 2,131 1,799 (295) 3,801
-------------------------------------------------------------------------
Segment profit(loss) .................. $ 318 $ 4,039 $ 3,330 $ (556) $ 7,132
=========================================================================
Segment average assets ................ $ 390,816 $ 674,867 $ 212,082 $ 753,449 $2,031,214
=========================================================================
THREE-MONTHS ENDED JUNE 30, 2002
Net interest income ................... $ 3,821 $ 6,747 $ 2,389 $ (134) $ 12,823
Provision for loan losses ............. 378 492 43 - 913
Other operating income ................ 2,022 195 1,258 322 3,796
General and administrative expenses ... 5,773 838 1,163 179 7,952
Income taxes (benefit) ................ (102) 1,845 787 9 2,539
-------------------------------------------------------------------------
Segment profit(loss) .................. $ (206) $ 3,767 $ 1,654 $ - $ 5,215
=========================================================================
Segment average assets ................ $ 349,151 $ 689,680 $ 250,990 $ 787,850 $2,077,671
=========================================================================
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Nine-months ended June 30, Three-months ended June 30,
2003 2002 2003 2002
------------------------------------------------------------------
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments ............................... $ 57,231 $ 50,208 $ 19,687 $ 16,619
Unallocated transfer pricing credit (primarily on
capital) ...................................... 4,127 7,244 1,285 1,841
Income from affordable housing subsidiary ........ 2,714 2,331 925 782
Holding company interest expense ................. (221) (701) (51) (158)
Elimination of intercompany interest income ...... (920) (789) (260) (251)
Other ............................................ 3,654 2,405 1,234 839
------------------------------------------------------------------
Consolidated total revenue ....................... $ 66,585 $ 60,697 $ 22,820 $ 19,672
==================================================================
PROFIT
Total for segments ............................... $ 19,778 $ 15,428 $ 7,131 $ 5,215
Unallocated transfer pricing credit (primarily on
capital)....................................... 2,476 4,346 772 1,104
Unallocated administrative and centralized support
costs (a) ..................................... (3,882) (4,231) (1,301) (1,366)
Holding company net loss ......................... (866) (899) (439) (318)
Elimination of intercompany interest income ...... (552) (473) (156) (151)
Affordable housing tax credits ................... 2,295 1,956 758 652
Other ............................................ (359) (142) (243) (72)
------------------------------------------------------------------
Consolidated net income .......................... $ 18,891 $ 15,985 $ 6,521 $ 5,064
==================================================================
AVERAGE ASSETS
Total for segments ............................... $ 2,053,700 $ 2,054,695 $ 2,031,214 $ 2,077,671
Elimination of intercompany loans ................ (16,429) (14,692) (15,923) (16,184)
Other assets not allocated ....................... 202,455 155,664 213,047 166,658
------------------------------------------------------------------
Consolidated average assets ...................... $ 2,239,726 $ 2,195,667 $ 2,228,338 $ 2,228,145
==================================================================
---------------------
(a) After-tax effect of $6.5 million and $7.1 million of general and
administrative expenses for the nine-month periods ended June 30, 2003
and 2002, respectively. After-tax effect of $2.2 million and $2.3
million of general and administrative expenses for the three-month
periods ended June 30, 2003 and 2002, respectively.
(14) Goodwill and Intangible Assets
Effective October 1, 2002, the Company adopted Financial Accounting
Statement 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
SFAS No. 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite
lives will not be amortized, but will rather be tested at least
annually for impairment. As required under SFAS No. 142, the Company
discontinued the amortization of goodwill with a net carrying value of
$12.9 million at October 1, 2001 and annual amortization of
approximately $1.2 million that resulted from business combinations
prior to the adoption of SFAS No. 142. The Company evaluates goodwill
for impairment at least annually. Impairment testing of goodwill was
completed as of October 1, 2002 and resulted in no impairment,
therefore, goodwill has a net carrying value of $12.9 million at June
30, 2003.
In addition to goodwill, the Company's other intangible assets consist
of mortgage servicing rights and other intangible assets from business
combinations which are included in other assets on the consolidated
balance sheet. Mortgage servicing rights are not subject to SFAS No.
142 but rather, are amortized over their expected life and subject to
periodic impairment testing. The results for the nine-and three-month
periods ended June 30, 2003 include charges of $3.9 million and $1.3
million, respectively, related to an impairment write-down of the
Company's mortgage servicing rights. The write-down was the result of
an increase in forecasted prepayment speeds, which resulted primarily
from the current lower interest rate environment. At June 30, 2003 and
September 30, 2002 the valuation reserve totaled $7.0 million and $3.1
million, respectively. The Company's other intangible assets resulted
from the purchase of deposits. This acquisition did not meet the
definition of a business combination under SFAS No. 147, "Acquisitions
of Certain Financial Institutions," therefore, it is not required to be
accounted for in accordance with SFAS No. 141 and SFAS No. 142. Changes
in the carrying value of capitalized mortgage servicing rights are
summarized as follows:
18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
As of and for the As of and for
9 months ended the year ended
June 30, September 30,
2003 2002
----------------- --------------
(In thousands)
Mortgage servicing rights, balance at beginning of period ................. $ 6,145 $ 6,287
Servicing rights capitalized .......................................... 6,125 4,926
Amortization of servicing rights ...................................... (2,010) (1,968)
Impairment of servicing rights ........................................ (3,855) (3,100)
---------- ----------
Mortgage servicing rights, balance at end of period ....................... $ 6,405 $ 6,145
========== ==========
Mortgage servicing rights, market value ................................... $ 6,426 $ 6,496
========== ==========
Intangible assets from business combinations, carrying and market value ... $ 426 $ 460
========== ==========
Amortization expense for the mortgage servicing rights asset are based
on assumptions made during each reporting period. Such assumptions
include, but are not limited to, the current level of interest rates
and the forecast prepayment speeds as estimated by major mortgage
dealers. Actual amortization expense is also affected by the amount of
loans sold with servicing retained. At June 30, 2003, the Company
services $869.3 million in mortgage loans for others, compared to
$768.7 million at September 30, 2002. Intangible assets from business
combinations are amortized on a straight-line method.
Actual amortization expense is as follows:
Nine-months ended Three-months ended
June 30, June 30,
---------------------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
Amortization of mortgage servicing rights ........................ $ 2,010 $ 1,452 $ 750 $ 513
Amortization of intangible assets from business combinations ..... 34 - 12 -
The following table shows the future estimated amortization expense for
originated mortgage servicing rights based on existing balances and the
interest rate environment as of June 30, 2003. The Company's actual
amortization expense in any given period may be significantly different
from the estimated amounts displayed depending on changes in mortgage
interest rates, estimated prepayment speeds, additional recognition of
servicing on loans sold in the future and market conditions.
Estimated future amortization expense: Amount
-----------------------------------------------------------------------------------------
(In thousands)
Three-months ended September 30, 2003 ............................ $ 753
For the year ended September 30, 2004 ............................ 2,347
For the year ended September 30, 2005 ............................ 1,091
For the year ended September 30, 2006 ............................ 690
For the year ended September 30, 2007 ............................ 435
For the year ended September 30, 2008 and thereafter ............. 1,088
19
ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operation
FORWARD-LOOKING STATEMENTS
This Report contains certain forward looking statements with respect to the
financial condition, results of operations and business of St. Francis Capital
Corporation (the "Company") and its wholly owned subsidiary, St. Francis Bank
(the "Bank"). The Company cautions readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors could affect the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected. Such factors include, but are
not limited to: (i) general market rates, (ii) general economic conditions,
(iii) legislative/regulatory changes, (iv) monetary and fiscal policies of the
U.S. Treasury and Federal Reserve, (v) changes in the quality or composition of
the Company's loan and investment portfolios, (vi) demand for loan products,
(vii) deposit flows, (viii) competition, (ix) demand for financial services in
the Company's markets, and (x) changes in accounting principles, policies or
guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Company's total assets at June 30, 2003 were $2.25 billion, a decrease of
$85 million from $2.34 billion at September 30, 2002. Loans receivable,
including mortgage loans held for sale, decreased $24.1 million from September
30, 2002 as declines in one- to four-family and commercial loans were partially
offset by increases in home equity loans. Total capital increased to $194.0
million at June 30, 2003 compared with $179.1 million at September 30, 2002. The
Company's ratio of shareholders' equity to total assets was 8.60% at June 30,
2003, compared to 7.66% at September 30, 2002. The Company's book value per
share was $19.33 at June 30, 2003, compared to $18.31 at September 30, 2002.
The restructuring of the balance sheet continues to be one of the strategic
initiatives of the Company. During the past three years the Company has reduced
the size of its mortgage-backed securities and investment securities portfolios
as repayments, scheduled maturities and sales occur. Funds received from these
repayments, maturities and sales have been and are expected to be used to grow
and diversify the Company's loan portfolio, to reduce the Company's wholesale
debt and as an additional source of liquidity. This restructuring is part of a
long-range plan to make the Company's balance sheet composition more
representative of "community banks" with a greater percentage of assets in our
loan portfolio as opposed to investments. Management anticipates that this
restructuring should improve the Company's margins due to the generally higher
interest rates on loans, and depending on the growth in the loan portfolio, this
will continue to be an ongoing initiative of the Company in fiscal 2003.
Loans receivable, including mortgage loans held for sale, decreased $24.1
million to $1.30 billion at June 30, 2003 from $1.32 billion at September 30,
2002. During the nine-month period ended June 30, 2003, one- to four-family
loans decreased $30.2 million, commercial loans decreased $23.4 million,
multi-family mortgage loans decreased $3.3 million and consumer and interim
financing loans decreased $2.9 million, offset by an increase of $33.3 million
in home equity loans and an increase of $2.4 million in commercial real estate
loans. The Company's one- to four-family mortgage loan portfolio has a
significant level of adjustable-rate loans and during periods of declining or
generally low interest rates, the customers generally convert adjustable-rate
loans to fixed-rate loans. However, fixed-rate loans are generally sold in the
secondary market and are not maintained on the Company's balance sheet. The
commercial loan portfolio has decreased due to a reduction in the Company's
syndicated loan credits.
For the nine-month period ended June 30, 2003, the Company originated
approximately $1.06 billion in loans, as compared to $785.2 million for the same
period in the prior year. Of the $1.06 billion in loans originated, $625.8
million were first mortgage loans, $182.1 million were home equity loans, $85.9
million were commercial real estate loans, $76.5 million were consumer and
interim financing loans, $52.4 million were multi-family loans and $36.9 million
were commercial loans. For the nine-month period ended June 30, 2003, the
Company purchased $451.1 million one- to four-family loans, as compared to
$232.6 million for the same period in the prior year. The increase in loans
purchased during the current year is primarily due to increased activity in the
Company's mortgage banking operation in Illinois. For the nine-month period
ended June 30, 2003, the Company sold $1.02 billion one- to four-family loans,
as compared to $542.9 million for the same period in the prior year. During
periods of declining or generally low interest rates, the Company originates
more fixed rate loans, which are generally sold in the secondary market.
Mortgage-backed and related securities, including securities available for sale,
decreased $79.6 million to $629.2 million at June 30, 2003 from $708.8 million
at September 30, 2002. The decreases were due to accelerated repayments,
scheduled maturities and sales during the period. The decrease in
mortgage-backed securities was partially offset by purchases of $933.5 million
during the nine-month period ended June 30, 2003. Debt and equity securities
increased $48.2 million to $64.8 million at June 30, 2003 from $16.6 million at
September 30, 2002. The increase was due to purchases of $93.6 million,
partially offset by scheduled maturities of $14.9 million and sales of $30.5
million. The increase in the debt and equity securities portfolio during the
nine-
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
month period ended June 30, 2003, was the result of the decline in the Company's
loan portfolio. As noted above, depending on the growth in the loan portfolio,
management anticipates balance sheet restructuring will continue to be an
ongoing initiative of the Company in fiscal 2003.
Deposits decreased $59.5 million to $1.36 billion at June 30, 2003 from $1.42
billion at September 30, 2002. The decrease in deposits was due primarily to
decreases of $93.5 million in certificates of deposit, partially offset by
increases of $20.3 million in checking accounts, $11.0 million in money market
demand account deposits and $2.7 million in passbook accounts. At June 30, 2003,
the Company had approximately $91.2 million in brokered certificates of deposit
compared with $191.4 million at September 30, 2002. The brokered deposits are
generally for terms of three months to three years. 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 level of deposit flows during any given period is heavily
influenced by factors such as the general level of interest rates as well as
alternative yields that investors may obtain on competing instruments, such as
money market mutual funds. The Company believes that the likelihood for
retention of brokered certificates of deposit is more a function of the rate
paid on such accounts, as compared to retail deposits which may be established
due to branch location or other undefined reasons.
Advances and other borrowings increased by $25.7 million to $667.8 million at
June 30, 2003 from $642.1 million at September 30, 2002. Short-term borrowings
increased $54.2 million to $659.4 million at June 30, 2003, compared to $605.2
million at September 30, 2002. At June 30, 2003, $445.0 million of the
short-term borrowings were callable Federal Home Loan Bank ("FHLB") advances
with maturities from two years to eight years and are callable by the FHLB
during the next fiscal year and quarterly thereafter. Long-term borrowings
decreased $28.4 million to $8.4 million at June 30, 2003, compared to $36.8
million at September 30, 2002. At June 30, 2003, the Company had additional
borrowing capacity of $280.8 million available from the FHLB.
RESULTS OF OPERATIONS
NET INCOME. Net income for the nine-month period ended June 30, 2003 was $18.9
million compared with $16.0 million for the nine-month period ended June 30,
2002. Net income for the three-month period ended June 30, 2003 was $6.5 million
compared with $5.1 million for the three-month period ended June 30, 2002. Net
income for the nine-and three-month periods ended June 30, 2003 increased due to
an increase in other operating income, due primarily to increases in gains on
sales of loans. Such increases were partially offset by charges of $3.9 million
and $1.3 million, respectively, related to an impairment write-down of the
Company's mortgage servicing rights. (For further information see footnote 14 in
"Notes to Unaudited Consolidated Financial Statements" on page 18 and discussion
of "Other Operating Income" on page 25).
The following table shows the return on average assets and return on average
equity ratios for each period:
Nine-months ended Three-months ended
June 30, June 30,
----------------- ------------------
2003 2002 2003 2002
------ ------ ------ ------
Return on average assets ................. 1.13% 0.97% 1.17% 0.91%
Return on average equity ................. 13.55% 12.73% 13.68% 11.86%
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $5.0 million or 12.0% to $36.7 million for the nine-month period ended
June 30, 2003 compared to $41.7 million for the same period in the prior year.
Net interest income before provision for loan losses decreased $2.6 million or
18.3% to $11.8 million for the three-month period ended June 30, 2003 compared
to $14.4 million for the same period in the prior year. The decrease in net
interest income is a result of a decrease in the Company's net interest margin,
partially offset by an increase in average earning assets. The net interest
margin decreased to 2.32% and 2.24% for the nine and three-month periods ended
June 30, 2003, respectively, compared with 2.69% and 2.75% for the same periods
in the prior year. The low interest rate environment affects the Company's net
interest margin as the yield on earning assets declines to reflect new rates.
The cost of liabilities is no longer decreasing as rapidly as the decrease in
the yield on earning assets because deposit rates are near their lowest level
and have little room for further downward adjustment. The Company's interest
rate
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
sensitivity as measured by it's one-year interest rate gap position is also
positive, which implies an increase in net interest income in a rising rate
environment or a decrease in net interest income in a falling rate environment.
Total interest income decreased $14.0 million or 15.1% to $79.3 million and $5.4
million or 17.8% to $25.2 million, respectively, for the nine-and three-month
periods ended June 30, 2003 compared to $93.3 million and $30.6 million,
respectively, for the same periods in the prior year. The decrease in interest
income was primarily the result of decreases in interest on loans,
mortgage-backed and related securities and debt and equity securities. The
decrease in interest income on loans was the result of a decrease in the average
yield on loans to 6.07% from 6.92% for the nine-month period ended June 30, 2003
and 2002, respectively, partially offset by an increase in the average balance
of loans to $1.31 billion from $1.28 billion for the same period. The decrease
in interest income on loans was the result of a decrease in the average yield on
loans to 5.85% from 6.69% for the three-month period ended June 30, 2003 and
2002, respectively, partially offset by an increase in the average balance of
loans to $1.30 billion from $1.29 billion for the same period.
The decrease in interest income on mortgage-backed and related securities was
due to a decrease in the average balance of such securities to $660.3 million
from $680.6 million for the nine-month periods ended June 30, 2003 and 2002,
respectively, and a decrease in the average yield on such securities to 2.97%
from 4.53% for the same periods. The decrease in interest income on
mortgage-backed and related securities for the three-month period ended June 30,
2003 compared to the three-month period ended June 30, 2002 was due to a
decrease in the average balance of such securities to $627.1 million from $676.1
million, respectively, and a decrease in the average yield on such securities to
2.65% from 4.49% for the same periods. The decrease in interest on debt and
equity securities was the result of a decrease in the average balance of such
securities to $33.3 million from $41.1 million for the nine-month periods ended
June 30, 2003 and 2002, respectively, and a decrease in the average yield on
such securities to 2.76% from 4.44% for the same periods. The decrease in
interest income on debt and equity securities for the three-month period ended
June 30, 2003 compared to the three-month period ended June 30, 2002 was due to
a decrease in the average balance of such securities to $64.3 million from $67.0
million, and a decrease in the average yield on such securities to 2.65% from
4.49% for the same periods. The amortization of original purchase premium or
discount is included as part of interest income on mortgage-backed and related
securities. For the nine-and three-month periods ended June 30, 2003, such
amortization reduced interest income by $6.3 million and $2.2 million,
respectively, compared to $1.5 million and $573,000 for the nine-and three-month
periods ended June 30, 2002. The increase in the amortization is due to the
higher level of prepayments within the mortgage-backed and related securities
portfolio caused by the generally lower level of interest rates. See "Financial
Condition" for a further discussion of the Company's balance sheet restructuring
activities.
Total interest expense decreased $9.1 million or 17.5% to $42.6 million for the
nine-month period ended June 30, 2003, compared to $51.7 million for the
nine-month period ended June 30, 2002. For the three-month period ended June 30,
2003, total interest expense decreased $2.8 million or 17.3% to $13.4 million
compared to $16.2 million for the three-month period ended June 30, 2002. The
decrease in interest expense was the result of decreases in the cost of deposits
and advances and other borrowings, as well as decreases in the average balances
of deposits. The average cost of deposits decreased to 2.09% and 1.94% for the
nine-and three-month periods ended June 30, 2003, respectively, from 2.85% and
2.55% for the same periods in the prior year. The average balances of deposits
decreased to $1.28 billion and $1.25 billion for the nine-and three-month
periods ended June 30, 2003, respectively, as compared to $1.33 billion and
$1.31 billion for the same periods in the prior year. See "Financial Condition"
for a further discussion of the Company's deposit base. The average balance of
advances and other borrowings increased to $655.3 million and $669.6 million for
the nine-and three-month periods ended June 30, 2003, respectively, as compared
to $593.2 million and $643.9 million for the same periods in the prior year. The
average cost of advances and other borrowings decreased to 4.61% and 4.43% for
the nine-and three-month periods ended June 30, 2003, respectively, from 5.22%
and 4.95% for the same periods in the prior year. The decrease in the cost of
borrowings is due to 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, 2003 and 2002, respectively. Tax-exempt investments are not
material and the tax-equivalent method of presentation is not included in the
schedule.
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
NINE-MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits .. $ 2,374 $ 20 1.13 % $ 2,799 $ 38 1.82%
Debt and equity securities ................. 33,291 687 2.76 41,127 1,365 4.44
Mortgage-backed and related securities...... 660,311 14,675 2.97 680,577 23,075 4.53
Loans:
First mortgage ........................... 803,525 38,590 6.42 793,609 43,124 7.27
Home equity .............................. 295,071 10,469 4.74 236,151 10,130 5.74
Consumer ................................. 87,767 5,205 7.93 102,176 6,349 8.31
Commercial and agricultural .............. 127,048 5,381 5.66 149,412 6,724 6.02
----------------------- ----------------------
Total loans .......................... 1,313,411 59,645 6.07 1,281,348 66,327 6.92
Federal Home Loan Bank stock ............... 102,560 4,244 5.53 64,118 2,518 5.25
----------------------- ----------------------
Total earning assets ................. 2,111,947 79,271 5.02 2,069,969 93,323 6.03
---------- ----------
Valuation allowances ....................... (12,341) (11,026)
Cash and due from banks .................... 34,778 32,761
Other assets ............................... 105,342 103,963
----------- ----------
Total assets ......................... $ 2,239,726 $2,195,667
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 99,660 151 0.20 $ 89,036 203 0.30
Money market demand accounts ............. 388,042 1,859 0.64 431,271 4,459 1.38
Passbook ................................. 97,564 354 0.49 89,677 535 0.80
Certificates of deposit .................. 698,139 17,656 3.38 724,311 23,268 4.30
----------------------- ----------------------
Total interest-bearing deposits ............. 1,283,405 20,020 2.09 1,334,295 28,465 2.85
Advances and other borrowings ............... 655,266 22,575 4.61 593,219 23,181 5.22
Advances from borrowers for taxes and
insurance .................................. 5,628 5 0.12 5,859 8 0.18
----------------------- ----------------------
Total interest-bearing liabilities ... 1,944,299 42,600 2.93 1,933,373 51,654 3.57
Non interest-bearing deposits ............... 97,048 78,616
Other liabilities ........................... 11,977 15,737
Shareholders' equity ........................ 186,402 167,941
----------- ----------
Total liabilities and shareholders' equity .. $ 2,239,726 $2,195,667
=========== ==========
Net interest income ......................... $ 36,671 $ 41,669
========== ==========
Net yield on interest-earning assets ........ 2.32 2.69
Interest rate spread ........................ 2.09 2.46
Ratio of earning assets to
interest-bearing liabilities ............... 108.62 107.07
THREE-MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits .. $ 1,660 $ 5 1.21 % $ 981 $ 3 1.23%
Debt and equity securities ................. 64,321 401 2.50 66,967 734 4.40
Mortgage-backed and related securities...... 627,117 4,146 2.65 676,073 7,565 4.49
Loans:
First mortgage ........................... 783,915 12,090 6.19 790,725 13,973 7.09
Home equity .............................. 305,427 3,533 4.64 250,487 3,293 5.27
Consumer ................................. 85,413 1,633 7.67 98,592 2,006 8.16
Commercial and agricultural .............. 124,718 1,687 5.43 150,646 2,252 6.00
----------------------- ----------------------
Total loans .......................... 1,299,473 18,943 5.85 1,290,450 21,524 6.69
Federal Home Loan Bank stock ............... 110,102 1,701 6.20 64,958 810 5.00
----------------------- ----------------------
Total earning assets ................. 2,102,673 25,196 4.81 2,099,429 30,636 5.85
---------- ---------
Valuation allowances ....................... (12,985) (13,060)
Cash and due from banks .................... 35,122 35,775
Other assets ............................... 103,528 106,001
----------- ----------
Total assets ......................... $ 2,228,338 $2,228,145
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 102,538 46 0.18 $ 92,732 59 0.26
Money market demand accounts ............. 392,236 536 0.55 409,955 1,060 1.04
Passbook ................................. 102,846 116 0.45 93,047 146 0.63
Certificates of deposit .................. 649,187 5,335 3.30 712,923 7,044 3.96
----------------------- ----------------------
Total interest-bearing deposits ............. 1,246,807 6,033 1.94 1,308,657 8,309 2.55
Advances and other borrowings ............... 669,614 7,401 4.43 643,855 7,938 4.95
Advances from borrowers for taxes and
insurance .................................. 5,578 1 0.07 5,669 2 0.14
----------------------- ----------------------
Total interest-bearing liabilities ... 1,921,999 13,435 2.80 1,958,181 16,249 3.33
Non interest-bearing deposits ............... 103,718 84,394
Other liabilities ........................... 11,411 14,309
Shareholders' equity ........................ 191,210 171,261
----------- ----------
Total liabilities and shareholders' equity .. $ 2,228,338 $2,228,145
=========== ==========
Net interest income ......................... $ 11,761 $ 14,387
========== =========
Net yield on interest-earning assets ........ 2.24 2.75
Interest rate spread ........................ 2.00 2.52
Ratio of earning assets to
interest-bearing liabilities ............... 109.40 107.21
23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
Nine-months ended Three-months ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in thousands)
Beginning balance .................... $ 14,212 $ 11,686 $ 14,265 $ 13,135
Provision for loan losses ............ 637 2,733 84 913
Recoveries ........................... 41 102 8 6
Charge-offs .......................... (718) (616) (185) (149)
-------- -------- -------- --------
Ending balance ....................... $ 14,172 $ 13,905 $ 14,172 $ 13,905
======== ======== ======== ========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period ................... 1.04% 1.02% 1.04% 1.02%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ............... 423.17% 447.25% 423.17% 447.25%
Ratio of net charge-offs to average
gross loans (annualized) ........ 0.07% 0.05% 0.05% 0.04%
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through a
provision for loan losses. The allowance is based upon past loan loss experience
and other factors, which in management's judgment, deserve current recognition
in estimating loan losses. The evaluation includes a review of all loans on
which full collectibility may not be reasonably assured. Other factors
considered by management include the size and character of the loan portfolio,
concentrations of loans to specific borrowers or industries, existing economic
conditions and historical losses on each portfolio category. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties which collateralize loans.
With respect to loans that are deemed impaired, the calculation of allowance for
loan losses is based upon the discounted present value of expected cash flows
received from the debtor or other measures of market prices or collateral
values.
In general, the level of the allowance for loan losses and changes during each
fiscal year is a function of several factors, including but not limited to
changes in the loan portfolio, net charge-offs and non-performing loans. Gross
loans receivable were $1.36 billion for both of the periods ended June 30, 2003
and 2002, respectively. Net charge-offs for the nine and three-month periods
ended June 30, 2003 were $677,000 and $177,000, respectively, compared to
$514,000 and $143,000 for the nine and three-month periods ended June 30, 2002.
Non-performing loans increased to $3.3 million or 0.25% of gross loans at June
30, 2003 compared to $2.2 million or 0.16% of gross loans at September 30, 2002.
For the nine and three-month periods ended June 30, 2003, the provision for loan
losses was $637,000 and $84,000, respectively, compared to $2.7 million and
$913,000, respectively, for the same periods in the prior year.
Management believes that the allowance for loan losses at June 30, 2003 is
adequate to absorb probable losses inherent in the portfolio. Management
believes it uses the best information available to make such determinations. If
circumstances differ substantially from the assumptions used in making
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States of America,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting the borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary should the quality of any loans deteriorate as a result of
factors discussed herein.
24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
OTHER OPERATING INCOME. Other operating income increased by $10.9 million to
$29.9 million and by $5.8 million to $11.1 million for the nine and three-month
periods ended June 30, 2003, compared to the same periods in the prior year. The
following table shows the percentage of other operating income to average assets
for each period:
Nine-months ended Three-months ended
June 30, June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
--------- ---------- --------- ----------
(Dollars in thousands)
Other operating income.................... $ 29,914 $ 19,028 $ 11,059 $ 5,285
Percent of average assets (annualized).... 1.79% 1.16% 1.99% 0.95%
The results for the nine-and three-month periods ended June 30, 2003 include
charges of $3.9 million and $1.3 million, respectively, related to an impairment
write-down of the Company's mortgage servicing rights, compared with $900,000
for the nine-and three-month periods ended June 30, 2002. The impairment
write-down is recorded as a valuation reserve at June 30, 2003 and 2002. The
Company's mortgage servicing rights are accounted for at the lower of book or
market value. As part of the calculation of the market value of mortgage
servicing rights, the Company calculates the present value of the future stream
of servicing fee income expected to be received from its mortgage loan servicing
portfolio, relying in part on median loan prepayment speeds as forecast by the
major mortgage dealers. These mortgage dealer forecasts utilize a number of
assumptions, including an assumption as to the future direction of interest
rates. During the nine-and three-month periods ended June 30, 2003, the
forecasted prepayment speeds have increased significantly as compared to the
previous period (reflecting forecasts for continued low interest rates and a
correspondingly high level of mortgage repayments and refinancings) and resulted
in the impairment write-downs. The Company services $869.3 million in mortgage
loans for others, with those servicing rights valued, net of valuation
allowances of $7.0 million, at $6.4 million as of June 30, 2003.
Other than the aforementioned impairment on mortgage servicing rights, the
increase for the nine-and three-month periods ended June 30, 2003 was due
primarily to gains on the sale of loans, loan-related fees and depository fees
and service charges. Gains on the sale of mortgage loans increased to $16.4
million and $5.9 million for the nine-and three-month periods ended June 30,
2003, respectively, compared to gains of $7.6 million and $2.3 million for the
same periods in the prior year. The Company's volume of mortgage loan sales were
$1.02 billion and $349.5 million for the nine and three-month periods ended June
30, 2003, respectively, compared to $542.9 million and $148.7 million for the
same periods in the prior year. The level of loan sale activity is highly
dependent on the interest rate environment and on the types of mortgage loans
originated. In the recent low interest rate environment, customers are more
likely to select or refinance into fixed-rate mortgages, which the Company then
generally sells in the secondary market. Loan servicing and loan related fees
increased to $4.9 million and $1.6 million for the nine-and three-month periods
ended June 30, 2003, respectively, compared to $3.0 million and $849,000 for the
nine-and three-month periods ended June 30, 2002, respectively. The increase in
other loan-related fees included higher levels of a variety of fees including
servicing revenues on loans sold, prepayment penalties, loan modification fees
and other loan origination fees, which were also attributable to increased loan
activity in the recent low interest rate environment. Depository fees and
service charges increased to $5.5 million and $2.3 million for the nine-and
three-month periods ended June 30, 2003, respectively, compared to $4.2 million
and $1.4 million for the nine-and three-month periods ended June 30, 2002,
respectively. The Company continues to experience increases in its retail
deposit base, particularly in checking accounts, and the related fee income
generated.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $3.4 million or 9.6% to $39.3 million and increased $1.4 million or
12.0% to $13.3 million for the nine and three-month periods ended June 30, 2003,
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:
Nine-months ended Three-months ended
June 30, June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
--------- ---------- --------- ----------
(Dollars in thousands)
General and administrative expenses....... $ 39,248 $ 35,822 $ 13,337 $ 11,912
Percent of average assets (annualized).... 2.34% 2.18% 2.40% 2.14%
25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The increase is primarily due to additional levels of compensation, including
increased commissions and incentive pay related to the Company's increased loan
origination activity, higher benefit costs and normal merit pay increases at the
start of the Company's fiscal year. Including commissions and salaries, mortgage
loan related compensation increased by approximately $1.7 million and $591,000
for the nine-and three-month periods ended June 30, 2003, respectively, compared
to the prior year. These increases were comprised primarily of commission
compensation and additional salary and benefit compensation, which were directly
related to the extremely high level of mortgage activity fostered by the low
interest rate environment. In addition, expenses related to the pending merger
with MAF Bancorp, Inc. were $456,000 and $353,000 for the nine-and three-month
periods ended June 30, 2003.
INCOME TAX EXPENSE. Income tax expense increased to $7.8 million and $2.9
million for the nine and three-month periods ended June 30, 2003, compared to
$6.2 million and $1.8 million for the same periods in the prior year. The
effective tax rates for the nine and three-month periods ended June 30, 2003
were 29.25% and 30.62%, respectively, compared with 27.81% and 26.04% for the
nine and three-month periods ended June 30, 2002. The changes in the effective
tax rate is primarily due to the increased amount of income, partially offset by
increases in affordable housing credits during the nine and three-month periods
ended June 30, 2003. The income tax credits received on the Company's affordable
housing investments were $2.3 million and $758,000 for the nine and three-month
periods ended June 30, 2003, respectively, compared with $2.0 million and
$652,000 for the same periods in the prior year. At June 30, 2003 the Company
had investments in 14 affordable housing projects compared to investments in 12
projects at June 30, 2002.
ASSET QUALITY
Total non-performing assets were $4.2 million, or 0.19% of total assets at June
30, 2003, compared with $4.1 million, or 0.18% of total assets at September 30,
2002. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure.
Non-performing assets are summarized as follows:
June 30, September 30,
2003 2002
---------- -------------
(Dollars in thousands)
Non-performing loans .................. $ 3,349 $ 2,209
Foreclosed properties ................. 847 1,908
---------- ----------
Non-performing assets ................. $ 4,196 $ 4,117
========== ==========
Performing troubled debt restructurings ... $ 1,044 $ 2,440
Non-performing loans to gross loans ....... 0.25% 0.16%
Non-performing assets to total assets ..... 0.19% 0.18%
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.
Impaired loans totaled $3.5 million at June 30, 2003 compared to $2.0 million at
September 30, 2002. These loans had associated impairment reserves of $346,000
and $696,000 at June 30, 2003 and September 30, 2002, respectively. For the
nine-month period ended June 30, 2003, the average balance of impaired loans was
$3.2 million compared to $9.2 million for the nine-month period ended June 30,
2002 and $6.3 million for the year ended September 30, 2002. Interest income on
impaired loans for the nine-month periods ended June 30, 2003 and 2002 was
$147,000 and $208,000, 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 attempts to control this risk through pricing of assets and
liabilities and maintaining specific levels of maturities. Generally, the
Company is subject to decreases in the net interest margin in rising rate
environments and increases in the net interest margin in falling interest rate
environments.
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
At June 30, 2003, the Company's estimated cumulative one-year gap between assets
and liabilities was a positive 2.66% of total assets. The Company's three-year
cumulative gap as of June 30, 2003 was a positive 0.21% of total assets. A
positive gap occurs when a greater dollar amount of interest-earning assets are
repricing or maturing than interest-bearing liabilities. The change in the
Company's gap position is due to the decline in interest rates during fiscal
2002 and 2003. As interest rates declined, the terms of the Company's assets
shortened as prepayments of the Company's mortgage-related assets increased and
the terms of the liabilities lengthened as consumers invested in longer term
certificates of deposit and the Company issued longer term brokered certificates
of deposit.
With a positive gap position, during periods of rising interest rates it is
expected that the yield of the Company's interest-earning assets will rise more
quickly than the cost on its interest-bearing liabilities, which will have a
positive 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.
The Company's interest rate risk position, as defined by gap, is dynamic as
interest rates change. While static gap analysis may be a useful measure of
determining short-term risk to future net income under certain circumstances, it
does not measure the sensitivity of the market value of assets and liabilities
to changes in interest rates. For example, gap analysis is limited in its
ability to predict trends in future earnings and makes no assumptions about
changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the market
interest rate environment. In the event market interest rates increase
significantly from the current rates at June 30, 2003, the Company expects that
its one-year positive gap would become negative due to the anticipated
shortening of the terms of the Company's fixed rate callable FHLB advances
becoming callable. In addition, prepayments of the Company's mortgage-related
assets will slow causing a lengthening in the terms of these assets.
27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of June 30, 2003.
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Residential ..................... $ 20,519 $ 43,024 $ 52,805 $ 15,271 $ 38,216 $ 169,835
Commercial ...................... 149,236 150,005 225,311 60,812 65,867 651,231
Consumer ........................ 313,029 24,966 21,753 20,006 14,443 394,197
Mortgage-backed and related
securities............................ 9,180 18,637 39,640 17,745 6,034 91,236
Assets available for sale:
Mortgage loans .................. 83,139 - - - - 83,139
Fixed rate mortgage related ..... 48,535 61,893 124,180 51,040 22,575 308,223
Variable rate mortgage related .. 6,363 41,415 31,595 23,331 127,007 229,711
Investment securities ........... 15,551 34,246 15,000 - - 64,797
Other assets ......................... 113,105 - - - - 113,105
---------- ---------- ---------- ---------- ---------- ----------
Total ........................... $ 758,657 $ 374,186 $ 510,284 $ 188,205 $ 274,142 $2,105,474
========== ========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts .................... $ 9,213 $ 25,055 $ 37,379 $ 16,779 $ 13,668 $ 102,094
Passbook savings accounts ....... 3,495 10,486 20,704 14,682 54,554 103,921
Money market deposit accounts ... 95,654 283,561 3,343 1,203 676 384,437
Certificates of deposit ......... 97,371 333,763 175,587 34,797 155 641,673
Borrowings (4) ....................... 184,697 29,680 328,390 125,000 - 667,767
---------- ---------- ---------- ---------- ---------- ----------
Total ........................... $ 390,430 $ 682,545 $ 565,403 $ 192,461 $ 69,053 $1,899,892
========== ========== ========== ========== ========== ==========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ......... $ 368,227 $ (308,359) $ (55,119) $ (4,256) $ 205,089 $ 205,582
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ......... $ 368,227 $ 59,868 $ 4,749 $ 493 $ 205,582
========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets .............. 16.33% 2.66% 0.21% 0.02% 9.12%
========== ========== ========== ========== ==========
-------------------
(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 5% to 85%, based on the individual
loan coupon rate and characteristics, 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 $58.9 million at June 30,
2003.
(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 33%, 14% and 99%, 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 $103,000 or 4.6% of total
assets.
(4) Fixed rate callable 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 callable FHLB advances of $320 million
maturing in one to three years and $125 million maturing in three to five
years.
28
ST. FRANCIS CAPITAL CORPORATION AND 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.
CRITICAL ACCOUNTING POLICES
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ significantly from those estimates under different assumptions and
conditions. The Company believes the following discussion addresses the
Company's most critical accounting policies, which are those that are most
important to the portrayal of the Company's financial condition and results and
require management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
ALLOWANCE FOR LOAN LOSSES -- The allowance for loan losses is a material
estimate that is particularly susceptible to significant changes in the near
term and is established through a provision for loan losses. The allowance is
based upon past loan loss experience and other factors which, in management's
judgment, deserve current recognition in estimating loan losses. The evaluation
includes a review of all loans on which full collectibility may not be
reasonably assured. Other factors considered by management include the size and
character of the loan portfolio, concentrations of loans to specific borrowers
or industries, existing economic conditions and historical losses on each
portfolio category. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties which collateralize loans. With respect to loans that are deemed
impaired, the calculation of allowance for loan losses is based upon the
discounted present value of expected cash flows received from the debtor or
other measures of market prices or collateral values.
Management believes it uses the best information available to make such
determinations. If circumstances differ substantially from the assumptions used
in making determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States of America,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting the borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary if loan quality deteriorates.
ACCOUNTING FOR INCOME TAXES -- As part of the process of preparing the
consolidated financial statements the Company is required to estimate income
taxes for federal and state purposes. This process involves estimating the
Company's actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the Company's consolidated
statements of financial condition. Management must then assess the likelihood
that the deferred tax assets will be recovered from future taxable income and to
the extent management believes that recovery is not likely, a valuation
allowance must be established. To the extent the Company establishes a valuation
allowance or increases this allowance in a period, the Company would include an
expense within the tax provision in the consolidated statements of income.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. A valuation allowance is based on
management's estimates of taxable income in the jurisdictions in which the
Company operates and the period over which deferred tax assets will be
recoverable. In the event actual results differ from these estimates, or if
management adjusts these estimates in future periods the Company may need to
establish an additional valuation allowance which could materially impact the
financial position and results of operations.
MORTGAGE SERVICING RIGHTS -- The Company recognizes as a separate asset the
rights to service mortgage loans for others. The value of mortgage servicing
rights is amortized in relation to the servicing revenue expected to be earned.
Estimating the fair value of the mortgage servicing rights involves judgment,
particularly of estimated prepayment speeds of the underlying mortgages
29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
serviced. Net income could be affected if management's estimate of the
prepayment speeds or other factors differ materially from actual prepayments.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need for
management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result.
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 $44.2 million and
$45.8 million as of June 30, 2003 and September 30, 2002, 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, 2003, the Company had
additional borrowing capacity of $280.8 million available from the FHLB.
The Company owns FHLB stock valued at $110.9 million and $90.8 million as of
June 30, 2003 and September 30, 2002, respectively. The Bank is required to own
$25.4 million of FHLB stock as of June 30 2003, therefore, the remainder of the
stock is held for investment purposes and is considered to be a liquid asset.
In fiscal 2002 the Company continued to reduce the size of its mortgage-backed
securities and investment securities portfolios as part of a strategy to
decrease the proportion of earnings from that segment of its balance sheet. The
reduction was primarily accomplished through the repayment of principal,
scheduled maturities and the sale of available-for-sale securities. Funds
generated from the repayment of principal, maturities and sales from the
mortgage-backed securities and investment securities portfolios were used to
grow and diversify the Company's loan portfolio, to reduce the Company's
wholesale debt and as an additional source of liquidity. Depending on the growth
in the loan portfolio, management anticipates that this form of "balance sheet
restructuring" will be an ongoing strategic initiative of the Company in fiscal
2003.
The Company is in the midst of a share repurchase program where it may purchase
up to 460,000 shares, or approximately five percent, of its common stock in the
open market. As of June 30, 2003, the Company had purchased 70,300 shares under
the current authorization at an average price of $20.78 per share. The Company
may purchase an additional 389,700 shares under the current authorization. The
Company's share repurchase program is funded through dividends received from the
Bank and the Company's line of credit. Due to the Company's access to liquidity,
shares repurchased have a minimal effect on the Company's liquidity.
At June 30, 2003, the Company had outstanding loan commitments including lines
of credit of $451.4 million compared to $451.1 million at September 30, 2002.
The Company had no commitments to purchase loans outstanding at either of these
dates. The Company anticipates it will have sufficient funds available to meet
its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit,
including brokered certificates, which are scheduled to mature in one year or
less at June 30, 2003 were $431.1 million compared to $414.1 million at
September 30, 2002. Management believes that a significant portion of such
deposits will remain with the Company.
Through the normal course of operations, the Company has entered into certain
contractual obligations and other commitments. Such obligations generally relate
to funding of operations through deposits or debt issuances, as well as leases
for premises and equipment. As a financial service provider the Company
routinely enters into commitments to extend credit. While contractual
obligations represent future cash requirements of the Company, a significant
portion of commitments to extend credit may expire without being drawn upon.
Such commitments are subject to the same credit policies and approval process
accorded to loans made by the Company.
30
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes significant contractual obligations and other
commitments at June 30, 2003.
Short and
Certificates of Long Term Operating
Years Ended June 30, Deposit Borrowings (1) Leases Total
--------------- -------------- ---------- ----------
(In thousands)
2004 ....................... $ 431,134 $ 214,377 $ 1,273 $ 646,784
2005 ....................... 117,806 186,250 650 304,706
2006 ....................... 57,781 142,140 581 200,502
2007 ....................... 10,109 25,000 581 35,690
2008 ....................... 24,689 100,000 581 125,270
2009 and thereafter ........ 154 - 8,751 8,905
---------- ---------- ---------- ----------
Total ...................... $ 641,673 $ 667,767 $ 12,417 $1,321,857
========== ========== ========== ==========
----------
Commitments to extend credit $ 451,443
==========
(1) Fixed-rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due. Short- and
long-term borrowings include fixed rate callable advances of $180 million
maturing in 2005, $140 million maturing in 2006, $25 million maturing in 2007
and $100 million maturing in 2008.
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:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ----------- --------- ------------ --------
(Dollars in thousands)
As of June 30, 2003:
Tangible capital.............. $ 181,080 8.09% => $ 89,585 =>4.0% => $ 111,981 => 5.0%
Core capital ................. 181,080 8.09% => 89,585 =>4.0% => 111,981 => 5.0%
Tier 1 risk-based capital..... 181,080 11.08% => 65,400 =>4.0% => 98,100 => 6.0%
Risk-based capital............ 194,915 11.92% => 130,800 =>8.0% => 163,500 => 10.0%
As of September 30, 2002:
Tangible capital.............. $ 175,889 7.57% => $ 92,971 =>4.0% => $ 116,214 => 5.0%
Core capital ................. 175,889 7.57% => 92,971 =>4.0% => 116,214 => 5.0%
Tier 1 risk-based capital..... 175,889 10.56% => 66,646 =>4.0% => 99,968 => 6.0%
Risk-based capital............ 189,793 11.39% => 133,291 =>8.0% => 166,614 => 10.0%
The capital of the Company and the Bank exceed all regulatory capital
requirements.
31
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
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, 2003.
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years To Four Years
---------------------------------------------------------------------------------------------------
Interest earning assets (Dollars in millions)
Loans:
Residential .......... $ 1.9 7.71% $ 1.1 6.36% $ 0.4 7.61% $ 0.9 7.49%
Commercial ........... 83.7 4.76% 33.4 5.85% 63.2 5.78% 67.7 5.46%
Consumer ............. 48.3 5.27% 39.5 4.85% 137.0 4.88% 129.9 4.89%
Mortgage-backed
securities:
Fixed rate ........... 140.7 3.01% 80.7 3.01% 80.7 3.01% 34.6 3.01%
Adjustable rate ...... 47.8 3.49% 15.8 3.49% 15.8 3.49% 11.7 3.49%
Debt and equity
securities .............. 49.8 3.00% 15.0 2.07% - - - -
Other .................... 113.1 6.40% - - - - - -
-------- -------- -------- --------
Total interest earning
assets .................. $ 485.3 4.39% $ 185.5 3.90% $ 297.1 4.49% $ 244.8 4.73%
======== ======== ======== ========
Interest bearing
liabilities
Deposits:
NOW accounts ......... $ 34.3 0.15% $ 18.7 0.15% $ 18.7 0.15% $ 8.4 0.15%
Passbooks ............ 14.0 0.25% 10.4 0.25% 10.3 0.25% 7.3 0.25%
Money market ......... 379.2 0.63% 1.7 0.63% 1.7 0.63% 0.6 0.63%
Certificates ......... 431.1 2.94% 117.8 3.46% 57.8 4.10% 10.1 4.16%
Borrowings
Fixed rate ........... 62.5 3.53% 210.0 5.85% 110.0 5.29% 25.0 5.02%
Adjustable rate ...... 160.3 1.18% - - - - - -
-------- -------- -------- --------
Total interest bearing
liabilities ............. $1,081.4 1.78% $ 358.6 4.58% $ 198.5 4.16% $ 51.4 3.33%
======== ======== ======== ========
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
-----------------------------------------------------------------------------
Interest earning assets (Dollars in millions)
Loans:
Residential .............. $ 6.7 7.02% $ 242.0 5.86% $ 253.0 5.92% $ 259.6
Commercial ............... 215.4 6.26% 187.8 6.41% 651.2 5.96% 668.8
Consumer ................. 14.7 7.79% 24.7 8.21% 394.1 5.25% 401.4
Mortgage-backed securities:
Fixed rate ............... 34.6 3.01% 28.2 3.01% 399.5 3.01% 400.2
Adjustable rate .......... 11.7 3.49% 127.0 3.49% 229.8 3.49% 229.7
Debt and equity
securities .................. - - - - 64.8 2.78% 64.8
Other ........................ - - - - 113.1 6.40% 113.1
-------- -------- -------- --------
Total interest earning
assets ...................... $ 283.1 5.85% $ 609.7 5.50% $2,105.5 4.92% $2,137.6
======== ======== ======== ========
Interest bearing liabilities
Deposits:
NOW accounts ............. $ 8.4 0.15% $ 13.6 0.15% $ 102.1 0.15% $ 100.0
Passbooks ................ 7.3 0.25% 54.6 0.25% 103.9 0.25% 100.4
Money market ............. 0.6 0.63% 0.6 0.63% 384.4 0.63% 384.2
Certificates ............. 24.7 4.15% 0.2 8.45% 641.7 3.21% 656.5
Borrowings
Fixed rate ............... 100.0 5.68% - - 507.5 5.37% 561.8
Adjustable rate .......... - - - - 160.3 1.18% 160.3
-------- -------- -------- --------
Total interest bearing
liabilities ................. $ 141.0 4.78% $ 69.0 0.26% $1,899.9 2.77% $1,963.2
======== ======== ======== ========
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein pursuant to Item 305 of Regulation S-K
is contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The company's senior management, with the participation of the
Company's chief executive officer and chief financial officer,
evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of June 30, 2003. Based on this evaluation, the
Company's chief executive officer and chief financial officer concluded
that, as of June 30, 2003, the disclosure controls and procedures were
(1) designed to ensure that material information relating to the
Company, including the Bank and the Bank's wholly owned subsidiaries,
is made known to the Company's chief executive officer and chief
financial officer by others within those entities, particularly during
the period in which this report was being prepared and (2) effective,
in that they provide reasonable assurance that information required to
be disclosed in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms.
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 25, 2003, the Company announced the declaration of a dividend
of $0.20 per share on the Company's common stock for the quarter ended
June 30, 2003. The dividend is payable on August 20, 2003 to
shareholders of record as of August 11, 2003. This will be the 32nd
consecutive cash dividend payment since the Company became
publicly-held in June 1993.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of St. Francis Bank, F.S.B. (1)
3.4 By-laws of St. Francis Bank, F.S.B. (1)
3.5 Articles of Amendment to the Articles of
Incorporation of Registrant (3)
4.0 Shareholders' Rights Agreement dated as of September
25, 1997 between Registrant and Firstar Trust Company
(4)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan
(1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership
Plan (1)
10.4 Credit Agreement by and between St. Francis Bank,
F.S.B. Employee Stock Ownership Trust and Registrant
(1)
10.5 St. Francis Bank, F.S.B. Management Recognition and
Retention Plan and Trust (1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock
Option Plan (1)
10.7 St. Francis Capital Corporation 1993 Stock Option
Plan for Outside Directors (1)
10.8 1986 Deferred Compensation Agreement as
Amended-Thomas R. Perz (4)
10.9 1987 Deferred Compensation Agreement-Thomas R. Perz
(1)
10.10 1988 Deferred Compensation Agreement-Edward W.
Mentzer (1)
10.11 2000 St. Francis Bank, FSB Employment
Agreement-Thomas R. Perz (5)
10.12 2000 St. Francis Capital Corporation Employment
Agreement-Thomas R. Perz (5)
10.13 1996 Amended Employment Agreement-James C. Hazzard
(5)
10.14 1997 Amended Employment Agreement-Bradley J. Smith
(5)
10.15 1998 Amended Employment Agreement-Jon D. Sorenson (5)
10.16 1998 Amended Employment Agreement-James S. Eckel (5)
10.17 St. Francis Capital Corporation 1997 Stock Option
Plan (3)
10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz
(3)
10.19 Merger agreement dated as of May 21, 2003 by and
between St. Francis Capital Corp. and MAF Bancorp,
Inc. (6)
11.1 Statement Regarding Computation of Earnings Per Share
(See footnote 8 in "Notes to Unaudited Consolidated
Financial Statements") (7)
31.1 Certification of Chief Executive Officer (7)
31.2 Certification of Chief Financial Officer (7)
32.1 Certification of Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (7)
32.2 Certification of Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (7)
(1) Incorporated by reference to exhibits filed with the
Registrant's Form S-1 Registration Statement declared
effective on April 22, 1993. (Registration Number
33-58680).
(2) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1995.
(3) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997.
(4) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1999.
(5) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 2000.
(6) Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on May 21, 2003.
(7) Filed herewith.
(b) Form 8-K:
On May 21, 2003, the Company filed a Current Report on Form
8-K to announce that MAF Bancorp, Inc. has agreed to acquire
St. Francis Capital Corporation in an all-stock transaction
with a fixed exchange ratio.
On July 25, 2003, the Company filed a Current Report on Form
8-K to announce its second quarter earnings and quarterly
dividend.
34
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 14, 2003 By: /s/ Jon D. Sorenson
----------------- ----------------------------------------
Jon D. Sorenson
Chief Financial Officer
35
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended By-laws of Registrant (2)
3.3 Stock Charter of St. Francis Bank, F.S.B. (1)
3.4 By-laws of St. Francis Bank, F.S.B. (1)
3.5 Articles of Amendment to the Articles of Incorporation of
Registrant (3)
4.0 Shareholders' Rights Agreement dated as of September 25, 1997
between Registrant and Firstar Trust Company (4)
10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan (1)
10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1)
10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan (1)
10.4 Credit Agreement by and between St. Francis Bank, F.S.B.
Employee Stock Ownership Trust and Registrant (1)
10.5 St. Francis Bank, F.S.B. Management Recognition and Retention
Plan and Trust (1)
10.6 St. Francis Capital Corporation 1993 Incentive Stock Option
Plan (1)
10.7 St. Francis Capital Corporation 1993 Stock Option Plan for
Outside Directors (1)
10.8 1986 Deferred Compensation Agreement as Amended-Thomas R. Perz
(4)
10.9 1987 Deferred Compensation Agreement-Thomas R. Perz (1)
10.10 1988 Deferred Compensation Agreement-Edward W. Mentzer (1)
10.11 2000 St. Francis Bank, FSB Employment Agreement-Thomas R. Perz
(5)
10.12 2000 St. Francis Capital Corporation Employment
Agreement-Thomas R. Perz (5)
10.13 1996 Amended Employment Agreement-James C. Hazzard (5)
10.14 1997 Amended Employment Agreement-Bradley J. Smith (5)
10.15 1998 Amended Employment Agreement-Jon D. Sorenson (5)
10.16 1998 Amended Employment Agreement-James S. Eckel (5)
10.17 St. Francis Capital Corporation 1997 Stock Option Plan (3)
10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz (3)
10.19 Merger agreement dated as of May 21, 2003 by and between St.
Francis Capital Corp. and MAF Bancorp, Inc. (6)
11.1 Statement Regarding Computation of Earnings Per Share (See
footnote 8 in "Notes to Unaudited Consolidated Financial
Statements") (7)
31.1 Certification of Chief Executive Officer (7)
31.2 Certification of Chief Financial Officer (7)
32.1 Certification of Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (7)
32.2 Certification of Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (7)
(1) Incorporated by reference to exhibits filed with the Registrant's Form S-1
Registration Statement declared effective on April 22, 1993. (Registration
Number 33-58680).
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on May 21, 2003.
(7) Filed herewith.
36