10-Q 1 c67498e10-q.txt QUARTERLY REPORT ENDED 12/31/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 Commission File Number 0-21298 ST. FRANCIS CAPITAL CORPORATION ------------------------------- (Exact name of Registrant as Specified in its Charter) WISCONSIN 39-1747461 ----------------------------- --------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203 --------------------------------------------------------------- (Address of Principal Executive Offices, Including Zip Code) (262) 787-8700 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes x No --------- ---------- (2) Yes x No --------- ---------- The number of shares outstanding of the issuer's common stock, $.01 par value per share, was 9,183,446 at January 31, 2002. ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY CONTENTS

ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Income (Unaudited)

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)

See accompanying Notes to Unaudited Consolidated Financial Statements 5 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flow (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements 6 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flow, cont. (Unaudited)

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 three month period ended December 31, 2001 are not necessarily indicative of the results which may be expected for the entire year ending September 30, 2002. 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, 2001. Certain previously reported balances have been reclassified to conform with current year presentation. (3) Commitments and Contingencies The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for the commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments that are reflected in the consolidated financial statements. The contractual or notional amounts of off-balance sheet financial instruments are as follows:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 45 days or less or other termination clauses and may require a fee. Fixed rate loan commitments as of December 31, 2001 have interest rates ranging from 5.875% to 9.875%. 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 8 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued 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 December 31, 2001, appraised values of the real estate collateral exceeded the amount of the guarantees. Interest rate swap agreements generally involve the exchange of fixed and variable rate interest rate payments without the exchange of the underlying notional amount on which the interest rate payments are calculated. The notional amounts of these agreements represent the amounts on which interest payments are exchanged between the counterparties. The notional amounts do not represent direct credit exposures. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties on interest rate payments, but does not expect any counterparty to fail to meet their obligations. Interest receivable or payable on interest rate swaps is recognized using the accrual method. The use of interest rate swaps enables the Company to synthetically alter the repricing characteristics of designated interest-bearing assets and liabilities. At December 31, 2001, the Company had $60 million in fixed receive-floating pay agreements with maturity dates ranging from 2008 to 2009 and call dates ranging from January 2002 to June 2002. The agreements have fixed interest rates ranging from 5.85% to 6.30% and variable interest rates ranging from 1.72% to 2.33%. 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. The commitments to fund equity investments represent amounts St. Francis Equity Properties, Inc. ("SFEP") is committed to invest in low-income housing projects which would qualify for tax credits under Section 42 of the Internal Revenue Code ("the Code"). The investment in the low-income housing projects is included in the Company's balance sheet as real estate held for investment. 9 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (4) Securities The Company's securities available for sale and held to maturity at December 31, 2001 were as follows:

During the three month periods ended December 31, 2001 and 2000, gross proceeds from the sale of securities available for sale totaled approximately $3.7 million and $8.0 million, respectively. The gross realized gains on such sales totaled approximately $57,000 and $122,000 for the three month periods ended December 31, 2001 and 2000, respectively. There were no gross realized losses on such sales for the three month periods ended December 31, 2001 and 2000. At December 31, 2001, $451.2 million of mortgage-related securities were pledged as collateral for Federal Home Loan Bank ("FHLB") advances. 10 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (5) Loans Loans receivable are summarized as follows:

11 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (6) Allowance For Loan Losses Activity in the allowance for loan losses is summarized as follows:

(7) Earnings Per Share Basic earnings per share of common stock for the three month periods ended December 31, 2001 and 2000, have been determined by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock for the three month periods ended December 31, 2001 and 2000, have been determined by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period adjusted for the dilutive effect of outstanding stock options. Book value per share of common stock at December 31, 2001 and September 30, 2001, 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:

The computation of book value per common share is as follows:

13 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (8) Stock Option Plans The Company has adopted stock option plans for the benefit of directors and officers of the Company. The option exercise price cannot be less than the fair value of the underlying common stock as of the date of the option grant, and the maximum term cannot exceed ten years. Stock options awarded to directors may be exercised at any time or on a cumulative basis over varying time periods, provided the 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 December 31, 2001, 60,650 shares were reserved for future grants. Further information concerning the options is as follows:

(9) Income Taxes Actual income tax expense differs from the "expected" income tax expense computed by applying the statutory Federal corporate tax rate to income before income tax expense, as follows:

14 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (10) Derivative and Hedging Activities Effective October 1, 2000, the Company adopted Financial Accounting Statement 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes new rules for the recognition and measurement of derivatives 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 utilizes interest rate swaps to hedge the fair value of brokered certificates of deposit ("CD's"). Hedges on brokered CD's account for a significant majority of the Company's hedging activity, with hedges on other items being relatively nominal. The interest rate swaps that hedge brokered CD's 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 CD's to a floating rate and thus hedge the fair value of the brokered CD's from changes in interest rates. The Company measures the effectiveness of its' 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 are considered a derivative 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. As of the adoption date of Statement 133, the Company had two interest rate swap agreements that were not considered hedges under the accounting standard. Both agreements were terminated during the quarter ended December 31, 2000. The fair value of the agreements as of October 1, 2000 is included in the cumulative effect of an accounting change and the change in fair value during the quarter ended December 31, 2000 is included in securities gains (losses) in the income statement. Upon adoption of Statement 133, the Company recorded the cumulative effect of an accounting change in an amount equal to the accounting effects of the statement as of October 1, 2000. The cumulative effect, net of taxes, was a decrease in net income of $84,000. At December 31, 2001, the Company had $60.0 million in interest rate swaps outstanding compared with $80.0 million at September 30, 2001. The swaps are designed to offset the changing interest payments of certain of the Company's brokered certificates. Fixed receive-floating pay swaps totaled $60.0 million at December 31, 2001 and were entered into to hedge interest rates on fixed rate certificates of deposits. Fixed receive-floating pay swaps will provide for a lower interest expense (or interest income) in a falling rate environment while adding to interest expense in a rising rate environment. During the three month period ended December 31, 2001, the Company recorded a net reduction of interest expense of $561,000 as a result of the Company's interest rate swap agreements compared with a net reduction of $200,000 for the three month period ended December 31, 2000. 15 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (11) Current Accounting Developments The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"--a replacement of FASB Statement No. 125. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2001. This Statement is to be applied prospectively with certain exceptions. Therefore, earlier or retroactive application of this Statement is not permitted. Adoption of this standard did not materially effect the results of operations or financial position of the Company. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. 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. SFAS No. 142 is effective January 1, 2002 for calendar year companies, however, any acquired goodwill or intangible assets recorded in transactions closed subsequent to June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of SFAS No. 142. As required under SFAS No. 142, the Company discontinued the amortization of goodwill with a net carrying value of $13.4 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. 141. The Company will evaluate goodwill for impairment at least annually. (12) Segment Information The Company's operations include four strategic business segments: Retail Banking, Commercial Banking, Mortgage Banking and Investments. Financial performance is primarily based on the individual segments' direct contribution to Company net income. The segments do not include the operations of the Company as a holding company, nor the operations of the Bank's operating subsidiaries. Capital is not allocated to the segments and thus net interest income related to the free funding associated with capital is not included in the individual segments. The Company only charges the segments with direct expenses. Costs associated with administrative and centralized back-office support areas of the Bank are not allocated to the segments. Income taxes are allocated to the segments based on the Bank's effective tax rate prior to the consolidation with its affordable housing subsidiary. The Retail Banking segment consists of the Bank's retail deposits, branch and ATM network, consumer lending operations, annuity and brokerage services and call center. The segment includes a much higher level of interest-bearing liabilities than earning assets. The Company views this segment as a significant funding vehicle for the other lending segments. The Company's transfer pricing model has the effect of viewing this segment as a comparison to the cost of wholesale funds. The Commercial Banking segment consists of the Bank's commercial, commercial real estate and multifamily lending operations. It also includes the lending aspects of the Company's affordable housing subsidiary. The Mortgage Banking segment consists of the Bank's single-family mortgage lending operation. Single-family lending consists of three primary operations: portfolio lending, lending for sale in the secondary market and loan servicing. The Investment segment consists of the Company's portfolio of mortgage-backed and related securities, its debt and equity securities and other short-term investments. This segment also includes the Company's wholesale sources of funding including FHLB advances, brokered certificates of deposits, reverse repurchase agreements and federal funds purchased. 16 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued

---------------------- (a) After-tax effect of $2.5 million and $2.1 million of general and administrative expenses for the three month periods ended December 31, 2001 and 2000, respectively. 17 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This Report contains certain forward looking statements with respect to the financial condition, results of operation and business of St. Francis Capital Corporation (the "Company"). The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors could affect the Company's financial performance and could cause actual results for future periods to differ materially from those anticipated or projected. Such factors include, but are not limited to: (i) general market rates, (ii) general economic conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or composition of the Company's loan and investment portfolios, (vi) demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand for financial services in the Company's markets, and (x) changes in accounting principles, policies or guidelines. 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 December 31, 2001 were $2.20 billion, a decrease of $6.6 million from $2.21 billion at September 30, 2001. Decreases in mortgage-backed and related securities and investment securities were offset by an increase in loans held for sale. The primary reason for the decrease is the continuing restructuring of the balance sheet as the Company continues to reduce the size of its mortgage-backed and related securities and investment securities portfolios. Total capital increased to $164.0 million at December 31, 2001 compared with $160.5 million at September 30, 2001. The Company's ratio of shareholders' equity to total assets was 7.45% at December 31, 2001, compared to 7.27% at September 30, 2001. The Company's fully dilutive book value per share was $16.91 at December 31, 2001, compared to $16.66 at September 30, 2001. The restructuring of the balance sheet continues to be one of the strategic initiatives of the Company. Since fiscal 2000, the Company continues to reduce 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 2002. Loans receivable, including mortgage loans held for sale, increased $36.7 million to $1.29 billion at December 31, 2001 from $1.26 billion at September 30, 2001. During the three month period ended December 31, 2001, multi-family mortgage loans increased $14.6 million, commercial real estate loans increased $15.9 million, and commercial loans increased $11.7 million, partially offset by a decrease of $4.5 million in consumer and interim financing loans and a decrease of $2.4 million in one- to four-family 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. For the three month period ended December 31, 2001, the Company originated approximately $326.8 million in loans, as compared to $143.3 million for the same period in the prior year. Of the $326.8 million in loans originated, $28.3 million were commercial loans, $17.5 million were multi-family loans, $26.0 million were commercial real estate loans, $188.5 million were first mortgage loans, $44.7 were home equity loans and $21.8 million were consumer and interim financing loans. For the three month period ended December 31, 2001, the Company purchased $82.4 million one- to four-family loans, as compared to $26.1 million for the same period in the prior year. The increase in loans purchased during the current year is primarily due to the Company's mortgage banking operation in Illinois. For the three month period ended December 31, 2001, the Company sold $221.4 million one- to four-family loans, as compared to $46.5 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 $35.9 million to $676.5 million at December 31, 2001 from $712.4 million at September 30, 2001. The decreases were due to accelerated repayments, scheduled maturities and sales during the current quarter. The decrease in mortgage-backed securities was partially offset by purchases of 18 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued $61.3 million during the three month period ended December 31, 2001. As noted above, in connection with the balance sheet restructuring program, in fiscal 2000, the Company began reducing the size of its mortgage-backed securities portfolios which management anticipates will continue to be an ongoing strategic initiative of the Company in fiscal 2002. As part of this effort, the Company has reduced the size of the mortgage-backed securities and investment securities portfolios and used the funds generated from the repayment of principal to grow and diversify the Company's loan portfolio, to reduce the amount of the Company's wholesale debt and as an additional source of liquidity. The Company intends to reduce the size of its mortgage-backed securities and investment securities portfolios to accommodate growth in the loan portfolio. Deposits decreased $18.9 million to $1.43 billion at December 31, 2001 from $1.45 billion at September 30, 2001. The decrease in deposits was due primarily to decreases of $12.3 million in certificates of deposit and $6.5 million in money market demand account deposits offset by increases of $2.5 million in checking accounts. At December 31, 2001, the Company had approximately $189.5 million in brokered certificates of deposit compared with $224.4 million at September 30, 2001. The brokered deposits generally consist of terms from three months to ten years and include certificates that are callable at the option of the Company. 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 $14.6 million to $586.1 million at December 31, 2001 from $571.4 million at September 30, 2001. Short term borrowings increased $22.5 million to $519.7 million at December 31, 2001, compared to $497.2 million at September 30, 2001. At December 31, 2001, $420.0 million of the short term borrowings were callable FHLB advances with maturities from three to ten years and are callable by the FHLB during the next fiscal year and quarterly thereafter. Long-term borrowings decreased $7.9 million to $66.4 million at December 31, 2001, compared to $74.3 million at September 30, 2001. At December 31, 2001, the Company had an additional borrowing capacity of $257.1 million available from the FHLB. RESULTS OF OPERATIONS NET INCOME. Net income for the three month period ended December 31, 2001 was $6.0 million compared with $4.4 million for the three month period ended December 31, 2000. The prior year period included a reduction in net income of $84,000 for the cumulative effect of a change in accounting principle resulting from the adoption of Financial Accounting Statement Number 133, "Accounting for Derivative Instruments and Hedging Activities." Net income for the three month period ended December 31, 2001 increased primarily due to an increase in net interest income and other operating income. The following table shows the return on average assets and return on average equity ratios for each period:

NET INTEREST INCOME. Net interest income before provision for loan losses increased $1.5 million or 12.7% to $14.0 million for the three month period ended December 31, 2001 compared to $12.5 million for the same period in the prior year. The increase in net interest income for the three month period ended December 31, 2001 was primarily due to an increase in the net interest margin to 2.70% from 2.06% in the prior year, partially offset by a decrease of $334.3 million in average earning assets. The increase in net interest margin is largely attributable to the reduction in market interest rates and to the restructuring of the balance sheet. Generally during times when market interest rates decline, the Company experiences an improvement in its' funding costs at a faster pace than 19 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued the decrease in its' asset yields. In addition, the Company continued its' long term balance sheet restructuring, replacing lower-yielding security assets with higher yielding loan assets. Total interest income decreased $12.3 million or 27.3% to $32.7 million for the three month period ended December 31, 2001 compared to $45.0 million at December 31, 2000. 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 balance of loans to $1.27 billion from $1.33 billion for the three month periods ended December 31, 2001 and 2000, respectively, and a decrease in the average yield on loans to 7.18% from 8.15% for the same periods. The decrease in interest income on mortgage-backed and related securities was due to a decrease in the average balance of such securities to $709.8 million from $820.0 million for the three month period ended December 31, 2001 and 2000, respectively, and a decrease in the average yield on such securities to 4.77% from 6.62% for the same periods. Total interest expense decreased $13.8 million or 42.6% to $18.7 million for the three month period ended December 31, 2001, compared to $32.5 million for the three month period ended December 31, 2000. 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. The average cost of deposits decreased to 3.19% from 5.46% for the three month periods ended December 31, 2001 and 2000, respectively. The average balances of deposits decreased to $1.37 billion for the three month period ended December 31, 2001, as compared to $1.39 billion for the same period 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 decreased to $553.5 million for the three month period ended December 31, 2001, as compared to $858.9 million for the same period in the prior year. The average cost of advances and other borrowings decreased to 5.50% for the three month period ended December 31, 2001 from 6.16% for the same period in the prior year. The borrowings are primarily adjustable-rate FHLB advances, reverse repurchase agreements and Federal Funds purchased which have repriced to reflect the changes in rate levels associated with the respective borrowing rate indexes from the same period in the prior year. The following table sets forth information regarding: (1) average assets and liabilities, (2) average yield on assets and average cost on liabilities, (3) net interest margin, (4) net interest rate spread, and (5) the ratio of earning assets to interest-bearing liabilities for the three month period ended December 31, 2001 and 2000, respectively. Tax-exempt investments are not material and the tax-equivalent method of presentation is not included in the schedule. 20 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued

21 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:

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 judgement, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Such 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. At December 31, 2001, gross loans receivable were $1.37 billion compared to $1.39 billion at December 31, 2000. Net charge-offs for the three month period ended December 31, 2001 were $215,000 compared to $195,000 for the three month period ended December 31, 2000. Non-performing loans decreased to $9.9 million or 0.73% of gross loans at December 31, 2001 compared to $10.3 million or 0.77% of gross loans at September 30, 2001. For the three month period ended December 31, 2001, the provision for loan losses was $911,000 compared to $603,000 for the same period in the prior year. Management believes that the allowance for loan losses at December 31, 2001 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. 22 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued OTHER OPERATING INCOME. Other operating income increased by $3.2 million to $7.4 million for the three month period ended December 31, 2001, compared to the same period in the prior year. The following table shows the percentage of other operating income to average assets for each period:

The increase for the three month period ended December 31, 2001 was due primarily to increases in gains on the sale of loans and increases in loan-related fees. Gains on the sale of mortgage loans increased to $3.2 million for the three month period ended December 31, 2001 compared to gains of $613,000 for the same period in the prior year. The Company's volume of mortgage loan sales were $221.4 million for the three month period ended December 31, 2001, compared to $46.4 million for the same period 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. The increase in other loan-related fees included higher levels of a variety of fees including 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. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $1.7 million or 16.4% to $11.9 million for the three month period ended December 31, 2001, compared to the same period in the prior year. The following table shows the percentage of general and administrative expenses to average assets for each period:

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 $800,000 during the quarter compared to the prior year. Increases in benefit costs in the current period are the result of lower benefit costs during the three months ended December 31, 2000. The Company paid off its ESOP loan in June 2000 and reduced the retirement benefit costs for the remainder of calendar year 2000. Normal retirement benefit costs resumed on January 1, 2001. Pension and ESOP expenses were $474,000 during the three month period ended December 31, 2001 compared with zero for the three month period ended December 31, 2000. The prior year also included $308,000 related to goodwill amortization. This expense was eliminated with the Company's adoption of Financial Accounting Standards No. 142 effective on October 1, 2001. INCOME TAX EXPENSE. Income tax expense increased to $2.6 million for the three month period ended December 31, 2001, compared to $1.4 million for the same period in the prior year. The effective tax rate for the three month period ended December 31, 2001 was 30.11% compared with 24.06% for the three month period ended December 31, 2000. The increase in the effective tax rate is primarily due to the increased amount of income and an increase in state taxes of $260,000 during the three month period ended December 31, 2001. The income tax credits received on the Company's affordable housing investments were $652,000 for each of the three month periods ended December 31, 2000 and 2001. 23 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued ASSET QUALITY Total non-performing assets were $10.4 million, or 0.47% of total assets at December 31, 2001, compared with $10.7 million, or 0.48% of total assets at September 30, 2001. 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:

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. The Company's largest non-performing credit at December 31, 2001 is a $3.1 million commercial credit, which had been reduced by $2.0 million in payments received during the quarter. The loan was restructured during the quarter with the Company receiving a new secured term loan (as a participant bank), the aforementioned cash payments and unregistered shares of the borrower's common stock. No additional charge-off or provision was required during the quarter in connection with the loan restructuring. Impaired loans totaled $8.7 million at December 31, 2001 compared to $7.8 million at September 30, 2001. These loans had associated impairment reserves of $1.5 million and $1.3 million at December 31, 2001 and September 30, 2001, respectively. For the three month period ended December 31, 2001, the average balance of impaired loans was $9.0 million compared to $11.0 million for the year ended September 30, 2001. Interest income on impaired loans for the three month periods ended December 31, 2001 and 2000 was $25,000 and $30,000, 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. The Company may utilize the following strategies to mitigate its interest rate risk, which is generally assumed to be adverse in a rising rate environment: (i) the Company seeks to originate and hold a variety of ARMs or other mortgage loans with short- to medium-term average lives and invests in primarily mortgage-backed and related securities with short- to medium-term average lives; (ii) the Company seeks to lengthen the maturities of deposits when deemed cost effective through the pricing and promotion of certificates of deposit with terms of one to five years, and periodically utilizes deposit marketing programs offering maturity and repricing terms structured to complement the repricing and maturity characteristics of the existing asset/liability mix; (iii) the Company has utilized short term and long term borrowings, principally secured from the FHLB, as well as, brokered certificates of deposits with risk characteristics that are similar to the Company's assets; and (iv) the Company may use off-balance sheet instruments such as interest rate swaps to hedge the Company's interest rate risk on selected assets or liabilities. At December 31, 2001, the Company's estimated cumulative one-year gap between assets and liabilities was a positive 3.53% 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 Company's three-year cumulative gap as of December 31, 2001 was a negative 8.41% of total assets. A negative gap occurs when a greater dollar amount of interest-bearing liabilities are repricing or maturing than interest-earning assets. The change in the Company's gap position is due to the decline in interest rates during fiscal 2001 and 2002. As interest rates declined, the terms of the Company's assets shortened and the terms of the liabilities lengthened. The shortening of assets is 24 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued primarily due to the shortening of prepayments on the Company's mortgage-related assets. The lengthening of the liabilities is due to both renewals of brokered certificates of deposit and to a lesser extent retail deposits, at longer terms and to the lengthening of the repricing characteristics of the Company's fixed rate puttable FHLB advances. 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 December 31, 2001, the Company expects that its one-year positive gap would become negative due to the anticipated shortening of the term of FHLB puttable advances and to a lesser extent, the lengthening of the term of mortgage-related assets assuming prepayments slow. 25 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued The following table summarizes the Company's gap position as of December 31, 2001.

-------------------------------------------------------------------------------- (1) Adjustable and floating rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed rate assets are included in the periods in which they are scheduled to be repaid based on scheduled amortization, in each case adjusted to take into account estimated prepayments utilizing the Company's historical prepayment statistics, modified for forecasted statistics using the Public Securities Association model of prepayments. For fixed rate mortgage loans and mortgage-backed and related securities, annual prepayment rates ranging from 8% to 30%, based on the loan coupon rate, were used. (2) Balances have been reduced for undisbursed loan proceeds, unearned insurance premiums, deferred loan fees, purchased loan discounts and allowances for loan losses, which aggregated $73.2 million at December 31, 2001. (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%, 10% and 98%, 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 $61.3 million or 2.8% of total assets. (4) Fixed rate puttable FHLB advances are included in the period of their modified duration rather than in the period in which they are due. Borrowings includes fixed rate puttable FHLB advances of $420 million maturing in one to three years. 26 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. 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 $40.9 million and $38.1 million as of December 31, 2001 and September 30, 2001, respectively. The Company's primary sources of funds are deposits, including brokered certificates of deposit, borrowings from the FHLB and proceeds from principal and interest payments on loans and mortgage-backed and related securities. Although maturities and scheduled amortization of loans are predictable sources of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and related securities are influenced significantly by general interest rates, economic conditions and competition. Additionally, the Bank is limited by the FHLB to borrowing up to 35% of its assets. At December 31, 2001, the Company had additional borrowing capacity of $257.1 million available from the FHLB. In fiscal 2001 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. Management anticipates that this form of "balance sheet restructuring" will be an ongoing strategic initiative of the Company in fiscal 2002. 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 December 31, 2001, 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. 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. 27 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued The following table summarizes the Bank's capital ratios at the dates indicated:

The capital of the Company and the Bank exceed all regulatory capital requirements. 28 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 December 31, 2001.

29 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. 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 The Annual Meeting of Shareholders was held on January 23, 2002. Only shareholders of record at the close of business on November 30, 2001 (the "Voting Record Date") were entitled to vote at the Annual Meeting. On the Voting Record Date, there were 9,175,744 shares of common stock outstanding, and 8,177,221 shares present at the meeting by the holders thereof in person or by proxy, which constituted a quorum. The following is a summary of the matters voted upon at the Annual Meeting.

ITEM 5. OTHER INFORMATION On January 18, 2002, the Company announced the declaration of a dividend of $0.15 per share on the Company's common stock for the quarter ended December 31, 2001. The dividend is payable on February 20, 2002 to shareholders of record as of February 11, 2002. This will be the 26th consecutive cash dividend payment since the Company became publicly-held in June 1993. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 11.1 Statement Regarding Computation of Earnings Per Share (See Footnote 7 in "Notes to Unaudited Consolidated Financial Statements") (b) No reports on Form 8-K were filed during the quarter for which this report was filed. 30 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ST. FRANCIS CAPITAL CORPORATION Dated: February 14, 2002 By: /s/ Jon D. Sorenson ------------------- -------------------------- Jon D. Sorenson Chief Financial Officer 31

ST FRANCIS CAPITAL CORP 10-Q