<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1997
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) (Zip Code)
(414) 486-8700
-------------------------------
(Registrant's telephone number)
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 5,276,855 at January 30, 1998.
Page 1 of 31 pages
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Statements of Financial Condition................ 3
Consolidated Statements of Income............................. 4
Consolidated Statements of Changes in Shareholders' Equity.... 5
Consolidated Statements of Cash Flows......................... 6
Notes to Consolidated Financial Statements.................... 8
ITEM 2. Management's Discussion and Analysis.......................... 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.... 29
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................. 30
ITEM 2. Changes In Securities......................................... 30
ITEM 3. Defaults Upon Senior Securities............................... 30
ITEM 4. Submission of Matters to a Vote of Security Holders........... 30
ITEM 5. Other Information............................................. 30
ITEM 6. Exhibits and Reports on Form 8-K.............................. 30
SIGNATURES.............................................................. 31
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31, September 30,
1997 1997
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................. $ 29,908 $ 22,899
Federal funds sold and overnight deposits ........................... 13,575 19,959
----------- -----------
Cash and cash equivalents ........................................... 43,483 42,858
----------- -----------
Trading account securities, at fair value ........................... - -
Assets available for sale, at fair value:
Debt and equity securities ...................................... 38,924 56,247
Mortgage-backed and related securities .......................... 561,431 620,716
Mortgage loans held for sale, at lower of cost or market ............ 19,342 24,630
Securities held to maturity, at amortized cost:
Debt securities (market values of $3,891 and $3,908,
respectively) ................................................... 3,829 3,833
Mortgage-backed and related securities (market values of $66,841
and $66,219, respectively) ...................................... 66,455 66,849
Loans receivable, net ............................................... 723,248 712,875
Federal Home Loan Bank stock, at cost ............................... 20,843 20,843
Accrued interest receivable ......................................... 9,160 9,250
Foreclosed properties ............................................... 258 416
Real estate held for investment ..................................... 52,492 51,476
Premises and equipment, net ......................................... 26,752 24,711
Other assets ........................................................ 31,431 25,945
----------- -----------
Total assets ........................................................ $ 1,597,648 $ 1,660,649
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ............................................................ $ 1,064,453 $ 1,087,136
Short term borrowings ............................................... 195,714 129,381
Long term borrowings ................................................ 191,872 290,847
Advances from borrowers for taxes and insurance ..................... 321 9,563
Accrued interest payable and other liabilities ...................... 13,142 15,192
----------- -----------
Total liabilities ................................................... 1,465,502 1,532,119
----------- -----------
Commitments and contingencies ....................................... - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued ..................................................... - -
Common stock $.01 par value: Authorized 12,000,000 shares;
Issued, 7,289,620 shares;
Outstanding, 5,251,311 and 5,226,998 shares, respectively ....... 73 73
Additional paid-in-capital .......................................... 73,832 73,541
Unrealized gain on securities available for sale, net of tax ........ 1,047 1,046
Unearned ESOP compensation .......................................... (2,989) (3,088)
Treasury stock at cost (2,038,309 and 2,062,622 shares, respectively) (44,036) (44,511)
Retained earnings, substantially restricted ......................... 104,219 101,469
----------- -----------
Total shareholders' equity .......................................... 132,146 128,530
----------- -----------
Total liabilities and shareholders' equity .......................... $ 1,597,648 $ 1,660,649
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------------------
1997 1996
------------------ ----------------
(In thousands, except per share data)
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans........................................................ $ 16,014 $ 13,265
Mortgage-backed and related securities....................... 11,656 9,901
Debt and equity securities................................... 948 1,009
Federal funds sold and overnight deposits.................... 460 259
Federal Home Loan Bank stock................................. 353 330
Trading account securities................................... 29 70
----------------- ----------------
Total interest and dividend income............................... 29,460 24,834
----------------- ----------------
INTEREST EXPENSE:
Deposits..................................................... 13,254 10,759
Advances and other borrowings................................ 5,748 5,125
----------------- ----------------
Total interest expense........................................... 19,002 15,884
----------------- ----------------
Net interest income before provision for loan losses............. 10,458 8,950
Provision for loan losses........................................ 200 261
----------------- ----------------
Net interest income.............................................. 10,258 8,689
----------------- ----------------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees......................... 555 458
Depository fees and service charges.......................... 809 403
Trading securities gains and commitment fees, net............ 83 385
Gain on debt and equity and mortgage-backed
and related securities, net............................... 527 476
Gain on sales of mortgage loans held for sale, net........... 1,042 227
Insurance and annuity commissions............................ 247 81
Gain (loss) on foreclosed properties......................... 5 (14)
Income from affordable housing............................... 1,017 550
Other income................................................. 132 91
----------------- ----------------
Total other operating income, net................................ 4,417 2,657
----------------- ----------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits........................... 4,988 3,626
Office building, including depreciation...................... 701 543
Furniture and equipment, including depreciation ............. 689 527
Federal deposit insurance premiums........................... 146 331
Real estate held for investment.............................. 1,180 621
Other general and administrative expenses.................... 2,263 1,814
----------------- ----------------
Total general and administrative expenses........................ 9,967 7,462
----------------- ----------------
Income before income tax expense................................. 4,708 3,884
Income tax expense............................................... 910 727
----------------- ----------------
Net income....................................................... $ 3,798 $ 3,157
================= ================
Basic earnings per share......................................... $ 0.77 $ 0.62
================= ================
Diluted earnings per share....................................... $ 0.72 $ 0.59
================= ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Unrealized
Shares of Losses on
Common Additional Securities Unearned
Stock Common Paid-In Available ESOP
Outstanding Stock Capital For Sale Compensation
-------------------------------------------------------------------------
(In thousands, except shares of common stock outstanding)
<S> <C> <C> <C> <C> <C>
Three months ended December 31, 1996
Balance at September 30, 1996 ......... 5,475,509 $ 73 $ 72,243 $ (1,765) $ (3,488)
Net income ............................ -- -- -- -- --
Cash dividend - $0.12 per share ....... -- -- -- -- --
Purchase of treasury stock ............ (119,445) -- -- -- --
Exercise of stock options ............. -- -- -- -- --
Amortization of unearned compensation . -- -- 349 -- 102
Unrealized loss on securities available
for sale, net of tax ............. -- -- -- 702 --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 .......... 5,356,064 $ 73 $ 72,592 $ (1,063) $ (3,386)
---------- ---------- ---------- ---------- ----------
Three months ended December 31, 1997
Balance at September 30, 1997 ......... 5,226,998 $ 73 $ 73,541 $ 1,046 $ (3,088)
Net income ............................ -- -- -- -- --
Cash dividend - $0.14 per share ....... -- -- -- -- --
Purchase of treasury stock ............ (3,000) -- -- -- --
Exercise of stock options ............. 27,313 -- -- -- --
Amortization of unearned compensation . -- -- 291 -- 99
Unrealized gain on securities available
for sale, net of tax ............. -- -- -- 1 --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .......... 5,251,311 $ 73 $ 73,832 $ 1,047 $ (2,989)
========== ========== ========== ========== ==========
<CAPTION>
Treasury Retained
Stock Earnings Total
----------------------------------------------------------
(In thousands, except shares of common stock outstanding)
<S> <C> <C> <C>
Three months ended December 31, 1996
Balance at September 30, 1996 ......... $ (35,529) $ 93,645 $ 125,179
Net income ............................ -- 3,157 3,157
Cash dividend - $0.12 per share ....... -- (523) (523)
Purchase of treasury stock ............ (3,056) -- (3,056)
Exercise of stock options ............. -- -- --
Amortization of unearned compensation . -- -- 451
Unrealized loss on securities available
for sale, net of tax ............. -- -- 702
---------- ---------- ----------
Balance at December 31, 1996 .......... $ (38,585) $ 96,279 $ 125,910
---------- ---------- ----------
Three months ended December 31, 1997
Balance at September 30, 1997 ......... $ (44,511) $ 101,469 $ 128,530
Net income ............................ -- 3,798 3,798
Cash dividend - $0.14 per share ....... -- (731) (731)
Purchase of treasury stock ............ (115) -- (115)
Exercise of stock options ............. 590 (317) 273
Amortization of unearned compensation . -- -- 390
Unrealized gain on securities available
for sale, net of tax ............. -- -- 1
---------- ---------- ----------
Balance at December 31, 1997 .......... $ (44,036) $ 104,219 $ 132,146
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------------
1997 1996
--------------- ---------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .............................................................. $ 3,798 $ 3,157
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ......................................... 200 261
Depreciation, accretion and amortization .......................... 1,009 833
Deferred income taxes ............................................. 524 2,856
Gain on debt and equity, mortgage-backed and related
securities and trading account securities, net ................. (610) (861)
Gains on the sales of mortgage loans held for sale, net ........... (1,042) (227)
Stock-based compensation expense .................................. 390 451
Decrease in loans held for sale ................................... 5,288 9,851
Other, net ........................................................ (6,776) (5,746)
-------- --------
Total adjustments ....................................................... (1,017) 7,418
-------- --------
Net cash provided by operating activities ............................... 2,781 10,575
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity ........ 4 998
Purchases of debt securities held to maturity ....................... -- (459)
Principal repayments on mortgage-backed and related securities
held to maturity ................................................ 394 315
Purchases of mortgage-backed securities available for sale .......... (80,155) (69,286)
Proceeds from sales of mortgage-backed securities available
for sale .......................................................... 103,688 57,482
Principal repayments on mortgage-backed securities available
for sale .......................................................... 35,752 13,993
Purchase of debt and equity securities available for sale ........... (10,780) (16,654)
Proceeds from sales of debt and equity securities available for sale 26,625 6,663
Principal repayments on debt and equity securities available for sale 1,478 10,874
Purchases of Federal Home Loan Bank stock ........................... -- (200)
Purchase of loans ................................................... (16,947) (4,901)
(Increase) decrease in loans, net of loans held for sale ............ 6,574 (8,482)
Increase in real estate held for investment ......................... (1,016) (2,745)
Purchases of premises and equipment, net ............................ (2,633) (1,616)
-------- --------
Net cash provided by (used in) investing activities ..................... 62,984 (14,018)
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE> 7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, continued
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ...................................... (22,683) 16,781
Proceeds from advances and other borrowings .............................. 23,855 29,209
Repayments on advances and other borrowings .............................. (40,382) (25,752)
Decrease in securities sold under agreements to repurchase ............... (16,115) --
Decrease in advances from borrowers for taxes and insurance .............. (9,242) (10,724)
Dividends paid ........................................................... (731) (523)
Stock option transactions ................................................ 273 --
Purchase of treasury stock ............................................... (115) (3,056)
-------- --------
Net cash provided by (used in) financing activities .......................... (65,140) 5,935
-------- --------
Increase in cash and cash equivalents ........................................ 625 2,492
Cash and cash equivalents:
Beginning of period .................................................... 42,858 22,459
-------- --------
End of period .......................................................... $ 43,483 $ 24,951
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 20,331 $ 16,197
Income taxes ........................................................... 101 10
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans secured as mortgage-backed securities ................... $ 7,661 $ 17,252
Transfer from loans to foreclosed properties ........................... 180 276
Transfer of mortgage loans to mortgage loans held for sale.............. 13,292 7,143
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and
balances of St. Francis Capital Corporation (the "Company"), its
wholly-owned subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and
the Bank's wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting
principles. However, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the consolidated financial statements have been
included. Operating results for the three-month period ended December
31, 1997 are not necessarily indicative of the results which may be
expected for the entire year ending September 30, 1998. The September
30, 1997 Consolidated Statement of Financial Condition presented with
the interim financial statements was audited and the auditors' report
thereon was unqualified.
Certain previously reported balances have been reclassified to conform
with the 1998 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.
8
<PAGE> 9
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:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
December 31, September 30,
1997 1997
--------------- -------------
(In thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed-rate loans..................................... $ 6,771 $ 10,890
Variable-rate loans.................................. 19,092 16,792
Mortgage loans sold with recourse........................ 40,682 39,763
Guarantees under letters of credit....................... 16,680 11,220
Interest rate swap agreements (notional amount).......... 173,000 163,000
Interest rate corridors (notional amount)................ 40,000 30,000
Commitments to:
Purchase mortgage-backed securities.................... 10,306 1,930
Sell mortgage-backed securities........................ - 1,930
Unused and open-ended lines of credit:
Consumer............................................... 142,724 122,970
Commercial............................................. 33,193 14,075
Open option contracts written:
Short-put options...................................... - -
Short-call options..................................... 2,000 2,000
Commitments to fund equity investments................... - 2,903
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates of 45 days
or less or other termination clauses and may require a fee. Fixed rate
loan commitments as of December 31, 1997 have interest rates ranging
from 7.00% to 7.88%. Because some commitments expire without being
drawn upon, the total commitment amounts do not necessarily represent
cash requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained
consists primarily of one- to four-family residences and other
residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans
that are sold to secondary market agencies, primarily FNMA, with the
servicing of these loans being retained by the Company. The Company
receives a larger servicing spread on those loans being serviced than
it would if the loans had been sold without recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party.
Potential losses on the letters of credit are the notional amount of
the guarantees less the value of the real estate collateral. At
December 31, 1997, appraised values of the real estate collateral
exceed 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.
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The Company is exposed to credit-related losses in the event of nonperformance
by the counterparties on interest rate payments but does not expect any
counterparty to fail to meet their obligations. The fixed pay-floating receive
agreements were entered into as hedges of the interest rates on Federal Home
Loan Bank (the "FHLB") advances. The fixed receive-floating pay agreements were
entered into as hedges of the interest rates on fixed rate brokered
certificates. Interest receivable or payable on interest rate swaps is
recognized using the accrual method. The use of interest rate swaps enables the
Company to synthetically alter the repricing characteristics of designated
interest-bearing liabilities.
The agreements at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1998 not applicable 5.04% 5.91%
10,000 Fixed Pay-Floating Receive 1998 not applicable 4.93% 5.76%
15,000 Fixed Pay-Floating Receive 1998 not applicable 5.25% 5.75%
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.23% 5.88%
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.43% 5.94%
10,000 Fixed Receive-Floating Pay 1998 not applicable 6.10% 5.91%
15,000 Fixed Receive-Floating Pay 2002 1998 7.00% 5.63%
8,000 Fixed Receive-Floating Pay 2002 1998 7.00% 5.14%
20,000 Fixed Receive-Floating Pay 2004 1998 7.00% 5.77%
10,000 Fixed Receive-Floating Pay 2007 1998 6.90% 5.60%
15,000 Fixed Receive-Floating Pay 2007 1999 7.15% 5.76%
15,000 Fixed Receive-Floating Pay 2007 1999 7.05% 5.60%
10,000 Fixed Receive-Floating Pay 2007 1999 7.13% 5.60%
15,000 Fixed Receive-Floating Pay 2007 1999 6.90% 5.63%
</TABLE>
The fair value of interest rate swaps, which is based on the present value of
the swap using dealer quotes, represent the estimated amount the Company would
receive or pay to terminate the agreements taking into account current interest
rates and market volatility. The interest rate swaps are off-balance sheet
items; therefore, at December 31, 1997, the gross unrealized gains and losses
of $1,172,000 and $132,000, respectively, equals the fair value of the interest
rate swaps of $1,040,000.
The Company uses interest rate corridors to help protect its net interest
margin in various interest rate environments. The corridors are of two general
types. One type of corridor pays 1.0% per annum of the notional amount over its
life only when the three-month LIBOR rate is between the corridor strike rates
(inclusive of the strike rate). There are no payments due to the Company when
the three-month LIBOR rate is outside the corridor strike rates. The other type
of corridor pays the Company a percent per annum equal to the three-month LIBOR
rate minus the lower corridor strike rate on the notional amount when the
three-month LIBOR rate is within the corridor strike rates. When the
three-month LIBOR rate is above the upper strike rate (equal to 1.0% above the
lower strike rate), the corridor pays the Company 1.0% per annum.
10
<PAGE> 11
ST FRANCIS CAPITAL CORPORATION AND SUBSIDARY
Notes to Unaudited Consolidated Financial Statements, continued
The interest rate corridors consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity
(000s) Payment Type Date Strike Rates
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$10,000 Three-month LIBOR minus lower strike price (up to 1.0%) 2001 7.75% - 8.75%
15,000 1.0% when three-month LIBOR within corridor 1999 6.50% - 7.50%
5,000 1.0% when three-month LIBOR within corridor 2000 7.00% - 8.00%
5,000 1.0% when three-month LIBOR within corridor 2000 7.50% - 8.50%
5,000 1.0% when three-month LIBOR within corridor 2001 7.75% - 8.75%
</TABLE>
These instruments do not qualify as hedges and are accounted for in the trading
portfolio, and therefore, are valued at fair value. The fair value of the
interest rate corridors is $54,000 at December 31, 1997.
Commitments to purchase and sell mortgage-backed securities are contracts which
represent notional amounts to purchase and sell mortgage-backed securities at a
future date and specified price. Such commitments generally have fixed
settlement dates.
The unused and open consumer lines of credit are conditional commitments issued
by the Company for extensions of credit such as home equity, auto, credit card,
or other similar consumer type financing. Furthermore, the unused and open
commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, agricultural
production, equipment or other similar commercial type financing. The credit
risk involved in extending 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 open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage-backed securities at a
future date and specified price. The Company receives a premium/fee for option
contracts written which gives the purchaser the right, but not the obligation to
buy or sell mortgage-backed securities within a specified time period for a
contracted price. The Company has been primarily utilizing these items to manage
the interest rate and market value risk relating to mortgage-backed securities
that result from the MBS loan swap program and mortgage loan pipeline.
The commitments to fund equity investments represent amounts St. Francis Equity
Properties ("SFEP"), a subsidiary of the Bank, 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.
11
<PAGE> 12
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, 1997 were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ------------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and obligations
of U.S. Government Agencies................ $ 23,025 $ 152 $ 11 $ 23,166
Corporate notes and bonds................... 5,509 10 2 5,517
Marketable equity securities............... 10,241 - - 10,241
----------- ----------- ----------- ------------
TOTAL DEBT AND EQUITY SECURITIES............. $ 38,775 $ 162 $ 13 $ 38,924
=========== =========== =========== ============
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC..................................... $ 3,694 $ 20 $ - $ 3,714
FNMA...................................... 11,576 35 - 11,611
Private issue............................. 179,721 1,588 1,351 179,958
REMICs:
FHLMC..................................... 143,918 497 619 143,796
FNMA...................................... 42,028 398 75 42,351
GNMA...................................... 6,775 8 10 6,773
Private issue............................. 172,198 1,126 250 173,074
CMO residual................................ 37 117 - 154
----------- ----------- ----------- ------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................... $ 559,947 $ 3,789 $ 2,305 $ 561,431
=========== =========== =========== ============
<CAPTION>
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ------------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
DEBT SECURITIES:
U. S. Treasury obligations and obligations
of U.S. Government Agencies................ $ 3,019 $ 27 $ - $ 3,046
State and municipal obligations............ 810 35 - 845
------------ ------------ ------------- -------------
TOTAL DEBT SECURITIES...................... $ 3,829 $ 62 $ - $ 3,891
============ ============ ============= =============
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FHLMC..................................... $ 1,636 $ 17 $ 1 $ 1,652
FNMA...................................... 2,010 15 4 2,021
Private issue............................. 62,809 477 118 63,168
------------ ------------ ------------- -------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES............................ $ 66,455 $ 509 $ 123 66,841
============ ============ ============= =============
</TABLE>
12
<PAGE> 13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
During the three months ended December 31, 1997 and 1996, gross proceeds from
the sale of securities available for sale totaled approximately $130.3 million
and $64.2 million, respectively. The gross realized gains on such sales totaled
approximately $2.1 million and $509,000 for the three months ended December 31,
1997 and 1996, respectively. The gross realized losses on such sales totaled
approximately $1.6 million and $33,000 for the three months ended December 31,
1997 and 1996, respectively.
During the year ended September 30, 1997, the Company recorded an impairment
loss of $3.4 million to reflect other than temporary impairment of the carrying
value of certain private issue mortgage-backed securities. The securities,
carried at $12.5 million prior to the writedown, were adjusted to fair value of
$9.1 million at September 30, 1997. The cost basis of impaired securities is
$1.2 million at December 31, 1997. The decline in the cost basis during the
quarter is due to repayments and the sale of one issue of the mortgage-backed
securities which was determined to be impaired at September 30, 1997. The
security sold had an adjusted cost basis of $7.2 million and a $151,000 gain was
recorded on the sale.
At December 31, 1997 and 1996, $276.8 million and $244.4 million, respectively,
of mortgage-related securities were pledged as collateral for FHLB advances.
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
(In thousands) 1997 1997
-----------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage - one- to four-family............... $ 240,619 $ 240,522
First mortgage - residential construction.......... 51,240 46,340
First mortgage - multi-family...................... 93,914 101,289
Commercial real estate............................. 93,837 87,950
Home equity........................................ 125,578 115,293
Commercial and agriculture......................... 74,131 72,144
Consumer secured by real estate.................... 76,539 89,627
Interim financing and consumer loans............... 13,829 15,255
Indirect auto...................................... 18,672 15,423
Education.......................................... 1,362 948
-------------- ---------------
Total gross loans............................... 789,721 784,791
-------------- ---------------
Less:
Loans in process................................. 38,285 38,200
Unearned insurance premiums..................... 580 552
Deferred loan and guarantee fees................ 1,210 1,290
Purchased loan discount......................... 1,022 1,042
Allowance for loan losses....................... 6,034 6,202
-------------- ---------------
Total deductions................................ 47,131 47,286
-------------- ---------------
Total loans receivable............................. 742,590 737,505
Less: First mortgage loans held for sale.......... 19,342 24,630
-------------- ---------------
Loans receivable, net.............................. $ 723,248 $ 712,875
============== ===============
</TABLE>
13
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Noteds to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------------
1997 1996
-------------- ----------------
(In thousands)
<S> <C> <C>
Beginning Balance........................ $ 6,202 $ 5,217
Charge-offs:
Real estate - mortgage................. - -
Commercial real estate................. - -
Commercial loans....................... - -
Home equity loans...................... - -
Consumer............................... (374) (473)
--------------- ----------------
Total charge-offs........................ (374) (473)
--------------- ----------------
Recoveries:
Real estate - mortgage................. - -
Commercial real estate................. - -
Commercial loans....................... - -
Home equity loans...................... - -
Consumer............................... 6 55
--------------- ----------------
Total recoveries......................... 6 55
--------------- ----------------
Net charge-offs.......................... (368) (418)
--------------- ----------------
Provision................................ 200 261
--------------- ----------------
Ending balance........................... $ 6,034 $ 5,060
=============== ================
</TABLE>
(7) Earnings Per Share
Basic earnings per share of common stock for the three months ended
December 31, 1997 and 1996, 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-months ended December 31, 1997 and 1996,
have been determined by dividing net income for the period by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Book value per share of
common stock at December 31, 1997 and September 30, 1997 have been
determined by dividing total shareholders' equity by the number of
shares of common stock and common stock equivalents considered
outstanding at the respective dates. Stock options are regarded as
common stock equivalents and are, therefore, considered in per share
calculations. Common stock equivalents are computed using the
treasury stock method. Total shares outstanding for earnings per
share calculation purposes have been reduced by the ESOP shares that
have not been committed to be released.
14
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Noteds to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net income for the period ............................................... $ 3,798,000 $ 3,157,000
============ ============
Common shares issued .................................................... 7,289,620 7,289,620
Net Treasury shares ..................................................... 2,053,134 1,890,574
Unallocated ESOP shares ................................................. 297,286 338,198
------------ ------------
Weighted average common shares
outstanding during the period ....................................... 4,939,200 5,060,848
Common stock equivalents based on the
treasury stock method ............................................... 333,864 287,937
------------ ------------
Total weighted average common shares and
equivalents outstanding ............................................. 5,273,064 5,348,785
============ ============
Basic earnings per share ................................................ $ 0.77 $ 0.62
Diluted earnings per share .............................................. $ 0.72 $ 0.59
</TABLE>
<TABLE>
<CAPTION>
The computation of book value per common share is as follows:
December 31, September 30,
1997 1997
------------ ------------
<S> <C> <C>
Common shares outstanding at the end
of the period ........................................................... 4,953,118 4,918,891
Incremental shares relating to dilutive stock
options outstanding at the end of the period ............................ 390,789 319,567
------------ ------------
5,343,907 5,238,458
============ ============
Total shareholders' equity at the end of
the period .............................................................. $132,146,000 $128,530,000
Book value per common share ............................................... $ 24.73 $ 24.54
</TABLE>
(8) Acquisitions
In February 1997, the Company completed the acquisition of Kilbourn
State Bank for $25.3 million in cash. Under the terms of the
agreement, the Company acquired all of the outstanding shares of
Kilbourn State Bank, with Kilbourn subsequently merging into Bank
Wisconsin, the Company's commercial banking subsidiary. The
acquisition was accounted for as a purchase. The related accounts and
results of operations are included in the Company's consolidated
financial statements from the date of acquisition. The acquisition of
Kilbourn State Bank added $93.0 million to assets, including additions
of $62.6 million to net loans and $67.8 million to deposits.
The excess of cost over the fair value of tangible assets acquired is
accounted for as goodwill and will be amortized over fifteen years
using the straight-line method. The amount of goodwill recorded due to
the acquisition was $9.1 million.
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Noteds to Unaudited Consolidated Financial Statements, continued
(9) Changes in Accounting Policy
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December
15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required
to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997. This statement establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company with the Securities and Exchange Commission, in quarterly reports or
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, various
words or phrases are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include words and phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions and various other statements indicated herein
with an asterisk after such statements. 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 decreased $63.0 million or 3.8% to $1.598 billion at
December 31, 1997 from $1.661 billion at September 30, 1997. The primary reason
for the decrease was a decline in mortgage-backed and related securities
available for sale of $59.3 million to $561.4 million. The proceeds from the
decline in mortgage-backed and related securities were used to pay down Federal
Home Loan Bank advances and pay off brokered certificates of deposit. The use
of these proceeds to reduce liabilities rather than reinvest in other assets
resulted in total assets being lower at the end of the quarter. The Company's
ratio of shareholders' equity to total assets was 8.27% at December 31, 1997,
compared to 7.74% at September 30, 1997. The Company's book value per share was
$24.73 at December 31, 1997, compared to $24.54 at September 30, 1997.
Loans receivable, including mortgage loans held for sale, increased $5.1
million to $742.6 million at December 31, 1997 from $737.5 million at September
30, 1997. The increase was due primarily to the increase in loans originated
for retention in the Company's loan portfolio. Long-term 15- and 30- year
fixed-rate loans are generally originated to be sold in the secondary market as
are five and seven year balloon loans. Shorter-term ARM loans are originated
both for sale in the secondary market and for the Company's loan portfolio.
Additionally, the Company has increased its emphasis on commercial and consumer
lending, which are primarily retained in the Company's loan portfolio. For the
three months ended December 31, 1997, the Company originated approximately
$131.3 million in loans, as compared to $80.9 million for the same period in
the prior year. Of the $131.3 million in loans originated, $22.0 million were
in commercial loans, $42.6 million were in consumer and interim financing loans
and $66.7 million were in first mortgage loans. Loan repayments and sales of
mortgage loans partially offset the increases in loan originations.
Mortgage-backed and related securities, including mortgage-backed and related
securities available for sale, decreased $59.7 million to $627.9 million at
December 31, 1997 from $687.6 million at September 30, 1997. This
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
decrease is due primarily to the sale of mortgage-backed and related securities
of $103.7 million as well as repayments of $36.2 million, partially offset by
purchases of $80.2 million during the three months ended December 31, 1997. At
December 31, 1997, private-issue mortgage-backed and related securities totaled
$415.8 million compared to $441.4 million at September 30, 1997. Private-issue
mortgage-backed and related securities represent a significant portion of the
Company's portfolio due to the Company's view of the benefit of higher interest
rates generally available on private-issue mortgage-backed and related
securities outweighing the additional credit risk associated with such
securities in comparison with agency securities.
At September 30, 1997, the Company recorded declines in fair value judged to be
other than temporary on four of its private issue mortgage-backed securities.
The Company believed that these four securities, two of which were rated "A"
and the other two of which were rated "BBB" at September 30, 1997, were
impaired at September 30, 1997. Therefore, in accordance with generally
accepted accounting principles, these securities were written down to fair
value and the impairment loss was recorded in the Company's income statement.
Prior to the adjustment, the Company's cost basis in these securities was $12.5
million. The impairment loss resulted in a new cost basis of $9.1 million for
these four issues. The four issues under impairment were private issue
mortgage-backed securities backed by single-family loans relating to properties
located primarily in California. The underlying loans have experienced
significant delinquencies and foreclosures and the Company learned that
recoveries on these loans were less than previously realized and that the
various subordinate and cash positions within the mortgage-backed structures
may no longer protect the Company's position in the securities. The Company
wrote these securities down to fair value which is a level where the remaining
cash flows should provide a return at a market rate of interest income on the
remaining cost basis.
As a result of the Company's view of the current external credit risk and
external interest rate risk cycles and the Company's internal view of its
investment management position, selected securities from the mortgage-backed
securities and debt and equity securities portfolios were sold during the three
months ended December 31, 1997. During the three months ended December 31,
1997, the Company sold securities totaling $130.3 million at a net gain of
$527,000. The net gain consisted of gross gains of $2.1 million and gross
losses of $1.6 million. Included in the sale of securities for the three months
ended December 31, 1997 is the sale of one issue of the mortgage-backed
securities which were determined to be impaired at September 30, 1997. The
security sold had an adjusted cost basis of $7.2 million and a $151,000 gain
was recorded on the sale. At December 31, 1997, the cost basis and market value
of impaired securities is $1.2 million and $1.7 million, respectively, compared
to $9.1 million and $9.1 million, respectively, at September 30, 1997.
Deposits decreased $22.7 million to $1.06 billion at December 31, 1997 from
$1.09 billion at September 30, 1997. The decrease in deposits was primarily due
to decreases of $11.9 million in brokered certificates of deposit and $21.8
million in certificates of deposit. However, slight increases in other types of
deposit products have partially offset the decreases. The Company has continued
to offer new deposit products in an effort to attract new deposits and maintain
current relationships with customers. At December 31, 1997, the Company had
approximately $128.9 million in brokered certificates of deposit compared with
$140.8 million at September 30, 1997. The brokered deposits generally are of
terms from three months to nine years in maturity with interest rates that
approximate the Company's retail certificate rates. At December 31, 1997, $99.9
million of the brokered deposits having longer maturities are callable within
one to two years. The Company cannot assure that there will be an increase in
deposits in the future, nor can there be any assurance the Company will retain
the deposits it now has.* The level of deposit flows during any given period is
heavily influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing instruments,
such as money market mutual funds.
Advances and other borrowings decreased by $32.7 million to $387.6 million at
December 31, 1997 from $420.2 million at September 30, 1997. The decrease is
due to repayments of Federal Home Loan Bank advances which
18
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
were funded by the proceeds of the sales of mortgage-backed and related
securities. Short term borrowings increased $66.3 million to $195.7 million at
December 31, 1997, compared to $129.4 million at September 30, 1997. Long term
borrowings decreased $98.9 million to $191.9 million at December 31, 1997,
compared to $290.8 million at December 31, 1996. The change in short term and
long term borrowings is due to adjustable rate borrowings moving from the
greater than one year maturity to the less than one year maturity category. At
December 31, 1997, the Company had a borrowing capacity available of $174.4
million from the FHLB; however, additional securities may have to be pledged as
collateral.
At December 31, 1997, the Company had $173.0 million in interest rate swaps
outstanding compared with $163.0 million at September 30, 1997. The swaps are
designed to offset the changing interest payments of some of the Company's
borrowings and brokered certificates. Fixed pay-floating receive swaps totaled
$55.0 million at December 31, 1997 and were entered into to hedge interest
rates on borrowings from the FHLB used to fund purchases of fixed rate
securities. Fixed pay-floating receive swaps will provide for a lower interest
expense (or interest income) in a rising rate environment while adding to
interest expense in a falling rate environment. Fixed receive-floating pay
swaps totaled $118.0 million at December 31, 1997 and were entered into to
hedge interest rates on brokered deposits used to fund the purchase of floating
rate securities. Fixed receive-floating pay swaps will provide for a lower
interest expense (or interest income) in a falling rate environment while
adding to interest expense in a rising rate environment. During the three
months ended December 31, 1997, the Company recorded a net reduction of
interest expense of $473,000 as a result of the Company's interest rate swap
agreements.
At December 31, 1997, the Company had $40.0 million in interest rate corridors
outstanding compared with $30.0 million at September 30, 1997. The Company uses
interest rate corridors to help protect its net interest margin in various
interest rate environments. $30.0 million of the interest rate corridors pay
the Company the range difference or a full 1.0% when the three-month Libor rate
is in the corridor strike rates. There are no payments due to the Company when
three-month Libor rates are outside of the corridor strike rates. $10.0 million
of the interest rate corridors pay the Company the difference between the
three-month Libor and the low limit of the corridor strike rate up to the full
amount of the corridor strike rate. There are no payments due to the Company
when three-month Libor rates are below the corridor strike rate. When rates are
above the corridor strike rate, the corridor pays the Company the full corridor
range of 1.0%.
There are certain risks associated with swaps and corridors, including the risk
that the counterparty may default and that there may not be an exact
correlation between the indices on which the swap agreements are based and the
terms of the hedged liabilities. In order to offset these risks, the Company
generally enters into swap and corridor agreements only with nationally
recognized securities firms and monitors the credit status of counterparties,
the level of collateral for such swaps and corridors and the correlation
between the hedged liabilities and indices utilized.
During the year ended September 30, 1997, the Company's Board of Directors
adopted a shareholders' rights plan (the "Rights Plan"). Under the terms of the
Rights Plan, the Board of Directors declared a dividend of one preferred share
purchase right for each outstanding share of common stock. If the rights become
exercisable, holders of each right, other than the acquirer, upon payment of
the exercise price, will have the right to purchase the Company's common stock
(in lieu of preferred shares) having a value equal to two times the exercise
price. Rights are redeemable by the Company at any time until they are
excercisable at the exchange rate of $.01 per right. Issuance of the rights has
no immediate dilutive effect, does not currently affect reported earnings per
share, is not taxable to the Company or its shareholders, and will not change
the way in which the Company's shares are traded. The rights expire in ten
years.
Advances and changes in available technology can significantly impact the
business and operations of the Company. The Company is in the process of
conducting a review of its computer systems and its third-party systems to
identify those that could be affected by the "Year 2000" issue and is
developing an implementation plan
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
to resolve the issue. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's programs or programs of third-party providers that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. If not corrected, Year 2000 issues could result in a major
system failure or miscalculations and material costs to the Company. The Company
presently believes that, with modifications to existing software and converting
to new software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems as so modified and converted, nor
will compliance with the Year 2000 problem result in a material cost.* However,
if such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended December 31, 1997 was $3.8
million compared to $3.2 million for the three months ended December 31, 1996.
The increase in net income was primarily the result of a $1.6 million increase
in net interest income and a $1.7 million increase in other operating income,
partially offset by a $2.5 million increase in general and administrative
expenses.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------------------------
1997 1996
---------- -------
<S> <C> <C>
Return on average assets................. 0.91% 0.88%
Return on average equity................. 11.48% 10.01%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $1.5 million or 16.9% to $10.5 million for the three months ended
December 31, 1997, compared to $9.0 million for the year ended December 31,
1996. The increase was due primarily to an increase of $197.1 million in
average earning assets. In addition, the net interest margin was 2.72% for the
three months ended December 31, 1997, compared to 2.67% for the three months
ended December 31, 1996. Over the last several years, the margin has been
affected by decreasing interest rate spreads that the Company has been
experiencing in its asset and liability base and a changing asset mix which
includes a higher level of non-interest earning assets. Over the last year, the
net interest margin has been relatively constant, fluctuating by only a few
basis points between each quarter. The Company increased its investment in
affordable housing units to $52.5 million at December 31, 1997 compared with
$39.6 million at December 31, 1996. At December 31, 1997, the Company has not
committed to any additional equity investments. This investment strategy
provides returns primarily through income tax credits but is not an interest
earning asset and thus has the effect of decreasing the Company's net interest
margin.
Total interest income increased $4.6 million or 18.6% to $29.4 million for the
three months ended December 31, 1997, compared to $24.8 million for the three
months ended December 31, 1996. The increase in interest income was primarily
the result of increases in interest on loans and securities. The increase in
interest on loans was primarily the result of an increase in the average
balance of loans to $750.5 million from $636.7 million for the three months
ended December 31, 1997 and 1996, respectively, and an increase in the average
yield on loans to 8.47% from 8.27% for the same period in the prior year. The
increase in the average balance of loans is due primarily to the Company's
recent efforts to emphasize commercial, consumer and home equity lending in
addition to the Kilbourn State Bank acquisition. However, such loans, while
potentially resulting ultimately in higher yields
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
for the Company, may result in a higher level of credit risk than conventional
mortgage loans. The increase in interest income on mortgage-backed and related
securities was due to an increase in the average balance of such securities to
$648.4 million for the three months ended December 31, 1997, from $579.9 million
for the three months ended December 31, 1996 and an increase in the average
yield on such securities to 7.13% from 6.77% for the same periods. The Company
has been active during the past quarter repositioning its available for sale
mortgage-backed and related securities portfolio by selling significant amounts
of securities and replacing them with securities with more favorable maturity
positions and characteristics which reflect the Company's overall
asset/liability management strategies.
Total interest expense increased $3.1 million or 19.6% to $19.0 million for the
three months ended December 31, 1997, compared to $15.9 million for the three
months ended December 31, 1996. The increase in interest expense was the result
of increases in the average balances and costs of deposits and advances and
other borrowings. The average balances of deposits were $1.04 billion for the
three months ended December 31, 1997, compared to $858.9 million for the same
period in the prior year. The increases in the balances of deposits are due to
the Company's offering of additional deposit products, the use of brokers to
sell certificates of deposit and the Kilbourn State Bank acquisition. The
average cost of deposits increased to 5.04% for the three months ended December
31, 1997, from 4.97% for the same period in the prior year. As part of a
continuing strategy, the Company continues to offer deposit products that
compete more effectively with money market funds and other non-financial
deposit products. Such accounts have generally changed the Company's
traditional mix of deposit accounts to one that is more adjustable to current
interest rates such as the money market demand account. This has resulted in
passbook and certificate of deposit accounts representing a lower percentage of
the Company's total deposit portfolio. The average balance of advances and
other borrowings were $398.8 million for the three months ended December 31,
1997, compared to $370.5 million for the same periods in the prior year. The
average cost of advances and other borrowings increased to 5.72% from 5.49% for
the three months ended December 31, 1997 and 1996, respectively. The borrowings
are primarily adjustable-rate FHLB advances which have repriced to reflect the
slight increase 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 periods ended
December 31, 1997 and 1996, respectively.
21
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------ -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits 35,095 460 5.20 % 20,459 259 5.02 %
Trading account securities 1,651 29 6.97 4,369 70 6.36
Debt and equity securities 69,703 948 5.40 68,413 1,009 5.85
Mortgage-backed and related securities 648,409 11,656 7.13 579,941 9,901 6.77
Loans:
First mortgage 446,947 9,215 8.18 417,381 8,348 7.94
Home equity 121,258 2,822 9.23 93,076 2,129 9.07
Consumer 110,648 2,404 8.62 100,939 2,187 8.60
Commercial and agricultural 71,623 1,573 8.71 25,274 601 9.43
------------------------- ------------------------
Total loans 750,476 16,014 8.47 636,670 13,265 8.27
Federal Home Loan Bank stock 20,843 353 6.72 19,259 330 6.80
------------------------- ------------------------
Total earning assets 1,526,177 29,460 7.66 1,329,111 24,834 7.41
----------- -----------
Valuation allowances (7,806) (6,922)
Cash and due from banks 28,612 16,438
Other assets 110,181 78,184
-------------- -------------
Total assets 1,657,164 1,416,811
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 61,585 239 1.54 43,499 156 1.42
Money market demand accounts 262,842 3,286 4.96 187,190 2,174 4.61
Passbook 115,772 917 3.14 77,037 553 2.85
Certificates of deposit 603,996 8,812 5.79 551,135 7,876 5.67
------------------------- ------------------------
Total interest-bearing deposits 1,044,195 13,254 5.04 858,861 10,759 4.97
Advances and other borrowings 398,751 5,748 5.72 370,540 5,125 5.49
Advances from borrowers for taxes and
insurance 8,108 - - 8,478 - -
------------------------- ------------------------
Total interest-bearing liabilities 1,451,054 19,002 5.20 1,237,879 15,884 5.09
----------- -----------
Non-interest bearing deposits 59,017 35,728
Other liabilities 15,781 18,061
Shareholders' equity 131,312 125,143
-------------- -------------
Total liabilities and shareholders' equity 1,657,164 1,416,811
============== =============
Net interest income 10,458 8,950
============== =============
Net yield on interest-earning assets
2.72 2.67
Interest rate spread
2.46 2.32
Ratio of earning assets to interest-bearing
liabilities 105.18 107.37
</TABLE>
22
<PAGE> 23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussin and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for
loan losses for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
1997 1996
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Beginning balance...................................... $ 6,202 $ 5,217
Provision for loan losses.............................
200 261
Recoveries............................................ 6 55
Charge-offs...........................................
(374) (473)
---------------- -----------------
Ending balance........................................ $ 6,034 $ 5,060
================ =================
Ratio of allowance for loan losses to gross loans
receivable at the end of the period.............. 0.76% 0.75%
Ratio of allowance for loan losses to total non-
performing loans at the end of the period........ 190.95% 116.72%
Ratio of net charge-offs to average gross loans
(annualized)..................................... 0.20% 0.26%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for potential losses as of December 31, 1997, based upon its current evaluation
of loan delinquencies, non-performing loans, charge-off trends, economic
conditions and other factors. Such evaluation, which includes a review of all
loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an accurate provision for
loan losses. At December 31, 1997, the provision for loan losses was $200,000
compared to $261,000 for the same period in the prior year. Charge-offs for the
three months ended December 31, 1997 were $374,000 compared to $473,000 for the
three months ended December 31, 1996. Repossessed autos sold during the quarter
resulted in charge-offs of $307,000. The balance of the repossessed auto loans
was $481,000 as of December 31, 1997. While additional charge-offs may be
incurred, it is expected they will happen at lower levels than in the previous
year (See "Asset Quality").* The Company believes that the allowance for loan
losses is adequate to provide for potential anticipated losses based upon
current known conditions.
OTHER OPERATING INCOME. Other operating income increased by $1.7 million to
$4.4 million for the three months ended December 31, 1997, compared to $2.7
million for the same period in the prior year. The following table shows the
percentage of other operating income to average assets for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
1997 1996
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Other operating income.................... $ 4,417 $ 2,657
Percent of average assets (annualized).... 1.06% .74%
</TABLE>
23
<PAGE> 24
ST. FRANCIS CAPITIAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The increase was due primarily to increases in gains on sales of mortgage
loans, increases in depository fees and service charges and income from the
Company's affordable housing subsidiary. Gains on the sale of mortgage loans
increased to $1.0 million from $227,000 for the three months ended December 31,
1997 and 1996, respectively. The Company's volume of mortgage loan sales was
$52.1 million for the three months ended December 31, 1997 compared to $27.1
million for the three months ended December 31, 1996. The decreasing interest
rate environment has increased the level of the Company's fixed rate loan
production which is sold into the secondary market. In addition to the
increased loan production, the falling interest rates have led to a greater
gain level on loans than in the prior year. Income from depository fees and
service charges increased to $809,000 for the three months ended December 31,
1997 compared to $403,000 for the three months ended December 31, 1996. Income
from the operations of the Company's affordable housing subsidiary (which
represents primarily rental income) increased to $1.0 million from $550,000 for
the three months ended December 31, 1997 and 1996, respectively. The Company
currently has 25 properties fully in operation compared to 19 in the prior
year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $2.5 million or 33.6% to $10.0 million for the three months ended
December 31, 1997, compared to $7.5 million for the same period in the prior
year. The following table shows the percentage of general and administrative
expenses to average assets for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
1997 1996
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
General and administrative expenses........ $9,967 $7,462
Percent of average assets (annualized)..... 2.39% 2.09%
</TABLE>
The current three month period includes the expenses of Kilbourn State Bank
which was purchased in February, 1997, and thus is not included in the prior
period numbers and also includes increased levels of compensation and other
costs associated with the opening of new branches and other activity connected
with the Company's higher level of earning assets. In addition, the affordable
housing subsidiary showed an increase in operating expenses of $559,000 for the
three months ended December 31, 1997, as compared to the same period in the
prior year, primarily as a result of the Company currently having 25 properties
fully in operation compared to 19 in the prior year.
INCOME TAX EXPENSE. Income tax expense increased $183,000 to $910,000 for the
three months ended December 31, 1997, compared to the same period in the prior
year. The effective tax rate for the three months ended December 31, 1997 was
19.33%, compared to 18.72% for the three months ended December 31, 1996. The
increase in effective rates reflects the increase in income before income tax
expense for the three months ended December 31, 1997 compared to the same
period in the prior year. Income tax credits increased to $967,000 for the
three months ended December 31, 1997, compared to $674,000 for the three months
ended December 31, 1996.
ASSET QUALITY
Total non-performing assets were $3.4 million or 0.21% of total assets at
December 31, 1997 and September 30, 1997. 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.
24
<PAGE> 25
ST. FRANCIS CAPITIAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets as of December 31, 1997 included $481,000 of purchased
auto loans which are past due or in default. These auto loans were purchased in
1995 and 1996 under a warehouse financing arrangement the Company had with the
originator of the sub-prime automobile loans. The intent of the financing was
to warehouse the loans until the originator could originate sufficient
quantities to securitize the loans and sell to institutional investors. At that
time, the loans would be sold back to the originator. The loans were serviced
by an independent third party servicer and the loans had various levels of
insurance and in addition were guaranteed as to principal and interest payments
by the originator of the loans. The maximum amount that the Company had
outstanding at any point in time was a balance of $14.6 million during
February, 1996. The Company has not funded any loans since that time and as of
December 31, 1997, the balance of the sub-prime auto loans was $481,000
compared to $1.1 million at September 30, 1997. The decrease in the loan
balance since September 30, 1997 is due to cash payments received of $273,000
and charge-offs of $307,000. Actions have been taken to repossess the
collateral on the delinquent loans and to enforce the guarantee of the
originator of these loans; however, it is anticipated that some portion of
these loans will ultimately result in a charge-off due to the possible
inability of the originator to perform under its guaranty.* In addition, the
level of insurance collected on policies paying for credit losses on the loans
has been lower than anticipated. Non-performing assets also includes a single
$846,000 commercial real estate loan on a shopping center.
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans................... $ 3,160 $ 2,995
Foreclosed properties..................
258 416
---------------- ----------------
Non-performing assets.................. $ 3,418 $ 3,411
================ ================
Non-performing loans to gross loans.... 0.40% 0.38%
Non-performing assets to gross assets.. 0.21% 0.21%
</TABLE>
There are no material loans about which management is aware that there exists
serious doubts as to the ability of the borrower to comply with the loan terms,
except as disclosed above.
Impaired loans totaled $1.3 million at December 31, 1997 compared to $1.9
million at September 30, 1997. These loans had associated impairment reserves
of $471,000 and $782,000 at December 31, 1997 and September 30, 1997,
respectively. The average balance of impaired loans was $1.7 million and $4.1
million at December 31, 1997 and September 30, 1997, respectively. Interest
income on impaired loans for the three months ended December 31, 1997 was
$16,000, compared to zero at September 30, 1997.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter
25
<PAGE> 26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
interest rate characteristics. Although management believes that
its asset/liability management strategies have reduced the potential
effects of changes in interest rates on its operations, increases in
interest rates may adversely affect the Company's results of operations
because interest-bearing liabilities will reprice more quickly than
interest-earning assets.
At December 31, 1997, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 9.79% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest earning assets. The Company's three-year
cumulative gap as of December 31, 1997 was a negative 6.92% of total assets.
With a negative gap position, during periods of rising interest rates it is
expected that the cost of the Company's interest-bearing liabilities will rise
more quickly than the yield on its interest-earning assets, which will have a
negative effect on its net interest income.* Although the opposite effect on
net interest income would occur in periods of falling interest rates, the
Company could experience substantial prepayments of its fixed-rate mortgage
loans and mortgage-backed and related securities in periods of falling interest
rates, which would result in the reinvestment of such proceeds at market rates
which are lower than current rates.*
26
<PAGE> 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 December
31, 1997.
<TABLE>
<CAPTION>
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed............................... $ 32,254 $30,480 $51,270 $25,414 $63,316 $ 202,734
Variable............................ 93,576 95,676 35,067 44,175 17,641 286,135
Consumer loans (2)....................... 110,977 53,673 23,195 16,404 30,130 234,379
Mortgage-backed and related securities 1,866 5,597 31,940 12,998 14,054 66,455
Assets available for sale:
Mortgage loans...................... 19,342 - - - - 19,342
Fixed rate mortgagE related......... 18,153 52,703 56,507 21,126 8,437 156,926
Variable rate mortgage related ..... 275,156 129,347 - - - 404,503
Other............................... 24,825 8,018 6,080 - - 38,923
Trading account securities............... - - - - - -
Investment securities and other assets 36,418 - 1,018 - 811 38,247
----------------------------------------------------------------------------------
Total............................... $612,567 $375,494 $205,077 $120,117 $134,389 $ 1,447,644
==================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts........................ $ 5,837 $ 17,512 $ 23,977 $ 9,516 $ 6,263 $ 63,105
Passbook savings accounts........... 4,942 14,828 30,029 20,687 45,809 116,295
Money market deposit accounts....... 58,750 176,253 18,699 4,675 1,558 259,935
Certificates of deposit............. 253,279 117,599 86,430 118,771 - 576,079
Borrowings............................... 382,529 5,000 56 - - 387,585
Impact of interest rate swap (4)......... 63,000 45,000 - (23,000) (85,000) -
----------------------------------------------------------------------------------
Total............................... $768,337 $376,192 $159,191 $ 130,649 $(31,370) 1,402,999
==================================================================================
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities............. $(155,770) $ (698) $ 45,886 $ (10,532) $ 165,759 $ 44,645
==================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities............. (155,770) (156,468) (110,582) (121,114) 44,645
=====================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets.................. (9.75%) (9.79%) (6.92%) (7.58%) 2.79%
=====================================================================
</TABLE>
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics, modified for forecasted
statistics using the Public Securities Association model of prepayments.*
For fixed rate mortgage loans and mortgage-backed and related securities,
annual prepayment rates ranging from 8% to 30%, based on the loan coupon
rate, were used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
insurance premiums, deferred loan fees, purchased loan discounts and
allowances for loan losses, which aggregated $47.1 million at December 31,
1997.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
of 37%, 17% and 88%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher
than the Company's historical rates but are considered by management to be
more indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $317.7 million or 19.9% of
total assets.
(4) Adjustable and floating rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
27
<PAGE> 28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding the withdrawal and prepayment are based on historical
experience, and management believes such assumptions reasonable, although the
actual withdrawal and repayment of assets and liabilities may vary
substantially.* Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and
liabilities may have similar maturities to repricing, they may react in
different degrees to changes in market interest rates.* Also, the interest
rates on other types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates.* Additionally, certain assets, such as
adjustable-rate loans and mortgage-backed and related securities, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the data in the table.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $43.5 million and
$42.9 million as of December 31, 1997 and September 30, 1997, 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, 1997, the Company
had a borrowing capacity available of $174.4 million from the FHLB; however,
additional securities may have to be pledged as collateral.
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 OTS capital regulations which require savings
institutions to meet three capital standards: (i) "tangible capital" in an
amount not less than 1.5% of adjusted total assets; (ii) "core capital" in an
amount not less than 3% of adjusted total assets; and (iii) "risk-based
capital" of at least 8% of risk-weighted assets. Savings institutions must
meet all of the standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios at the dates
indicated:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
------------------------ ------------------------
Capital Capital
------------------------ ------------------------
Capital Standard Amount Percent Amount Percent
- ------------------------------------ ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital 117,264 7.41% 117,337 7.14%
Core capital 117,264 7.41% 117,337 7.14%
Risk-based capital 123,098 12.20% 122,856 12.21%
</TABLE>
As evidenced by the foregoing, the capital of the Company's financial
institution subsidiary exceeded all capital requirements as mandated by the
requirements of the OTS.
28
<PAGE> 29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
More than More than More than More than
Within One Year Two Years Three Years Four Years
One Year to Two Years to Three Years to Four Years to Five Years
------------------ ----------------- ------------------ ------------------- ------------------
Interest Earning Assets (Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
commercial loans:
Fixed rate $ 51.4 8.12% $ 28.5 8.06% $ 15.3 8.09% $ 15.1 8.09% $ 10.1 8.05%
Adjustable rate 87.7 8.25% 45.8 8.30% 40.7 8.28% 29.4 8.24% 22.2 8.24%
Consumer loans:
Fixed rate 9.8 8.75% 15.7 8.68% 10.5 8.67% 13.8 9.12% 15.1 9.15%
Adjustable rate 26.8 9.50% 19.2 9.48% 44.8 9.28% 22.8 9.13% 8.3 10.37%
Mortgage-backed
Securities:
fixed rate 78.3 7.13% 44.2 6.94% 44.2 6.94% 17.1 7.00% 17.1 7.03%
adjustable rate 61.4 7.01% 40.6 7.03% 33.4 7.03% 21.5 7.06% 15.8 7.07%
Debt and equity
securities 32.8 6.41% 6.1 6.40% - - - - - -
Other 36.4 5.85% 1.0 5.81% - - - - - -
Total interest
--------- --------- ---------- ---------- ----------
earning assets $ 384.6 7.52% $ 201.1 7.78% $ 188.9 7.99% $ 119.7 8.10% $ 88.6 8.13%
========= ========= ========== ========== ==========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 23.3 1.42% $ 12.0 1.42% $ 12.0 1.42% $ 4.8 1.42% $ 4.7 1.42%
Passbooks 19.8 2.95% 15.0 2.95% 15.0 2.95% 10.3 2.95% 10.4 2.95%
Money market 235.0 4.58% 9.3 4.58% 9.4 4.58% 2.3 4.58% 2.3 4.58%
Certificates 389.0 5.74% 164.0 5.78% 14.7 5.94% 3.9 5.81% 4.4 6.14%
Borrowings
fixed rate 62.8 5.10% - - 0.1 6.94% - - - -
adjustable rate 134.7 5.82% 155.0 6.01% 30.0 6.00% 5.0 6.02% - -
Total interest
--------- --------- ---------- ---------- ----------
bearing liabilities $ 864.6 5.21% $ 355.3 5.58% $ 81.2 4.59% $ 26.3 3.82% $ 21.8 3.43%
========= ========= ========== ========== ==========
<CAPTION>
Fair
Over Market
Five Years Total Value
-- ----------------- ------------------ ---------
Interest Earning Assets
<S> <C> <C> <C> <C> <C>
Mortgage and
commercial loans:
Fixed rate $ 82.3 8.22% $ 202.7 8.14% $ 204.0
Adjustable rate 79.7 8.23% 305.5 8.25% 313.5
Consumer loans:
Fixed rate 47.6 9.03% 112.5 8.95% 113.1
Adjustable rate - - 121.9 9.41% 123.0
Mortgage-backed
Securities:
fixed rate 22.5 6.69% 223.4 7.00% 223.7
adjustable rate 231.8 6.93% 404.5 6.97% 509.9
Debt and equity
securities - - 38.9 6.41% 39.0
Other 0.8 5.15% 38.2 5.83% 40.1
Total interest
---------- ---------- ---------
earning assets $ 464.7 7.58% $ 1,447.6 7.72% $1,566.3
========== ========== =========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 6.3 1.42% $ 63.1 1.42% $ 63.1
Passbooks 45.8 2.95% 116.3 2.95% 116.3
Money market 1.6 4.58% 259.9 4.58% 259.9
Certificates 0.1 8.45% 576.1 5.76% 575.7
Borrowings
fixed rate - - 62.9 5.09% 62.9
adjustable rate - - 324.7 5.93% 324.7
Total interest
---------- ---------- ---------
bearing liabilities $ 53.8 2.83% $ 1,403.0 5.12% $1,402.6
========== ========== =========
</TABLE>
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank is involved in any pending
legal proceedings involving amounts in the aggregate which
management believes are material to the financial condition and
results of operations of the Registrant and the Bank.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On January 26, 1998, the Company announced the declaration of a
dividend of $0.14 per share on the Company's common stock for the
quarter ended December 31, 1997. The dividend is payable on
February 20, 1998 to shareholders of record as of February 10,
1998. This will be the tenth cash dividend payment since the
Company became a publicly-held company in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share
(See Footnote 7 in "Notes to Unaudited Consolidated
Financial Statements")
27.1 Financial Data Schedule
(b) Report on Form 8-K dated November 13, 1997 reporting
an Item 5 and an Item 7 event relating to the
Registrant's restatement of previously disclosed
9/30/97 fiscal year end results.
30
<PAGE> 31
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 16, 1998 By: /s/ Jon D. Sorenson
------------------------
Jon D. Sorenson
Chief Financial Officer
31
<PAGE> 32
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:___________________ By:__________________________________
Jon D. Sorenson
Chief Financial Officer
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 29,908
<INT-BEARING-DEPOSITS> 13,575
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 600,355
<INVESTMENTS-CARRYING> 70,284
<INVESTMENTS-MARKET> 70,732
<LOANS> 742,590
<ALLOWANCE> 6,034
<TOTAL-ASSETS> 1,597,648
<DEPOSITS> 1,064,453
<SHORT-TERM> 195,714
<LIABILITIES-OTHER> 13,463
<LONG-TERM> 191,872
0
0
<COMMON> 73
<OTHER-SE> 132,073
<TOTAL-LIABILITIES-AND-EQUITY> 1,597,648
<INTEREST-LOAN> 16,014
<INTEREST-INVEST> 12,604
<INTEREST-OTHER> 842
<INTEREST-TOTAL> 29,460
<INTEREST-DEPOSIT> 13,254
<INTEREST-EXPENSE> 19,002
<INTEREST-INCOME-NET> 10,458
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 527
<EXPENSE-OTHER> 2,263
<INCOME-PRETAX> 4,708
<INCOME-PRE-EXTRAORDINARY> 4,708
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,798
<EPS-PRIMARY> $0.77
<EPS-DILUTED> $0.72
<YIELD-ACTUAL> 2.72
<LOANS-NON> 3,160
<LOANS-PAST> 1,364
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,202
<CHARGE-OFFS> 374
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 6,034
<ALLOWANCE-DOMESTIC> 6,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
