<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
-------------------------------
(Exact name of Registrant as Specified in its Charter)
WISCONSIN 39-1747461
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
---------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(414) 486-8700
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
----- -----
(2) Yes x No
----- -----
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 10,124,870 at April 30, 1999.
Page 1 of 31 pages
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Consolidated Financial Statements.......................................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 28
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings................................................................................... 29
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 29
ITEM 3. Defaults Upon Senior Securities..................................................................... 29
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 29
ITEM 5. Other Information................................................................................... 30
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 30
SIGNATURES.................................................................................................... 31
- ----------
</TABLE>
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
March 31, September 30,
1999 1998
----------------- ------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 25,347 $ 23,861
Federal funds sold and overnight deposits.................................... 14,101 6,885
----------------- ------------------
Cash and cash equivalents.................................................... 39,448 30,746
----------------- ------------------
Assets available for sale, at fair value:
Debt and equity securities................................................ 223,225 109,061
Mortgage-backed and related securities.................................... 868,600 634,003
Mortgage loans held for sale, at lower of cost or market..................... 29,533 23,864
Securities held to maturity, at amortized cost:
Debt securities (market values of $850 and $1,875, respectively........... 810 1,817
Mortgage-backed and related securities (market values of $48,797
and $63,497, respectively)................................................ 48,620 63,087
Loans receivable, net........................................................ 964,442 855,132
Federal Home Loan Bank stock, at cost........................................ 32,253 23,453
Accrued interest receivable.................................................. 13,068 9,726
Foreclosed properties........................................................ 377 63
Real estate held for investment.............................................. 29,535 29,997
Real estate held for sale.................................................... - 20,772
Premises and equipment, net.................................................. 32,836 32,165
Other assets................................................................. 36,615 30,290
----------------- ------------------
Total assets................................................................. $ 2,319,362 $ 1,864,176
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits..................................................................... $ 1,318,591 $ 1,216,874
Short term borrowings........................................................ 594,402 417,672
Long term borrowings......................................................... 260,972 87,005
Advances from borrowers for taxes and insurance.............................. 3,119 8,553
Accrued interest payable and other liabilities............................... 10,156 12,527
----------------- ------------------
Total liabilities............................................................ 2,187,240 1,742,631
----------------- ------------------
Commitments and contingencies................................................ - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued............................................................... - -
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 10,119,242 and 9,575,366 shares, respectively................ 146 146
Additional paid-in-capital................................................... 81,773 75,237
Accumulated other comprehensive income (loss)................................ (3,642) 381
Unearned ESOP compensation................................................... (2,467) (2,678)
Treasury stock at cost (4,459,998 and 5,003,874 shares, respectively)........ (59,434) (63,903)
Retained earnings, substantially restricted.................................. 115,746 112,362
----------------- ------------------
Total shareholders' equity................................................... 132,122 121,545
----------------- ------------------
Total liabilities and shareholders' equity................................... $ 2,319,362 $ 1,864,176
================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
<S> <C> <C> <C> <C>
Loans ............................................ $ 38,002 $ 32,344 $ 19,465 $ 16,330
Mortgage-backed and related securities ........... 22,910 21,840 12,601 10,184
Debt and equity securities ....................... 3,524 1,580 2,372 632
Federal funds sold and overnight deposits ........ 586 617 188 157
Federal Home Loan Bank stock ..................... 898 721 513 368
Trading account securities ....................... 16 38 5 9
-------- -------- -------- --------
Total interest and dividend income .................... 65,936 57,140 35,144 27,680
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits ......................................... 27,239 25,608 13,517 12,354
Advances and other borrowings .................... 15,268 11,318 8,727 5,570
-------- -------- -------- --------
Total interest expense ................................ 42,507 36,926 22,244 17,924
-------- -------- -------- --------
Net interest income before provision for loan losses... 23,429 20,214 12,900 9,756
Provision for loan losses ............................. 960 1,700 480 1,500
-------- -------- -------- --------
Net interest income ................................... 22,469 18,514 12,420 8,256
-------- -------- -------- --------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees ............. 904 1,114 385 559
Depository fees and service charges .............. 1,923 1,567 971 758
Securities gains (losses) ........................ (372) 492 (400) (118)
Gain on sales of loans ........................... 2,124 2,344 860 1,302
Insurance, annuity and brokerage commissions ..... 705 531 319 284
(Loss) on foreclosed properties .................. (33) (21) (11) (26)
Income from affordable housing ................... 2,172 2,435 826 1,418
Gain on sale of real estate held for sale ........ 1,225 -- 492 --
Other income ..................................... 503 1,128 244 996
-------- -------- -------- --------
Total other operating income, net ..................... 9,151 9,590 3,686 5,173
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits ............... 10,393 9,571 5,009 4,583
Office building, including depreciation .......... 2,182 1,530 1,179 829
Furniture and equipment, including depreciation... 2,110 1,517 1,096 828
Federal deposit insurance premiums ............... 348 316 185 170
Affordable housing expenses ...................... 2,345 2,721 936 1,541
Other general and administrative expenses ........ 4,520 4,678 2,500 2,415
-------- -------- -------- --------
Total general and administrative expenses ............. 21,898 20,333 10,905 10,366
-------- -------- -------- --------
Income before income tax expense ...................... 9,722 7,771 5,201 3,063
Income tax expense (benefit) .......................... 2,287 390 1,531 (520)
-------- -------- -------- --------
Net income ............................................ $ 7,435 $ 7,381 $ 3,670 $ 3,583
======== ======== ======== ========
Basic earnings per share .............................. $ 0.82 $ 0.75 $ 0.39 $ 0.36
======== ======== ======== ========
Diluted earnings per share ............................ $ 0.78 $ 0.70 $ 0.37 $ 0.34
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Accumulated
Shares of Other
Common Additional Comprehensive
Stock Common Paid-In Income/
Outstanding Stock Capital (Loss)
-------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C>
Six months ended March 31, 1998
- -------------------------------
Balance at September 30, 1997 - as
previously reported ............................ 5,226,998 $ 73 $ 73,541 $ 1,046
2-for-1 stock split declared March 23, 1999 ......... 5,226,998 73 (73) --
----------- ----------- ----------- -----------
Balance at September 30, 1997 ....................... 10,453,996 $ 146 $ 73,468 $ 1,046
Net income .......................................... -- -- -- --
Unrealized loss on securities available
for sale ....................................... -- -- -- (495)
Reclassification adjustment for gains
realized in net income ......................... -- -- -- (492)
Incomes taxes ....................................... -- -- -- 415
Comprehensive income ................................
Cash dividend - $0.14 per share ..................... -- -- -- --
Purchase of treasury stock .......................... (189,976) -- -- --
Exercise of stock options, net ...................... 163,346 -- 296 --
Amortization of unearned compensation ............... -- -- 887 --
----------- ----------- ----------- -----------
Balance at March 31, 1998 ........................... 10,427,366 $ 146 $ 74,651 $ 474
=========== =========== =========== ===========
Six months ended March 31, 1999
- -------------------------------
Balance at September 30, 1998 - as
previously reported ............................ 4,787,683 $ 73 $ 75,310 $ 381
2-for-1 stock split declared March 23, 1999 ......... 4,787,683 73 (73) --
----------- ----------- ----------- -----------
Balance at September 30, 1998 ....................... 9,575,366 $ 146 $ 75,237 $ 381
Net income .......................................... -- -- -- --
Unrealized loss on securities available
for sale ....................................... -- -- -- (7,014)
Reclassification adjustment for losses
realized in net income ......................... -- -- -- 372
Incomes taxes ....................................... -- -- -- 2,619
Comprehensive income ................................
Cash dividend - $0.16 per share ..................... -- -- -- --
Shares of common stock issued for acquisition........ 734,564 -- 5,556 --
Purchase of treasury stock .......................... (479,974) -- -- --
Exercise of stock options, net ...................... 289,286 -- 63 --
Amortization of unearned compensation ............... -- -- 917 --
----------- ----------- ----------- -----------
Balance at March 31, 1999 ........................... 10,119,242 $ 146 $ 81,773 $ (3,642)
=========== =========== =========== ===========
<CAPTION>
Unearned
ESOP Treasury Retained
Compensation Stock Earnings Total
-------------------------------------------------------------
of Common Stock Outstanding)
<S> <C> <C> <C> <C>
Six months ended March 31, 1998
- -------------------------------
Balance at September 30, 1997 - as
previously reported ............................ $ (3,088) $ (44,511) $ 101,469 $ 128,530
2-for-1 stock split declared March 23, 1999 ......... -- -- -- --
----------- ----------- ----------- -----------
Balance at September 30, 1997 ....................... $ (3,088) $ (44,511) $ 101,469 $ 128,530
Net income .......................................... -- -- 7,381 7,381
Unrealized loss on securities available
for sale ....................................... -- -- -- (495)
Reclassification adjustment for gains
realized in net income ......................... -- -- -- (492)
Incomes taxes ....................................... -- -- -- 415
-----------
Comprehensive income ................................ 6,809
Cash dividend - $0.14 per share ..................... -- -- (1,470) (1,470)
Purchase of treasury stock .......................... -- (4,132) -- (4,132)
Exercise of stock options, net ...................... -- 1,723 (967) 1,052
Amortization of unearned compensation ............... 205 -- -- 1,092
----------- ----------- ----------- -----------
Balance at March 31, 1998 ........................... $ (2,883) $ (46,920) $ 106,413 $ 131,881
=========== =========== =========== ===========
Six months ended March 31, 1999
- -------------------------------
Balance at September 30, 1998 - as
previously reported ............................ $ (2,678) $ (63,903) $ 112,362 $ 121,545
2-for-1 stock split declared March 23, 1999 ......... -- -- -- --
----------- ----------- ----------- -----------
Balance at September 30, 1998 ....................... $ (2,678) $ (63,903) $ 112,362 $ 121,545
Net income .......................................... -- -- 7,435 7,435
Unrealized loss on securities available
for sale ....................................... -- -- -- (7,014)
Reclassification adjustment for losses
realized in net income ......................... -- -- -- 372
Incomes taxes ....................................... -- -- -- 2,619
-----------
Comprehensive income ................................ 3,412
Cash dividend - $0.16 per share ..................... -- -- (1,540) (1,540)
Shares of common stock issued for acquisition........ -- 9,727 -- 15,283
Purchase of treasury stock .......................... -- (8,988) -- (8,988)
Exercise of stock options, net ...................... -- 3,730 (2,511) 1,282
Amortization of unearned compensation ............... 211 -- -- 1,128
----------- ----------- ----------- -----------
Balance at March 31, 1999 ........................... $ (2,467) $ (59,434) $ 115,746 $ 132,122
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Six months ended
March 31,
----------------------------------------
1999 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 7,435 $ 7,381
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................. 960 1,700
Depreciation, accretion and amortization .................................. 4,804 3,737
Deferred income taxes ..................................................... 507 263
Securities (gains) losses ................................................. 372 (492)
Originations of loans held for sale ....................................... (139,436) (102,640)
Proceeds from sales of loans held for sale ................................ 131,643 103,249
Stock-based compensation expense .......................................... 1,128 1,092
Gain on sale of real estate held for sale ................................. (1,225) --
Other, net ................................................................ (1,903) (6,965)
--------- ---------
Total adjustments ............................................................... (3,150) (56)
--------- ---------
Net cash provided by operating activities ....................................... 4,285 7,325
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity ................ 1,004 2,008
Purchases of debt securities held to maturity ............................... -- --
Proceeds from maturities of mortgage-backed and related securities .......... 3,909 --
Principal repayments on mortgage-backed and related securities
held to maturity ........................................................ 10,558 709
Purchases of mortgage-backed securities available for sale .................. (419,685) (197,217)
Proceeds from sales of mortgage-backed securities available for sale ........ 28,572 142,722
Principal repayments on mortgage-backed securities available for sale ....... 156,873 97,805
Purchase of debt and equity securities available for sale ................... (214,748) (35,774)
Proceeds from sales of debt and equity securities available for sale ........ 75,520 26,514
Proceeds from maturities of debt and equity securities available for sale ... 32,524 12,599
Net cash used for acquisitions .............................................. (4,286) --
Purchases of Federal Home Loan Bank stock ................................... (12,150) --
Redemption of Federal Home Loan Bank stock .................................. 3,504 --
Purchase of loans ........................................................... (11,979) (27,114)
Increase in loans, net of loans held for sale ............................... (85,469) (16,009)
Proceeds from sale of real estate held for sale ............................. 21,997 --
Increase in real estate held for investment ................................. (603) (1,665)
Purchases of premises and equipment, net .................................... (2,306) (5,487)
--------- ---------
Net cash (used in) investing activities ......................................... (416,765) (909)
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE> 7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Six months ended
March 31,
----------------------------------------
1999 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................. 85,165 2,158
Proceeds from advances and other borrowings .............................. 777,320 99,786
Repayments on advances and other borrowings .............................. (572,263) (103,157)
Increase (decrease) in securities sold under agreements to repurchase .... 145,640 (6,177)
Decrease in advances from borrowers for taxes and insurance .............. (5,434) (6,376)
Dividends paid ........................................................... (1,540) (1,470)
Stock option transactions ................................................ 1,282 1,052
Purchase of treasury stock ............................................... (8,988) (4,132)
--------- ---------
Net cash provided by (used in) financing activities .......................... 421,182 (18,316)
--------- ---------
Increase (decrease) in cash and cash equivalents ............................. 8,702 (11,900)
Cash and cash equivalents:
Beginning of period .................................................... 30,746 42,858
--------- ---------
End of period .......................................................... $ 39,448 $ 30,958
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 42,654 $ 38,127
Income taxes ........................................................... 102 105
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans secured as mortgage-backed securities ................... $ 5,961 $ 9,680
Transfer from loans to foreclosed properties ........................... 174 470
Transfer of mortgage loans to mortgage loans held for sale ............. 30,029
33,713
Acquisitions:
Assets acquired ........................................................ $ 42,866 $ --
Cash paid for purchase of stock ........................................ (10,132) --
Cash acquired .......................................................... 5,846 --
--------- ---------
Net cash used for acquisitions .................................... (4,286) --
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and
balances of St. Francis Capital Corporation (the "Company"), its
wholly-owned subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and
the Bank's wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included. Operating results
for the three and six-month periods ended March 31, 1999 are not
necessarily indicative of the results which may be expected for the
entire year ending September 30, 1999.
Certain previously reported balances have been reclassified to conform
with the 1999 presentation.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement established
standards for reporting the components of comprehensive income
prominently within the financial statements. Comprehensive income
includes net income plus certain transactions that are reported
directly within stockholders' equity. The Company adopted this
statement with the first quarter of 1999 financial statements and has
restated the prior period amounts. The adoption of this statement did
not have any impact on the financial position or the results of
operations of the Company.
On March 23, 1999, the Company declared a two-for-one stock split of
its common stock payable on April 19, 1999, in the form of a stock
dividend for shareholders of record at the close of business on April
10, 1999. All share and per share amounts on the accompanying
consolidated financial statements have been restated to give effect to
the stock split.
(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)
March 31, September 30,
1999 1998
----------------- ------------------
(In thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed-rate loans..................................... $ 11,403 $ 10,637
Variable-rate loans.................................. 54,226 19,647
Mortgage loans sold with recourse........................ 22,309 35,558
Guarantees under IRB issues.............................. 24,504 18,301
Interest rate swap agreements (notional amount).......... 200,000 225,000
Interest rate corridors (notional amount)................ - 10,000
Commitments to:
Purchase mortgage-backed securities.................... 25,000 -
Sell mortgage-backed securities........................ - 37,000
Unused and open-ended lines of credit:
Consumer............................................... 162,491 158,210
Commercial............................................. 97,836 25,061
Open option contracts written:
Short-put options...................................... - -
Short-call options..................................... 12,000 2,000
</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 March 31, 1999 have interest rates ranging from
6.25% to 8.00%. 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 Federal National
Mortgage Association ("FNMA"), with the servicing of these loans being
retained by the Company. The Company's exposure on loans sold with
recourse is the same as if the loans remained in the Company's loan
portfolio. The Company receives a larger servicing spread on those
loans being serviced than it would if the loans had been sold without
recourse.
The Company has entered into agreements whereby, for an initial and
annual fee, it will guarantee payment on letters of credit backing
industrial revenue bond issues ("IRB"). The IRBs are issued by
municipalities to finance real estate owned by a third party. Potential
losses on the letters of credit are the notional amount of the
guarantees less the value of the real estate collateral. At March 31,
1999, appraised values of the real estate collateral exceeded the
amount of the guarantees.
Interest rate swap agreements generally involve the exchange of fixed
and variable rate interest rate payments without the exchange of the
underlying notional amount on which the interest rate payments are
calculated. The notional amounts of these agreements represent the
amounts on which interest payments are exchanged between the
counterparties. The notional amounts do not represent direct credit
exposures. The Company is exposed to credit-related losses in the event
of nonperformance by the counterparties on interest rate payments, but
does not expect any counterparty to fail to meet their obligations. The
fixed receive-floating pay agreements were entered into as hedges of
the interest rates on fixed rate 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.
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The agreements at March 31, 1999 consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 15,000 Fixed Receive-Floating Pay 2003 1999 6.00% 4.79%
15,000 Fixed Receive-Floating Pay 2005 1999 6.10% 4.80%
15,000 Fixed Receive-Floating Pay 2005 1999 6.25% 4.86%
10,000 Fixed Receive-Floating Pay 2003 1999 6.58% 5.03%
5,000 Fixed Receive-Floating Pay 2003 1999 6.47% 5.03%
10,000 Fixed Receive-Floating Pay 2003 1999 6.53% 5.00%
5,000 Fixed Receive-Floating Pay 2003 1999 6.43% 5.00%
15,000 Fixed Receive-Floating Pay 2007 1999 7.05% 4.91%
15,000 Fixed Receive-Floating Pay 2007 1999 6.90% 4.79%
10,000 Fixed Receive-Floating Pay 2007 1999 7.13% 4.91%
15,000 Fixed Receive-Floating Pay 2005 1999 6.00% 4.87%
15,000 Fixed Receive-Floating Pay 2008 1999 6.30% 4.86%
10,000 Fixed Receive-Floating Pay 2008 1999 5.85% 4.86%
10,000 Fixed Receive-Floating Pay 2009 2000 6.00% 4.93%
10,000 Fixed Receive-Floating Pay 2009 2000 6.00% 4.83%
10,000 Fixed Receive-Floating Pay 2009 2000 6.05% 4.84%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 4.88%
5,000 Fixed Receive-Floating Pay 2009 2001 6.25% 4.85%
</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 March 31, 1999,
the gross unrealized gains and losses of $999,000 and $1.5 million,
respectively, equals the fair value loss of the interest rate swaps of
$526,000.
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 these lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for
these commitments may include, but may not be limited to, real estate,
investment securities, equipment, accounts receivable, inventory, and
Company deposits.
The open option contracts purchased and sold represent the notional
amounts to buy or sell mortgage-backed securities or futures on U.S.
treasury securities. The Company receives a premium/fee for sold put
and call options which give the purchaser the right, but not the
obligation, to buy or sell these securities or futures respectively,
within a specified time period for a contracted price. The Company pays
a premium/fee for purchased put and call options which gives the
Company the right, but not the obligation, to sell or buy these
securities or futures respectively, within a specified time period for
a contracted price. The Company has been utilizing these options to
manage the interest rate and market value risk relating to
mortgage-backed securities ("MBS") that result from the MBS loan swap
program, mortgage pipeline, and for the securities portfolios.
10
<PAGE> 11
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
March 31, 1999 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 ............. $205,183 $ 54 $ 1,606 $203,631
Corporate notes and bonds ................ 1,000 7 -- 1,007
Marketable equity securities ............. 18,587 -- -- 18,587
======== ======== ======== ========
TOTAL DEBT AND EQUITY SECURITIES .......... $224,770 $ 61 $ 1,606 $223,225
======== ======== ======== ========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC .................................. $ 1,496 $ -- $ 4 $ 1,492
FNMA ................................... 12,401 -- 42 12,359
GNMA ................................... 319 10 -- 329
Private issue .......................... 88,513 466 2,020 86,959
REMICs:
FHLMC .................................. 146,180 196 1,365 145,011
FNMA ................................... 51,131 83 250 50,964
GNMA ................................... 2,636 226 -- 2,862
Private issue .......................... 570,405 894 2,711 568,588
CMO residual ............................. 36 -- -- 36
-------- -------- -------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES .......................... $873,117 $ 1,875 $ 6,392 $868,600
======== ======== ======== ========
<CAPTION>
SECURITIES HELD TO MATURITY
--------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ------------ ------------- -------------
(In thousands)
DEBT SECURITIES:
<S> <C> <C> <C> <C>
State and municipal obligations .... $ 810 $ 40 $ -- $ 850
======= ======= ======= =======
TOTAL DEBT SECURITIES .............. $ 810 $ 40 $ -- $ 850
======= ======= ======= =======
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FNMA ............................. $ 825 $ -- $ 1 $ 824
Private issue .................... 47,795 188 10 47,973
------- ------- ------- -------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES .................... $48,620 $ 188 $ 11 $48,797
======= ======= ======= =======
</TABLE>
During the six month periods ended March 31, 1999 and 1998, gross
proceeds from the sale of securities available for sale totaled
approximately $109.1 million and $169.2 million, respectively. The
gross realized gains on such sales totaled approximately $130,000 and
$2.2 million for the six month periods ended March 31, 1999 and 1998,
respectively. The
11
<PAGE> 12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
gross realized losses on such sales totaled approximately $498,000 and
$1.9 million for the six month periods ended March 31, 1999 and 1998,
respectively.
During the three month periods ended March 31, 1999 and 1998, gross
proceeds from the sale of securities available for sale totaled
approximately $85.1 million and $49.9 million, respectively. The gross
realized gains on such sales totaled approximately $64,000 and $80,000
for the three month periods ended March 31, 1999 and 1998,
respectively. The gross realized losses on such sales totaled
approximately $410,000 and $266,000 for the three month periods ended
March 31, 1999 and 1998, respectively.
At March 31, 1999 and 1998, $498.4 million and $222.9 million,
respectively, of mortgage-related securities were pledged as collateral
for Federal Home Loan Bank ("FHLB") advances.
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
First mortgage - one- to four-family .... $ 245,396 $ 254,047
First mortgage - residential construction 86,542 71,092
First mortgage - multi-family ........... 149,544 105,380
Commercial real estate .................. 209,173 170,562
Home equity ............................. 140,530 142,993
Commercial and agriculture .............. 119,219 93,927
Consumer secured by real estate ......... 92,408 85,595
Interim financing and consumer loans .... 14,413 13,375
Indirect auto ........................... 39,356 32,173
Education ............................... 3,550 2,529
---------- ----------
Total gross loans ................... 1,100,131 971,673
---------- ----------
Less:
Loans in process .................... 95,834 83,436
Unearned insurance premiums ......... 236 292
Deferred loan and guarantee fees .... 892 848
Purchased loan discount ............. 516 571
Allowance for loan losses ........... 8,678 7,530
---------- ----------
Total deductions .................... 106,156 92,677
---------- ----------
Total loans receivable .................. 993,975 878,996
Less: First mortgage loans held for sale 29,533 23,864
---------- ----------
Loans receivable, net ................... $ 964,442 $ 855,132
========== ==========
</TABLE>
12
<PAGE> 13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Six months ended Three months ended
March 31, March 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- -------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Beginning Balance.................................. $ 7,530 $ 6,202 $ 7,964 $ 6,034
Charge-offs:
Real estate - mortgage........................... - - - -
Commercial real estate........................... - - - -
Commercial loans................................. (11) - (1) -
Home equity loans................................ (20) - (20) -
Consumer......................................... (113) (437) (71) (63)
------------- -------------- ------------- --------------
Total charge-offs.................................. (144) (437) (92) (63)
------------- -------------- ------------- --------------
Recoveries:
Real estate - mortgage........................... - - - -
Commercial real estate........................... - - - -
Commercial loans................................. - - - -
Home equity loans................................ 16 - 16 -
Consumer......................................... 13 17 7 11
-------------- ------------- -------------- -------------
Total recoveries................................... 29 17 23 11
-------------- -------------- ------------- -------------
Net charge-offs.................................... (115) (420) (69) (52)
------------- -------------- ------------- --------------
Acquired bank's allowance.......................... 303 - 303 -
Provision.......................................... 960 1,700 480 1,500
-------------- ------------- -------------- -------------
Ending balance..................................... $ 8,678 $ 7,482 $ 8,678 $ 7,482
============= ============== ============= ==============
</TABLE>
Total non-performing assets were $3.8 million, or 0.16% of total
assets at March 31, 1999, compared with $2.9 million, or 0.16% of
total assets at September 30, 1998. Non-performing assets include
loans which have been placed on nonaccrual status and property upon
which a judgment of foreclosure has been entered but prior to the
foreclosure sale, as well as property acquired as a result of
foreclosure. Non-performing assets includes a single $824,000
commercial real estate loan on a shopping center.
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------ -----------------
(In thousands)
<S> <C> <C>
Non-performing loans.............................. $ 3,417 $ 2,861
Foreclosed properties.............................
377 63
------------------ -----------------
Non-performing assets............................. $ 3,794 $ 2,924
================== =================
Non-performing loans to gross loans............... 0.31% 0.29%
Non-performing assets to total assets............. 0.16% 0.16%
</TABLE>
13
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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 $912,000 at March 31, 1999 compared to $1.0
million at September 30, 1998. These loans had associated impairment
reserves of $449,000 and $529,000 at March 31, 1999 and September 30,
1998, respectively. The average balance of impaired loans was $971,000
and $1.4 million at March 31, 1999 and September 30, 1998,
respectively.
(7) Earnings Per Share
Basic earnings per share of common stock for the six and three months
ended March 31, 1999 and 1998, 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 six and three month periods ended March 31,
1999 and 1998, have been determined by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options. Book value per share of common stock at
March 31, 1999 and September 30, 1998 have been determined by dividing
total shareholders' equity by the number of shares of common stock
outstanding during the period adjusted for the dilutive effect of
outstanding stock options at the respective dates. Stock options are
regarded as potential common stock and are, therefore, considered in
per share calculations. Total shares outstanding for earnings per share
calculation purposes have been reduced by the Employee Stock Ownership
Plan ("ESOP") shares that have not been committed to be released.
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Six months ended Three months ended
March 31, March 31,
-------------------------------- ---------------------------------
1999 1998 1999 1998
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income for the period .................. $ 7,435,000 $ 7,381,000 $ 3,670,000 $ 3,583,000
=========== =========== =========== ===========
Common shares issued ....................... 14,579,240 14,579,240 14,579,240 14,579,240
Net Treasury shares ........................ 5,034,146 4,090,192 4,763,866 4,073,758
Unallocated ESOP shares .................... 503,154 585,336 492,650 575,894
----------- ----------- ----------- -----------
Weighted average common shares
outstanding during the period .......... 9,041,940 9,903,712 9,322,724 9,929,588
Assumed incremental common stock issued upon
exercise of stock options .............. 491,367 628,619 469,537 596,044
----------- ----------- ----------- -----------
Total weighted average common shares and
equivalents outstanding ................ 9,533,307 10,532,331 9,792,261 10,525,632
=========== =========== =========== ===========
Basic earnings per share ................... $ 0.82 $ 0.75 $ 0.39 $ 0.36
Diluted earnings per share ................. $ 0.78 $ 0.70 $ 0.37 $ 0.34
</TABLE>
14
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of book value per common share is as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------ -------------------
<S> <C> <C>
Common shares outstanding at the end
of the period ................................. 9,626,592 9,040,476
Incremental shares relating to dilutive stock
options outstanding at the end of the period... 453,568 484,196
------------ ------------
10,080,160 9,524,672
============ ============
Total shareholders' equity at the end of
the period .................................... $132,122,000 $121,545,000
Book value per common share ...................... $ 13.11 $ 12.76
</TABLE>
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of directors
and officers of the Company. The option exercise price cannot be less
than the fair value of the underlying common stock as of the date of
the option grant, and the maximum term cannot exceed ten years. Stock
options awarded to directors may be exercised at any time or on a
cumulative basis over varying time periods, provided the grantee
remains a director of the Company. The stock options awarded to
officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At March 31, 1999, 95,774 shares were reserved for future grants.
Further information concerning the options is as follows:
<TABLE>
<CAPTION>
Six months ended March 31,
------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------
Average Average
Exercise Exercise
Options Price Options Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.... 1,163,620 $ 10.51 1,313,132 $ 9.69
Granted .............................. 782,264 18.65 73,334 19.19
Canceled ............................. (40,550) 17.31 (49,500) 14.12
Exercised ............................ (304,120) 5.01 (169,346) 5.14
---------- ------------- --------- -------------
Outstanding at end of period ......... 1,601,214 $ 15.36 1,167,620 $ 10.50
========== ============= ========= =============
Options exercisable .................. 434,940 $5.00 - 20.25 507,106 $5.00 - 19.38
========== ============= ========= =============
</TABLE>
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Six months ended March 31,
1999 1998
------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Federal income tax expense at statutory rate of 35%.................. $ 3,403 $ 2,720
State income taxes, net of Federal income tax benefit................ 233 (388)
Tax exempt interest.................................................. (70) -
Non-deductible compensation.......................................... 229 219
Acquisition intangible amortization.................................. 117 123
Affordable housing credits........................................... (1,654) (2,048)
Other, net........................................................... 29 (237)
------------- -------------
$ 2,287 $ 389
============= =============
</TABLE>
Included in other assets is a deferred tax asset of $3.3 million and
$3.6 million at March 31, 1999 and September 30, 1998.
(10) Acquisitions
In January 1999, the Company completed the acquisition of Reliance
Bancshares, Inc. ("Reliance") for $25.4 million in stock and cash.
Under the terms of the agreement each share of Reliance common stock
was converted into either .25 shares of common stock of the Company or
$5.20 in cash in accordance with elections made by Reliance
shareholders and subject to certain specified allocation and proration
procedures. The Company issued 734,564 shares of common stock in
connection with this transaction. The acquisition was treated as a
purchase transaction for accounting purposes. The related accounts and
results of operations are included in the Company's consolidated
financial statements from the date of acquisition. The acquisition of
Reliance added $43.0 million in assets, including additions of $25.7
million to net loans and $16.6 million to deposits. Proforma results
for the prior period are not materially different from the historical
information. All share and per share amounts have been restated to give
effect to the two-for-one stock split effective April 19, 1999.
The excess of cost over the fair value of tangible assets acquired is
accounted for as goodwill and is amortized over fifteen years using the
straight-line method. The amount of goodwill recorded due to the
acquisition was $3.0 million.
(11) Changes in Accounting Policy
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective
for fiscal years beginning after December 15, 1997 and will be adopted
by the Company in its September 30, 1999 financial statements. 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. Adoption is not expected to have an effect on results
of operations or financial position.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for years beginning after
June 15, 1999, although earlier adoption is permitted. This standard
establishes new rules for the recognition and measurement of
derivatives and hedging activities. It requires all derivatives to be
recorded on the balance sheet at fair value, although the timing of
recognition in earnings will depend on the classification of the hedge
according to criteria established by SFAS 133. Changes in the fair
value of derivatives that do not meet these criteria are
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
required to be included in earnings in the period of the change. The
Company will adopt this standard on October 1, 1999 and expects that it
will not materially effect results of operations or financial position.
The FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise: an amendment of FASB Statement
No. 65," which is effective for the first fiscal quarter beginning
after December 15, 1998 and was adopted by the Company on January 1,
1999. This statement requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold
those investments. This statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans held
by a mortgage banking entity with the required accounting for
securities retained after the securitization of other types of assets
by a nonmortgage banking enterprise. Adoption did not materially effect
results of operations or financial position.
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Forward-looking statements with respect to the financial condition, results of
operations and business of the Company, which 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
cautions 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.
YEAR 2000
Advances and changes in available technology can significantly impact the
business and operations of the Company. 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 is adhering to the Federal Financial Institution's Examination
Council ("FFIEC") Year 2000 directives that have been published since 1996,
which establish policy guidelines and time frames to guide Year 2000 compliance.
All management activities and plans have incorporated the FFIEC guidelines
published to date.
The Company's Year 2000 compliance efforts have included completing an inventory
of all products and services that may be affected by Year 2000 date related
issues. Each item has been categorized as either mission critical, moderate or
low priority depending on its importance to the operation of the Company's
business activities. The Company is adhering to FFIEC guidelines for completing
the remediation, testing and implementation for all mission critical activities
by June 30, 1999.* The remediation and testing of all critical systems is
complete at this time. Testing of moderate and low priority systems is on
schedule and is expected to be completed by June 30, 1999.* The Company is
currently on schedule to complete Year 2000 compliance activities within its
designated time frame. The project is being overseen by a steering committee
composed of representatives from all areas of the Company and being directed by
the Company's Information Services division.
The Company utilizes a national third party provider for the bulk of its data
processing needs. As a result, a large part of the Company's mission critical
Year 2000 testing is for products and services processed by that service
provider. The service provider has completed the remediation and testing of its
systems and has had its Year 2000 compliant systems in production since June 30,
1998. The Company has successfully completed its testing of that system to
verify that the service provider's system functions in the Year 2000 for those
services used by the Company. The Company has no custom developed system code.
Therefore, the remediation phase of the Company's Year 2000 plan does not
include code renovation.
In addressing the Year 2000 issue, the Company has also taken into consideration
technology issues beyond its data processing activities. Non-data processing
systems include equipment in use which is not defined as computer hardware or
software. Such equipment could result in service or product breakdown if not
Year 2000 compliant. As part of its Year 2000 plan, the Company has addressed
such items as alarm systems, elevators, keyless entry systems, telephone and
data systems and others. As of this time successful testing of such system has
been completed.
The Year 2000 issue also may affect the Company's customers who may experience a
disruption in business that could potentially result in financial difficulties
and eventually result in an inability to repay their loans. The Company includes
as part of its normal underwriting standards consideration of the Year 2000
credit risk. The assessment is made through personal contact and a
questionnaire, which allows the Company to review the customer's Year 2000
awareness and compliance status. This process results in an overview of the
customer's preparedness but does not give absolute assurance that the customer
will not have problems with Year 2000 issues. The potential impact of Year 2000
on the customer's ability to repay loans cannot be determined at this time.
18
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The estimated costs of the Year 2000 issues are not expected to have a
significant impact on the Company's results of operations, liquidity or capital
resources. Direct costs of the Year 2000 issue have been estimated to not exceed
$500,000 per year for the fiscal years ending September 30, 1999 and 2000. The
primary direct costs include compensation and benefits paid to staff dedicated
solely to the Year 2000 issue, direct costs paid to vendors or others related to
Year 2000 preparedness and the income statement effect of hardware and software
purchased to replace items not Year 2000 compliant. The figure does not include
costs considered by the Company to be indirect costs. The primary indirect cost
includes the time and effort of many of the Company's employees to prepare for
the Year 2000 in addition to performing their normal work routines. The costs of
the Year 2000 project are based on the Company's best estimates, which include
numerous assumptions about future events. Actual costs may differ due to actual
events being different than those assumed at the time the cost estimates were
prepared.
The Company presently believes that the compliance effort can and will be
completed prior to the Year 2000.* However, if required product or service
upgrades are not complete by that time, the Year 2000 issues could disrupt
normal business operations.* Although not expected at this time, the most likely
worst case scenario includes the Company being unable to process some or all of
its transactions on a temporary basis.* Because of the nature of this scenario,
the Company is in the process of establishing contingency plans for all mission
critical services.* Contingency plans will be completed by June 30, 1999. The
contingency plans will be tested and modified, if necessary, throughout the
remainder of 1999.* The Year 2000 contingency plan will be designed to ensure
that mission critical core banking processes will continue if one or more
supporting systems fail and to allow for limited transaction processing until
the Year 2000 problems are fixed.*
FINANCIAL CONDITION
The Company's total assets increased $455.2 million or 24.4% to $2.02 billion at
March 31, 1999 from $1.86 billion at September 30, 1998, and included
approximately $43 million from the acquisition of Reliance Bancshares in January
1999. The primary areas of growth were an increase of $234.6 million in
mortgage-backed and related securities available for sale, a $114.2 million
increase in investment securities available for sale and a $109.3 million
increase in loans receivable, including loans held for sale. Funding the
increase in assets were increases in deposits of $101.7 million and increases in
borrowings of $350.7 million. The Company's ratio of shareholders' equity to
total assets was 5.70% at March 31, 1999, compared to 6.52% at September 30,
1998. The Company's fully dilutive book value per share was $13.11 at March 31,
1999, compared to $12.76 at September 30, 1998.
Loans receivable, including mortgage loans held for sale, increased $115.0
million to $994.0 million at March 31, 1999 from $879.0 million at September 30,
1998. The Company has been actively growing its loan portfolio particularly in
the areas of commercial real estate, single-family construction, multi-family,
commercial and automobile lending. For the six month period ended March 31,
1999, the Company originated approximately $443.0 million in loans, as compared
to $297.3 million for the same period in the prior year. Of the $443.0 million
in loans originated, $68.3 million were in commercial loans, $107.4 million were
in consumer and interim financing loans and $267.3 million were in first
mortgage loans.
Mortgage-backed and related securities, including securities available for sale,
increased $220.1 million to $917.2 million at March 31, 1999 from $697.1 million
at September 30, 1998. The growth in mortgage-backed securities was due
primarily in response to the increase in the Company's total capital which
occurred as a result of the completion of the Reliance Bancshares acquisition.
The Company has been an active purchaser of adjustable rate mortgage-backed
securities as well as short-term mortgage-related securities because of their
lower level of interest rate risk and low credit risk in relation to the
interest earned on such securities.
Debt and equity securities, including those available for sale, increased $113.2
million to $224.0 million at March 31, 1999 from $110.9 million at September 30,
1998. The growth in debt and equity securities was due primarily in response to
the increase in the Company's total capital which occurred as a result of the
completion of the Reliance Bancshares acquisition. Debt and equity securities
are comprised primarily of U.S. Treasury and agency securities and mutual fund
investments.
Deposits increased $101.7 million to $1.319 billion at March 31, 1999 from
$1.217 billion at September 30, 1998. The increase in deposits was primarily due
to increases of $73.7 million in certificates of deposit and $35.4 million in
money market demand deposits. However, slight decreases in other types of
deposit products have partially offset the increases. At March 31, 1999, the
Company had approximately $258.7 million in brokered certificates of deposit
compared with $214.9 million at September 30, 1998.
Advances and other borrowings increased by $350.7 million to $855.4 million at
March 31, 1999 from $504.7 million at September 30, 1998. The increase is
primarily due to borrowings from the FHLB. Short term borrowings increased
$176.7 million to $594.4 million at March 31, 1999, compared to $417.7 million
at September 30, 1998. Long term borrowings increased $174.0 million to
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
$261.0 million at March 31, 1999, compared to $87.0 million at September 30,
1998. At March 31, 1999, $175.0 million of the short term borrowings are
callable FHLB advances with maturities from five to ten years and are callable
by the FHLB after three to six months. At March 31, 1999, the Company did not
have any additional borrowing capacity available from the FHLB.
At March 31, 1999, the Company had $200.0 million in interest rate swaps
outstanding compared with $225.0 million at September 30, 1998. The swaps are
designed to offset the changing interest payments of some of the Company's
borrowings and brokered certificates. Fixed receive-floating pay swaps totaled
$200.0 million at March 31, 1999 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 six month period ended March 31, 1999,
the Company recorded a net reduction of interest expense of $1.1 million as a
result of the Company's interest rate swap agreements.
RESULTS OF OPERATIONS
NET INCOME. Net income for the six month period ended March 31, 1999 was $7.4
million, unchanged from the same period in the prior year. Net income for the
three month period ended March 31, 1999 was $3.7 million compared to $3.6
million for the three month period ended March 31, 1998. Net income for both the
three and six month periods ended March 31, 1999 was largely unchanged from the
same periods during the previous year due to an increase in net interest income
and a decline in the provision for loan losses, offset by a decrease in other
operating income and by increases in general and administrative expenses and
income tax expense.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Six months ended Three months ended
March 31, March 31,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Return on average assets.................. 0.74% 0.91% 0.69% 0.90%
Return on average equity.................. 12.40% 11.22% 11.93% 10.96%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $4.0 million or 21.4% and $4.2 million or 50.4% for the six and three
month periods ended March 31, 1999, respectively, compared to the same periods
in the prior year. The increase was due primarily to an increase of $376.0
million and $544.8 million in average earning assets for the six and three month
periods ended March 31, 1999, respectively. The net interest margin decreased to
2.51% for the six month period ended March 31, 1999, compared with 2.71% in the
prior year and decreased to 2.60% for the three month period ended March 31,
1999, compared with 2.69% in the prior year. 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. The Company's
investment in affordable housing 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 $8.8 million or 15.4% to $65.9 million for the
six month period ended March 31, 1999, compared to $57.1 million for the six
month period ended March 31, 1998, and increased $7.5 million or 27.0% to $35.1
for the three month period ended March 31, 1998, compared to $27.7 million for
the three month period ended March 31, 1998. 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 $931.9 million from $761.2 million for the six month
period ended March 31, 1999 and 1998, respectively, partially offset by a
decrease in the average yield on loans to 8.18% from 8.52% for the same period
in the prior year. The increase in net interest income on loans for the three
month period ended March 31, 1999 compared with the three month period ended
March 31, 1998 was the result of an increase in the average balance of loans to
$957.8 million from $771.9 million, partially offset by decreases in the average
yield on loans to 8.24% from 8.58% 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 commercial real estate
lending. However, such loans, while potentially resulting ultimately in higher
yields for the Company, may result in a higher level of credit risk than
conventional mortgage loans. The decrease in the average yield is primarily due
to the lower interest rate environment in effect during the period. As loans
repay, they are replaced in the
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Company's portfolio by new loans which generally have lower interest rates than
the loans previously put in the portfolio. The increase in interest income on
mortgage-backed and related securities was due to an increase in the average
balance of such securities to $759.9 million from $635.6 million for the six
month period ended March 31, 1999 and 1998, respectively, partially offset by
decreases in the average yield on such securities to 6.05% from 6.89% for the
same periods. The increase in interest income on mortgage-backed and related
securities for the three month period ended March 31, 1999 compared with the
three month period ended March 31, 1998 was due to an increase in the average
balance of such securities to $837.1 million from $622.8 million, partially
offset by decreases in the average yield on such securities to 6.10% from 6.63%
for the same periods. The decrease in the average yield on securities is the
result of the current interest rate environment. As new securities are added to
the portfolio they have the effect of decreasing the overall yield of the
portfolio. In addition, securities which are repaid generally have a higher
yield than current production.
Total interest expense increased $5.6 million or 15.1% to $42.5 million for the
six month period ended March 31, 1999, compared to $36.9 million for the six
month period ended March 31, 1998. For the three month period ended March 31,
1998, total interest expense increased $4.3 million, or 24.1%, to $22.2 million
compared to $17.9 million for the three month period ended March 31, 1998. The
increase in interest expense was the result of increases in the average balances
of deposits and advances and other borrowings, partially offset by decreases in
the cost. The average balances of deposits were $1.2 million for the six and
three month periods ended March 31, 1999, as compared to $1.0 million for the
same periods in the prior year. The increases in the balances of deposits are
due to the Company's offering of additional deposit products and the use of
brokers to sell certificates of deposit. The average cost of deposits decreased
to 4.55% and 4.46% for the six and three month periods ended March 31, 1999,
respectively, from 5.00% and 4.96% for the same periods in the prior year. As
part of a continuing strategy, the Company continues to offer deposit products
that compete more effectively with money market funds and other non-financial
deposit products. Such accounts have generally changed the Company's traditional
mix of deposit accounts to one that is more adjustable to current interest rates
such as the money market demand account. This has resulted in passbook and
certificate of deposit accounts representing a lower percentage of the Company's
total deposit portfolio. The average balance of advances and other borrowings
were $606.9 million and $716.4 million for the six and three month periods ended
March 31, 1999, respectively, as compared to $397.6 million and $396.4 million
for the same periods in the prior year. The average cost of advances and other
borrowings decreased to 5.04% and 4.94% for the six and three month periods
ended March 31, 1999, respectively, from 5.70% for the same periods in the prior
year. The borrowings are primarily adjustable-rate FHLB advances which have
repriced to reflect the slight decrease 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 six month periods ended March 31,
1999 and 1998, respectively. Tax-exempt investments are immaterial and the
tax-equivalent method of presentation is not included in the schedule.
21
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits... $ 22,846 $ 586 5.14 % $ 22,614 $ 617 5.47 %
Trading account securities.................. 423 16 7.59 1,098 38 6.94
Debt and equity securities.................. 131,443 3,524 5.38 56,251 1,580 5.63
Mortgage-backed and related securities...... 759,916 22,910 6.05 635,629 21,840 6.89
Loans:
First mortgage............................ 550,191 21,941 8.00 447,764 18,384 8.23
Home equity............................... 141,001 5,840 8.31 125,393 5,710 9.13
Consumer ................................. 142,264 6,122 8.63 111,426 4,922 8.86
Commercial and agricultural............... 98,411 4,099 8.35 76,602 3,328 8.71
--------------------- ---------------------
Total loans........................... 931,867 38,002 8.18 761,185 32,344 8.52
Federal Home Loan Bank stock................ 27,076 898 6.65 20,843 721 6.94
--------------------- ---------------------
Total earning assets.................. 1,873,571 65,936 7.06 1,497,620 57,140 7.65
------------ ------------
Valuation allowances........................ (12,879) (6,834)
Cash and due from banks..................... 33,355 29,204
Other assets................................ 117,376 112,634
------------ ------------
Total assets.......................... $ 2,011,423 $ 1,632,624
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 70,023 424 1.21 $ 62,069 438 1.42
Money market demand accounts.............. 339,033 7,289 4.31 265,287 6,566 4.96
Passbook.................................. 128,852 1,857 2.89 121,218 1,960 3.24
Certificates of deposit................... 661,999 17,669 5.35 578,839 16,644 5.77
--------------------- ---------------------
Total interest-bearing deposits.............. 1,199,907 27,239 4.55 1,027,413 25,608 5.00
Advances and other borrowings................ 606,863 15,259 5.04 397,567 11,306 5.70
Advances from borrowers for taxes and 4,398 9 0.41 5,021 12 0.48
insurance.................................. --------------------- ---------------------
Total interest-bearing liabilities.... 1,811,168 42,507 4.71 1,430,001 36,926 5.18
Non interest-bearing deposits................ 68,097 56,416
Other liabilities............................ 11,937 14,266
Shareholders' equity......................... 120,221 131,941
---------- -----------
Total liabilities and shareholders' equity... $ 2,011,423 $ 1,632,624
Net interest income.......................... =========== $23,429 =========== $20,214
========= =========
Net yield on interest-earning assets......... 2.51 2.71
Interest rate spread......................... 2.35 2.47
Ratio of earning assets to
interest-bearing liabilities............... 103.45 104.73
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits... $ 15,401 $ 188 4.95% $ 10,133 $ 157 6.28
Trading account securities.................. 307 5 6.61 545 9 6.70
Debt and equity securities.................. 172,831 2,372 5.57 42,799 632 5.99
Mortgage-backed and related securities...... 837,138 12,601 6.10 622,849 10,184 6.63
Loans:
First mortgage............................ 569,236 11,437 8.15 448,581 9,169 8.29
Home equity............................... 139,403 2,837 8.25 129,528 2,888 9.04
Consumer ................................. 145,949 3,072 8.54 112,204 2,518 9.10
Commercial and agricultural............... 103,211 2,119 8.33 81,581 1,755 8.72
----------------------- ------------------------
Total loans........................... 957,799 19,465 8.24 771,894 16,330 8.58
Federal Home Loan Bank stock................ 30,367 513 6.85 20,843 368 7.16
----------------------- ------------------------
Total earning assets.................. 2,013,843 35,144 7.08 1,469,063 27,680 7.64
---------- -----------
Valuation allowances........................ (14,907) (5,862)
Cash and due from banks..................... 33,651 29,796
Other assets................................ 115,486 115,087
------------- -------------
Total assets.......................... $ 2,148,073 $ 1,608,084
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 71,231 209 1.19 $ 62,553 199 1.29
Money market demand accounts.............. 345,160 3,541 4.16 267,732 3,280 4.97
Passbook.................................. 126,644 864 2.77 126,664 1,043 3.34
Certificates of deposit................... 687,203 8,903 5.25 553,682 7,832 5.74
----------------------- ------------------------
Total interest-bearing deposits.............. 1,230,238 13,517 4.46 1,010,631 12,354 4.96
Advances and other borrowings................ 716,438 8,725 4.94 396,383 5,568 5.70
Advances from borrowers for taxes and 1,782 2 0.46 1,934 2 0.42
insurance.................................. ----------------------- ------------------------
Total interest-bearing liabilities.... 1,948,458 22,244 4.63 1,408,948 17,924 5.16
Non interest-bearing deposits................ 63,255 53,815
Other liabilities............................ 11,592 12,751
Shareholders' equity......................... 124,768 132,570
------------- -------------
Total liabilities and shareholders' equity... $ 2,148,073 $ 1,608,084
============= =============
Net interest income.......................... $ 12,900 $ 9,756
========== ===========
Net yield on interest-earning assets......... 2.60 2.79
Interest rate spread......................... 2.45 2.48
Ratio of earning assets to
interest-bearing liabilities............... 103.36 104.27
</TABLE>
22
<PAGE> 23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan
losses for each period:
<TABLE>
<CAPTION>
Six months ended Three months ended
March 31, March 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance ..................... $ 7,530 $ 6,202 $ 7,964 $ 6,034
Provision for loan losses ............. 960 1,700 480 1,500
Recoveries ............................ 29 17 23 11
Charge-offs ........................... (144) (437) (92) (63)
Acquired bank's allowance ............. 303 -- 303 --
------- ------- --------- ---------
Ending balance ........................ $ 8,678 $ 7,482 $ 8,678 $ 7,482
======= ======= ========= =========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period ................... 0.79% 0.90% 0.79% 0.90%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ............... 253.97% 270.40% 253.97% 270.40%
Ratio of net charge-offs to average
gross loans (annualized) ........ 0.03% 0.11% 0.03% 0.03%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for probable losses as of March 31, 1999, 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
March 31, 1999, the provision for loan losses was $960,000 compared to $1.7
million for the same period in the prior year. The Company's loan portfolio is
significantly more diversified than in previous years. The Company has and
continues to expect to increase its commercial, consumer and commercial real
estate loan portfolios which are generally presumed to have more risk than
standard single-family mortgage loans.* Loan types other than single-family
loans constitute a larger percentage of total loans than in previous years and
the trend is expected to continue.* Charge-offs for the six and three month
periods ended March 31, 1999 were $144,000 and $92,000, respectively, compared
to $437,000 and $63,000 for the six and three month periods ended March 31,
1998. The Company believes that the allowance for loan losses is adequate to
provide for anticipated probable losses based upon current known conditions.*
OTHER OPERATING INCOME. Other operating income decreased by $439,000 to $1.5
million for the six and three month periods ended March 31, 1999, compared to
the same periods in the prior year. The following table shows the percentage of
other operating income to average assets for each period:
<TABLE>
<CAPTION>
Six months ended Three months ended
March 31, March 31,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Other operating income.................... $ 9,151 $ 9,590 $ 3,686 $ 5,173
Percent of average assets (annualized).... 0.91% 1.18% 0.70% 1.30%
</TABLE>
The decreases were due primarily to decreases in gains on sales of mortgage
loans, gains on securities, income from the Company's affordable housing
subsidiary and other income, partially offset by a gain on the sale of real
estate held for sale. Gains on the sale
23
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
of mortgage loans decreased to $2.1 million and $860,000 for the six and three
month periods ended March 31, 1999, respectively, compared to gains of $2.3
million and $1.3 million for the same periods in the prior year. The level of
gains on loans is highly dependent on the interest rate environment and
resulting level of origination of mortgage loans. In particular, during periods
of falling interest rates, the Company is more likely to originate more fixed
rate mortgage loans, which are sold into the secondary market. During the six
month period ended March 31, 1999, the Company realized losses on the sale of
securities of $372,000 compared with gains of $492,000 for the six month period
ended March 31, 1998. During the three month period ended March 31, 1999, the
Company realized losses on the sale of securities of $400,000 compared with
losses of $118,000 for the three month period ended March 31, 1998. The Company
does not consider gains on the sale of securities as a predictable source of
earnings, as such sales are based on the Company's ongoing review of the
individual securities within the Company's available for sale portfolio whereby
securities may be sold and replaced with ones that offer a better combination of
interest income, interest rate risk or credit risk than the security sold. The
prior year's three and six month periods included the refund of state income
taxes related to an earlier year's tax audit. The interest portion of the refund
($795,000) was included in other operating income while the portion that was a
refund of previous taxes paid ($780,000) was a reduction in income tax expense.
Income from the operations of the Company's affordable housing subsidiary (which
represents primarily rental income) decreased to $2.2 million and $826,000 for
the six and three month periods ended March 31, 1999, compared with $2.4 million
and $1.4 million for the same periods in the prior year. During the six and
three month periods ended March 31, 1999, the Company realized gains of $1.2
million and $492,000 on the sale of 13 affordable housing properties which had
been classified as real estate held for sale at September 30, 1998. The Company
currently has 12 properties fully in operation compared to 25 in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.6 million or 7.7% and $539,000 or 5.2% for the six and three
month periods ended March 31, 1999, compared to the same periods in the prior
year. The following table shows the percentage of general and administrative
expenses to average assets for each period:
<TABLE>
<CAPTION>
Six months ended Three months ended
March 31, March 31,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
General and administrative expenses....... $ 21,898 $ 20,333 $ 10,905 $ 10,366
Percent of average assets (annualized).... 2.18% 2.50% 2.06% 2.61%
</TABLE>
The increase in costs are due primarily to increases in personnel and other
activity connected with the Company's increase in its loan and deposit
portfolio, partially offset by a decrease in affordable housing expenses
resulting from the sale of investments during the year.
INCOME TAX EXPENSE. Income tax expense increased to $2.3 million and $1.5
million for the six and three month periods ended March 31, 1999, compared to
the same period in the prior year. The effective tax rate for the six and three
month periods ended March 31, 1999 was 23.52% and 29.44% respectively, compared
with 5.02% and a negative 16.98% for the six and three month periods ended March
31, 1998. The increase in the effective tax rate is due to the aforementioned
refund of state income taxes of $780,000 included in the prior year's six and
three month periods and the decrease in tax credits earned by the Company's
affordable housing subsidiary due to the sale of 13 of the properties in the
current year's six and three month periods. Income tax credits decreased to $1.7
million and $551,000 for the six and three month periods ended March 31, 1999,
compared to $2.0 and $1.1 million for the six and three month periods ended
March 31, 1998.
ASSET QUALITY
Total non-performing assets were $3.8 million, or 0.16% of total assets at March
31, 1999, compared with $2.9 million, or 0.16% of total assets at September 30,
1998. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure. Non-performing assets includes a single $824,000 commercial real
estate loan on a shopping center.
24
<PAGE> 25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Non-performing loans.............................. $ 3,417 $ 2,861
Foreclosed properties............................. 377 63
----------------- -----------------
Non-performing assets............................. $ 3,794 $ 2,924
================= =================
Non-performing loans to gross loans............... 0.31% 0.29%
Non-performing assets to total assets............. 0.16% 0.16%
</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 $912,000 at March 31, 1999 compared to $1.0 million at
September 30, 1998. These loans had associated impairment reserves of $449,000
and $529,000 at March 31, 1999 and September 30, 1998, respectively. The average
balance of impaired loans was $971,000 and $1.4 million at March 31, 1999 and
September 30, 1998, respectively. Interest income on impaired loans for the six
month period ended March 31, 1999 was $31,000, compared to $63,000 at September
30, 1998. Interest income on impaired loans is recognized only to the extent
that payments are expected to exceed the amount of principal due on the loans.
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.
At March 31, 1999, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 10.23% 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 March 31, 1999 was a negative 12.94% 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.*
25
<PAGE> 26
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 March 31, 1999.
<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
----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed............................... $ 46,197 $ 22,512 $ 53,968 $ 43,532 $ 83,181 $ 249,390
Variable............................ 126,613 80,575 89,995 115,333 14,422 426,938
Consumer loans (2)....................... 152,074 51,914 7,765 36,175 40,186 288,114
Mortgage-backed and related securities... 5,621 16,114 20,475 6,410 - 48,620
Assets available for sale:
Mortgage loans...................... 29,533 - - - - 29,533
Fixed rate mortgage related......... 73,954 177,023 216,447 30,615 - 498,039
Variable rate mortgage related...... 270,380 100,181 - - - 370,561
Other............................... 75,789 38,061 109,375 - - 223,225
Trading account securities............... - - - - -
Investment securities and other assets... 46,353 - - 811 - 47,164
---------------------------------------------------------------------------------
Total............................... $ 826,514 $ 486,380 $ 498,025 $ 232,876 $ 137,789 $2,181,584
=================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts........................ $ 6,398 $ 19,196 $ 22,088 $ 10,432 $ 6,865 $ 64,979
Passbook savings accounts........... 3,776 11,330 22,944 15,806 35,002 88,858
Money market deposit accounts....... 90,398 271,197 26,729 6,682 2,227 397,233
Certificates of deposit............. 191,859 422,440 83,356 8,693 100 706,448
Borrowings (4)........................... 571,318 25,000 4,056 230,000 25,000 855,374
Impact of interest rate swap ............ 200,000 (200,000) - - - -
---------------------------------------------------------------------------------
Total............................... $1,063,749 $ 549,163 $ 159,173 $ 271,613 $ 69,194 $2,112,892
=================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities.............................. $ (237,235) $ (62,783) $ 338,852 $ (38,737) $ 68,595 $ 68,692
=================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities............. $ (237,235) $ (300,018) $ 38,834 $ 97 $ 68,692
=====================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets.................. (10.23%) (12.94%) 1.68% 0.00% 2.96%
=====================================================================
- -------------------------------------------------------------------------------------------------------------------
</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 $106.2 million at March 31,
1999.
(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 $448.8 million or 19.4% 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.
26
<PAGE> 27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
actual withdrawals and repayments of assets and liabilities may vary
substantially.* Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and liabilities
may have similar maturities to repricing, they may react in different degrees to
changes in market interest rates.* Also, the interest rates on other types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates.* Additionally, certain assets, such as adjustable-rate loans and
mortgage-backed and related securities, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of an actual change in interest rates, actual prepayment
and early withdrawal levels could deviate significantly from those assumed in
calculating the data in the table.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $39.5 million and
$30.7 million as of March 31, 1999 and September 30, 1998, 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 March 31, 1999, the Company did
not have any additional borrowing capacity available from the FHLB.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow Office of Thrift Supervision ("OTS") capital
regulations which require savings institutions to meet two capital standards:
(i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets
and (ii) "risk-based capital" of at least 8% of risk-weighted assets.
The following table summarizes the Bank's capital ratios at the dates indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------- --------- ----------- ------------ --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Tangible capital.............. 142,445 6.17% > 92,349 >4.0% >115,436 > 5.0%
- - - -
Core capital ................. 142,445 6.17% > 92,349 >4.0% >115,436 > 5.0%
- - - -
Tier 1 risk-based capital..... 142,445 10.59% > 53,787 >4.0% > 80,680 > 6.0%
- - - -
Risk-based capital............ 151,123 11.24% >107,573 >8.0% >134,467 >10.0%
- - - -
As of September 30, 1998:
Tangible capital.............. 119,843 6.48% > 73,966 >4.0% > 92,458 > 5.0%
- - - -
Core capital ................. 119,843 6.48% > 73,966 >4.0% > 92,458 > 5.0%
- - - -
Tier 1 risk-based capital..... 119,843 10.23% > 46,846 >4.0% > 70,270 > 6.0%
- - - -
Risk-based capital............ 127,373 10.88% > 93,693 >8.0% >117,116 >10.0%
- - - -
</TABLE>
The capital of the Company and the Bank exceed all regulatory capital
requirements.
27
<PAGE> 28
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
March 31, 1999.
<TABLE>
<CAPTION>
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years To Four Years
------------------ ------------------ ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning
assets (In millions)
Mortgage and
Commercial loans:
Fixed rate $ 91.9 7.92% $ 59.9 7.86% $ 17.5 7.88% $ 24.9 7.88%
Adjustable rate 106.7 7.90% 56.1 7.89% 36.0 7.80% 44.1 7.75%
Consumer loans:
Fixed rate 13.1 8.31% 20.4 8.51% 13.2 8.52% 14.4 8.52%
Adjustable rate 30.7 8.20% 22.3 8.30% 50.2 8.35% 26.5 8.40%
Mortgage-backed
Securities:
Fixed rate 272.7 6.05% 118.5 6.33% 118.5 6.42% 18.5 6.52%
Adjustable rate 74.1 6.18% 55.6 6.20% 51.9 6.30% 44.4 6.50%
Debt and equity
securities 113.9 5.50% 54.7 6.00% 54.7 6.00% - -
Other 46.3 4.79% - - - - - -
---------- ---------- ---------- ----------
Total interest
earning assets $ 749.4 6.52% $387.4 6.95% $341.9 6.92% $ 172.8 7.48%
========== ========== ========== ==========
Interest bearing liabilities
Deposits:
NOW accounts $ 25.6 1.00% $ 11.0 1.00% $ 11.0 1.00% $ 5.2 1.00%
Passbooks 15.1 1.89% 11.5 1.89% 11.5 1.89% 7.9 1.89%
Money market 361.5 4.31% 13.5 4.31% 13.4 4.31% 3.3 4.31%
Certificates 593.9 5.20% 71.0 5.26% 7.3 5.42% 5.4 5.93%
Borrowings
Fixed rate 179.0 4.77% 0.0 6.95% - - - -
Adjustable rate 241.4 5.00% 5.0 4.97% - - - -
---------- ---------- ---------- ----------
Total interest
bearing
liabilities $ 1,416.5 4.77% $112.0 4.37% $ 43.2 3.01% $ 21.8 3.04%
========== ========== ========== ==========
<CAPTION>
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
------------------ ------------------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets (In millions)
Mortgage and
Commercial loans:
Fixed rate $ 24.9 7.85% $ 59.8 8.00% $ 278.9 7.91% $ 281.5
Adjustable rate 52.1 7.64% 132.0 7.84% 427.0 7.82% 432.3
Consumer loans:
Fixed rate 18.9 8.52% 65.5 8.54% 145.5 8.51% 147.7
Adjustable rate 13.0 8.51% - - 142.7 8.33% 144.5
Mortgage-backed
Securities:
Fixed rate 18.5 6.52% - - 546.7 6.22% 546.1
Adjustable rate 40.8 6.60% 103.8 6.70% 370.6 6.43% 366.6
Debt and equity
securities - - - - 223.3 5.74% 221.7
Other - - 0.8 5.15% 47.1 4.80% 47.1
-------- --------- --------- ---------
Total interest
earning assets $ 168.2 7.46% $ 361.9 7.66% $2,181.6 7.00% $2,187.5
======== ========= ========= =========
Interest bearing liabilities
Deposits:
NOW accounts $ 5.3 1.00% $ 6.9 1.00% $ 65.0 1.00% $ 78.7
Passbooks 7.9 1.89% 35.0 1.89% 88.9 1.89% 88.9
Money market 3.3 4.31% 2.2 4.31% 397.2 4.31% 397.2
Certificates 28.3 5.91% 0.5 8.45% 706.4 5.24% 705.2
Borrowings
Fixed rate - - 430.0 4.81% 609.0 4.80% 608.7
Adjustable rate - - - - 246.4 5.00% 246.4
-------- --------- --------- ---------
Total interest bearing
liabilities $ 44.8 4.50% $ 474.6 4.54% $2,112.9 4.64% $2,125.1
======== ========= ========= =========
</TABLE>
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on January 27, 1999.
Only shareholders of record at the close of business on December
1, 1998 (the "Voting Record Date") were entitled to vote at the
annual meeting. On the Voting Record Date, there were 4,635,265
shares of common stock outstanding, and 4,291,625 shares present
at the meeting by the holders thereof in person or by proxy, which
constituted a quorum. The following is a summary of the matters
voted upon at the meeting.
<TABLE>
<CAPTION>
NUMBER OF VOTES *
--------------------------------------------------------------
BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C>
NOMINEES FOR DIRECTOR FOR
THREE-YEAR TERM EXPIRING IN 2002
David J. Drury 4,038,764 252,861 - -
Rudolph T. Hoppe 4,035,004 256,621 - -
Thomas R. Perz 4,032,992 258,633 - -
RATIFICATION OF AMENDMENTS TO THE
ST. FRANCIS CAPITAL CORPORATION
1997 STOCK OPTION PLAN 3,147,190 565,463 54,664 524,308
RATIFICATION OF AN INCREASE IN THE
NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK 3,923,415 343,634 24,536 40
RATIFICATION OF AN INCREASE IN THE
NUMBER OF AUTHORIZED SHARES OF
PREFERRED STOCK 2,773,273 941,154 26,496 550,702
RATIFICATION OF THE ADVANCE NOTICE
REQUIREMENTS AS PROVIDED IN THE
PROPOSED AMENDED BY-LAWS 2,885,360 692,255 190,701 523,309
RATIFICATION OF APPOINTMENT OF
KPMG LLP AS AUDITORS 4,088,003 30,721 172,901 -
</TABLE>
* Due to the fact the Annual Meeting of Shareholders was held on
January 27, 1999, the above information does not reflect the
effects of the two-for-one stock split which was effective on April
19, 1999. See "Notes to Unaudited Consolidated Financial
Statements" for information regarding the stock split.
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 26, 1999, the Company announced the declaration of a
dividend of $0.08 per share on the Company's common stock for the
quarter ended March 31, 1999. The dividend is payable on May 21,
1999 to shareholders of record as of May 10, 1999. This will be
the fifteenth consecutive cash dividend payment since the Company
became a publicly-held company in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share
(See Footnote 7 in "Notes to Unaudited Consolidated
Financial Statements")
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report was filed.
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: May 17, 1999 By: /s/ Jon D. Sorenson
-------------- ---------------------------------
Jon D. Sorenson
Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 25,347
<INT-BEARING-DEPOSITS> 14,101
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,091,825
<INVESTMENTS-CARRYING> 49,430
<INVESTMENTS-MARKET> 49,647
<LOANS> 993,975
<ALLOWANCE> 8,678
<TOTAL-ASSETS> 2,319,362
<DEPOSITS> 1,318,591
<SHORT-TERM> 594,402
<LIABILITIES-OTHER> 13,275
<LONG-TERM> 260,972
0
0
<COMMON> 146
<OTHER-SE> 131,976
<TOTAL-LIABILITIES-AND-EQUITY> 2,319,362
<INTEREST-LOAN> 38,002
<INTEREST-INVEST> 26,434
<INTEREST-OTHER> 1,500
<INTEREST-TOTAL> 65,936
<INTEREST-DEPOSIT> 27,239
<INTEREST-EXPENSE> 42,507
<INTEREST-INCOME-NET> 23,429
<LOAN-LOSSES> 960
<SECURITIES-GAINS> (372)
<EXPENSE-OTHER> 21,898
<INCOME-PRETAX> 9,722
<INCOME-PRE-EXTRAORDINARY> 9,722
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,435
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 2.51
<LOANS-NON> 3,417
<LOANS-PAST> 98
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,530
<CHARGE-OFFS> (144)
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 8,678
<ALLOWANCE-DOMESTIC> 8,678
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
