<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 December 31, 1998
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 4,980,061 at January 29, 1999.
Page 1 of 31 pages
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<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............... 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 29
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 30
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 30
ITEM 3. Defaults Upon Senior Securities..................................................................... 30
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 30
ITEM 5. Other Information................................................................................... 30
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 30
SIGNATURES.................................................................................................... 31
</TABLE>
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
1998 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 35,452 $ 23,861
Federal funds sold and overnight deposits.................................... 20,712 6,885
----------------- -----------------
Cash and cash equivalents.................................................... 56,164 30,746
----------------- -----------------
Assets available for sale, at fair value:
Debt and equity securities............................................... 122,596 109,061
Mortgage-backed and related securities................................... 738,113 634,003
Mortgage loans held for sale, at lower of cost or market..................... 24,855 23,864
Securities held to maturity, at amortized cost:
Debt securities (market values of $1,855 and $1,875,
respectively)............................................................ 1,813 1,817
Mortgage-backed and related securities (market values of $57,255
and $63,497, respectively)............................................... 57,058 63,087
Loans receivable, net........................................................ 880,532 855,132
Federal Home Loan Bank stock, at cost........................................ 28,153 23,453
Accrued interest receivable.................................................. 10,431 9,726
Foreclosed properties........................................................ 208 63
Real estate held for investment.............................................. 29,699 29,997
Real estate held for sale.................................................... 7,315 20,772
Premises and equipment, net.................................................. 32,159 32,165
Other assets................................................................. 34,912 30,290
----------------- -----------------
Total assets................................................................. $ 2,024,008 $ 1,864,176
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits..................................................................... $ 1,255,434 $ 1,216,874
Short term borrowings........................................................ 411,369 417,672
Long term borrowings......................................................... 231,105 87,005
Advances from borrowers for taxes and insurance.............................. 243 8,553
Accrued interest payable and other liabilities............................... 12,091 12,527
----------------- -----------------
Total liabilities............................................................ 1,910,242 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 12,000,000 shares;
Issued, 7,289,620 shares;
Outstanding, 4,610,278 and 4,787,683 shares, respectively................ 73 73
Additional paid-in-capital................................................... 75,641 75,310
Accumulated other comprehensive income (loss)................................ (3,059) 381
Unearned ESOP compensation................................................... (2,575) (2,678)
Treasury stock at cost (2,679,342 and 2,501,937 shares, respectively)........ (70,958) (63,903)
Retained earnings, substantially restricted.................................. 114,644 112,362
----------------- -----------------
Total shareholders' equity................................................... 113,766 121,545
----------------- -----------------
Total liabilities and shareholders' equity................................... $ 2,024,008 $ 1,864,176
================= =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
---------------------------------------
1998 1997
------------------ ----------------
(In thousands, except per share data)
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans........................................................................ $ 18,537 $ 16,014
Mortgage-backed and related securities....................................... 10,309 11,656
Debt and equity securities................................................... 1,152 948
Federal funds sold and overnight deposits.................................... 398 460
Federal Home Loan Bank stock................................................. 385 353
Trading account securities................................................... 11 29
------------------ ----------------
Total interest and dividend income............................................... 30,792 29,460
------------------ ----------------
INTEREST EXPENSE:
Deposits..................................................................... 13,722 13,254
Advances and other borrowings................................................ 6,541 5,748
------------------ ----------------
Total interest expense........................................................... 20,263 19,002
------------------ ----------------
Net interest income before provision for loan losses............................. 10,529 10,458
Provision for loan losses........................................................ 480 200
------------------ ----------------
Net interest income.............................................................. 10,049 10,258
------------------ ----------------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees......................................... 519 555
Depository fees and service charges.......................................... 952 809
Securities gains............................................................. 28 610
Gain on sales of mortgage loans held for sale, net........................... 1,264 1,042
Insurance annuity and brokerage commissions.................................. 386 247
Gain (loss) on foreclosed properties......................................... (22) 5
Income from affordable housing............................................... 1,346 1,017
Gain on sale of real estate held for sale.................................... 733 -
Other income................................................................. 259 132
------------------ ----------------
Total other operating income, net................................................ 5,465 4,417
------------------ ----------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits........................................... 5,384 4,988
Office building, including depreciation...................................... 1,003 701
Furniture and equipment, including depreciation ............................. 1,014 689
Federal deposit insurance premiums........................................... 163 146
Affordable housing expenses.................................................. 1,409 1,180
Other general and administrative expenses.................................... 2,020 2,263
------------------ ----------------
Total general and administrative expenses........................................ 10,993 9,967
------------------ ----------------
Income before income tax expense................................................. 4,521 4,708
Income tax expense............................................................... 756 910
------------------ ----------------
Net income....................................................................... $ 3,765 $ 3,798
================== ================
Basic earnings per share......................................................... $ 0.86 $ 0.77
================== ================
Diluted earnings per share....................................................... $ 0.81 $ 0.72
================== ================
</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>
- -----------------------------------------------------------------------------------------------------------
Shares of Accumulated
Common Additional Other
Stock Common Paid-In Comprehensive
Outstanding Stock Capital Income
-------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C>
Three months ended December 31, 1997
Balance at September 30, 1997............... 5,226,998 $ 73 $ 73,541 $ 1,046
Net income.................................. - - - -
Unrealized gain on securities available
for sale............................... - - - 580
Reclassification adjustment for gains
realized in net income................. - - - (610)
Incomes taxes............................... - - - 31
Comprehensive income........................
Cash dividend - $0.14 per share............. - - - -
Purchase of treasury stock.................. (3,000) - - -
Exercise of stock options, net.............. 27,313 - - -
Amortization of unearned compensation....... - - 291 -
------------- ---------- ---------- --------------
Balance at December 31, 1997................ 5,251,311 $ 73 $ 73,832 $ 1,047
============= ========== ========== ==============
Three months ended December 31, 1998
Balance at September 30, 1998............... 4,787,683 $ 73 $ 75,310 $ 381
Net income.................................. - - - -
Unrealized loss on securities available
for sale............................... - - - (5,616)
Reclassification adjustment for gains
realized in net income................. - - - 28
Incomes taxes............................... - - - 2,204
Comprehensive income........................
Cash dividend - $0.16 per share............. - - - -
Purchase of treasury stock.................. (217,987) - - -
Exercise of stock options, net.............. 40,582 - - -
Amortization of unearned compensation....... - - 331 -
------------- ---------- ---------- --------------
Balance at December 31, 1998................ 4,610,278 $ 73 $ 75,641 $ (3,059)
============= ========== ========== ==============
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Unearned
ESOP Treasury Retained
Compensation Stock Earnings Total
-------------------------------------------------------------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C>
Three months ended December 31, 1997
Balance at September 30, 1997............... $(3,088) $(44,511) $ 101,469 $ 128,530
Net income.................................. - - 3,798 3,798
Unrealized gain on securities available
for sale............................... - - - 580
Reclassification adjustment for gains
realized in net income................. - - - (610)
Incomes taxes............................... - - - 31
-------------
Comprehensive income........................ 3,799
Cash dividend - $0.14 per share............. - - (731) (731)
Purchase of treasury stock.................. - (115) - (115)
Exercise of stock options, net.............. - 590 (317) 273
Amortization of unearned compensation....... 99 - - 390
----------- ----------- ----------- -------------
Balance at December 31, 1997................ $(2,989) $(44,036) $ 104,219 $ 132,146
=========== =========== =========== =============
Three months ended December 31, 1998
Balance at September 30, 1998............... $(2,678) $(63,903) $ 112,362 $ 121,545
Net income.................................. - - 3,765 3,765
Unrealized loss on securities available
for sale............................... - - - (5,616)
Reclassification adjustment for gains
realized in net income................. - - - 28
Incomes taxes............................... - - - 2,204
-------------
Comprehensive income........................ 3,799
Cash dividend - $0.16 per share............. - - (745) (745)
Purchase of treasury stock.................. - (8,048) - (8,048)
Exercise of stock options, net.............. - 993 (738) 255
Amortization of unearned compensation....... 103 - - 434
---------- ---------- ----------- -------------
Balance at December 31, 1998................ $(2,575) $(70,958) $ 114,644 $ 113,766
=========== ========== =========== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
-----------------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................... $ 3,765 $ 3,798
Adjustments to reconcile net income to net cash provided by Operating
activities:
Provision for loan losses .............................................................. 480 200
Depreciation, accretion and amortization ............................................... 2,172 1,542
Deferred income taxes .................................................................. 2,144 524
Securities gains ....................................................................... (28) (610)
Originations of loans held for sale .................................................... (86,207) (47,863)
Proceeds from sales of loans held for sale ............................................. 83,952 52,109
Stock-based compensation expense ....................................................... 434 390
Other, net ............................................................................. (2,120) (6,776)
--------- ---------
Total adjustments ............................................................................ 827 (484)
--------- ---------
Net cash provided by operating activities .................................................... 4,592 3,314
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity ............................. 4 4
Purchases of debt securities held to maturity ............................................ -- --
Principal repayments on mortgage-backed and related securities
held to maturity ..................................................................... 6,029 394
Purchases of mortgage-backed securities available for sale ............................... (200,950) (80,155)
Proceeds from sales of mortgage-backed securities available
for sale ............................................................................... 23,990 103,688
Principal repayments on mortgage-backed securities available
for sale ............................................................................... 72,850 35,752
Purchase of debt and equity securities available for sale ................................ (81,058) (10,780)
Proceeds from sales of debt and equity securities available for sale ..................... 47,005 21,625
Proceeds from maturities of debt and equity securities available for sale ................ 20,518 6,478
Purchases of Federal Home Loan Bank stock ................................................ (5,900) --
Redemption of Federal Home Loan Bank stock ............................................... 1,200 --
Purchase of loans ........................................................................ (4,627) (16,947)
Increase in loans, net of loans held for sale ............................................ (30,340) 6,574
Gain on sale of real estate held for sale ................................................ (733) --
Proceeds from sale of real estate held for sale .......................................... 14,190 --
(Increase) decrease in real estate held for investment ................................... (333) (1,549)
Purchases of premises and equipment, net ................................................. (528) (2,633)
--------- ---------
Net cash (used in) investing activities ...................................................... (138,683) 62,451
--------- ---------
</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>
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31,
-----------------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................................. 38,560 (22,683)
Proceeds from advances and other borrowings .............................................. 283,684 23,855
Repayments on advances and other borrowings .............................................. (169,169) (40,382)
Increase (decrease) in securities sold under agreements to repurchase .................... 23,282 (16,115)
Decrease in advances from borrowers for taxes and insurance .............................. (8,310) (9,242)
Dividends paid ........................................................................... (745) (731)
Stock option transactions ................................................................ 255 273
Purchase of treasury stock ............................................................... (8,048) (115)
--------- ---------
Net cash provided by financing activities .................................................... 159,509 (65,140)
--------- ---------
Increase in cash and cash equivalents ........................................................ 25,418 625
Cash and cash equivalents:
Beginning of period .................................................................... 30,746 42,858
--------- ---------
End of period .......................................................................... $ 56,164 $ 43,483
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................... $ 19,352 $ 20,331
Income taxes ........................................................................... 100 101
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans secured as mortgage-backed securities ................................... $ 3,959 $ 7,661
Transfer from loans to foreclosed properties ........................................... 156 180
Transfer of mortgage loans to mortgage loans held for sale ............................. 18,591 13,292
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances
of St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included. Operating results
for the three-month period ended December 31, 1998 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.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
8
<PAGE> 9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The contractual or notional amounts of off-balance sheet financial instruments
are as follows:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
December 31, September 30,
1998 1998
------------ -------------
(In thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed-rate loans ............................ $ 15,185 $ 10,637
Variable-rate loans ......................... 38,910 19,647
Mortgage loans sold with recourse ............... 25,893 35,558
Guarantees under IRB issues ..................... 24,504 18,301
Interest rate swap agreements (notional amount) . 170,000 225,000
Interest rate corridors (notional amount) ....... -- 10,000
Commitments to:
Purchase mortgage-backed securities ........... 35,000 --
Sell mortgage-backed securities ............... -- 37,000
Unused and open-ended lines of credit:
Consumer ...................................... 158,340 158,210
Commercial .................................... 30,778 25,061
Open option contracts written:
Short-put options ............................. -- --
Short-call options ............................ 4,000 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 December 31,
1998 have interest rates ranging from 6.50% to 7.50%. 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 December 31, 1998, 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
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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.
The agreements at December 31, 1998 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% 5.17%
15,000 Fixed Receive-Floating Pay 2005 1999 6.10% 5.05%
15,000 Fixed Receive-Floating Pay 2005 1999 6.25% 5.11%
10,000 Fixed Receive-Floating Pay 2003 1999 6.58% 5.28%
5,000 Fixed Receive-Floating Pay 2003 1999 6.47% 5.28%
10,000 Fixed Receive-Floating Pay 2003 1999 6.53% 5.28%
5,000 Fixed Receive-Floating Pay 2003 1999 6.43% 5.28%
15,000 Fixed Receive-Floating Pay 2007 1999 7.15% 5.10%
15,000 Fixed Receive-Floating Pay 2007 1999 7.05% 5.14%
10,000 Fixed Receive-Floating Pay 2007 1999 7.13% 5.14%
15,000 Fixed Receive-Floating Pay 2005 1999 6.00% 5.13%
15,000 Fixed Receive-Floating Pay 2007 1999 6.90% 5.04%
15,000 Fixed Receive-Floating Pay 2008 1999 6.30% 5.26%
10,000 Fixed Receive-Floating Pay 2008 1999 5.85% 5.08%
</TABLE>
The fair value of interest rate swaps, which is based on the present value of
the swap using dealer quotes, represent the estimated amount the Company would
receive or pay to terminate the agreements taking into account current interest
rates and market volatility. The interest rate swaps are off-balance sheet
items; therefore, at December 31, 1998, the gross unrealized gains and losses of
$1.8 million and $387,000, respectively, equals the fair value of the interest
rate swaps of $1.4 million.
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 December 31,
1998 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................. $ 99,693 $ 128 $ 311 $ 99,510
Corporate notes and bonds.................... 1,000 11 - 1,011
Marketable equity securities................. 22,075 - - 22,075
=========== ========= ========== ============
TOTAL DEBT AND EQUITY SECURITIES.............. $ 122,768 $ 139 $ 311 $ 122,596
=========== ========= ========== ============
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC...................................... $ 6,358 $ 21 $ 1 $ 6,378
FNMA....................................... 4,045 - 52 3,993
Private issue.............................. 95,800 617 2,171 94,246
REMICs:
FHLMC...................................... 64,251 149 53 64,347
FNMA....................................... 66,083 41 972 65,152
GNMA....................................... 2,901 18 - 2,919
Private issue.............................. 503,532 517 3,007 501,042
CMO residual................................. 36 - - 36
----------- --------- ---------- ------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES.............................. $ 743,006 $ 1,363 $ 6,256 $ 738,113
=========== ========= ========== ============
<CAPTION>
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ------------ ------------- -------------
(In thousands)
DEBT SECURITIES:
U. S. Treasury obligations and obligations of
U.S. Government Agencies................. $ 1,003 $ 7 $ - $ 1,010
State and municipal obligations.............. 810 35 - 845
=========== ========= ========== ============
TOTAL DEBT SECURITIES........................ $ 1,813 $ 42 $ - 1,855
=========== ========= ========== ============
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FHLMC...................................... $ 484 $ - $ - $ 484
FNMA....................................... 1,215 1 1 1,215
Private issue.............................. 55,359 270 73 55,556
----------- --------- ---------- ------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES.............................. $ 57,058 $ 271 $ 74 $ 57,255
=========== ========= ========== ============
</TABLE>
11
<PAGE> 12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
During the three month periods ended December 31, 1998 and 1997, gross
proceeds from the sale of securities available for sale totaled
approximately $24.0 million and $130.3 million, respectively. The gross
realized gains on such sales totaled approximately $9,000 and $2.1
million for the three month periods ended December 31, 1998 and 1997,
respectively. The gross realized losses on such sales totaled
approximately $31,000 and $1.6 million for the three month periods
ended December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, $410.8 million and $276.8 million,
respectively, of mortgage-related securities were pledged as collateral
for FHLB advances.
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
First mortgage - one- to four-family............................... $ 242,502 $ 254,047
First mortgage - residential construction.......................... 77,254 71,092
First mortgage - multi-family...................................... 126,063 105,380
Commercial real estate............................................. 181,107 170,562
Home equity........................................................ 140,127 142,993
Commercial and agriculture......................................... 94,626 93,927
Consumer secured by real estate.................................... 90,876 85,595
Interim financing and consumer loans............................... 13,955 13,375
Indirect auto...................................................... 36,257 32,173
Education.......................................................... 2,871 2,529
-------------- ---------------
Total gross loans............................................... 1,005,638 971,673
-------------- ---------------
Less:
Loans in process................................................ 90,473 83,436
Unearned insurance premiums..................................... 442 292
Deferred loan and guarantee fees................................ 828 848
Purchased loan discount......................................... 544 571
Allowance for loan losses....................................... 7,964 7,530
-------------- ---------------
Total deductions................................................ 100,251 92,677
-------------- ---------------
Total loans receivable............................................. 905,387 878,996
Less: First mortgage loans held for sale.......................... 24,855 23,864
-------------- ---------------
Loans receivable, net.............................................. $ 880,532 $ 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>
Three months ended
December 31,
----------------------------------
1998 1997
--------------- ----------------
(In thousands)
<S> <C> <C>
Beginning Balance.................................................... $ 7,530 $ 6,202
Charge-offs:
Real estate - mortgage............................................. - -
Commercial real estate............................................. - -
Commercial loans................................................... (10) -
Home equity loans.................................................. - -
Consumer........................................................... (42) (374)
--------------- ----------------
Total charge-offs.................................................... (52) (374)
--------------- ----------------
Recoveries:
Real estate - mortgage............................................. - -
Commercial real estate............................................. - -
Commercial loans................................................... - -
Home equity loans.................................................. - -
Consumer........................................................... 6 6
---------------- ----------------
Total recoveries..................................................... 6 6
---------------- ----------------
Net charge-offs...................................................... (46) (368)
---------------- ----------------
Provision............................................................ 480 200
---------------- ----------------
Ending balance....................................................... $ 7,964 $ 6,034
================ ================
</TABLE>
(7) Earnings Per Share
Basic earnings per share of common stock for the three month periods
ended December 31, 1998 and 1997, have been determined by dividing net
income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the three month periods ended December 31, 1998 and
1997, have been determined by dividing net income for the period by the
weighted average number of shares of common stock outstanding during
the period adjusted for the dilutive effect of outstanding stock
options. Book value per share of common stock at December 31, 1998 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 common stock
equivalents and are, therefore, considered in per share calculations.
Common stock equivalents are computed using the treasury stock method.
Total shares outstanding for earnings per share calculation purposes
have been reduced by the Employee Stock Ownership Plan ("ESOP") shares
that have not been committed to be released.
13
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Net income for the period................................ $ 3,765,000 $ 3,798,000
================== ===================
Common shares issued..................................... 7,289,620 7,289,620
Net Treasury shares...................................... 2,649,276 2,053,134
Unallocated ESOP shares.................................. 256,713 297,286
------------------ -------------------
Weighted average common shares
outstanding during the period........................ 4,383,631 4,939,200
Common stock equivalents based on the
treasury stock method................................ 248,291 333,864
------------------ -------------------
Total weighted average common shares and
equivalents outstanding.............................. 4,631,922 5,273,064
================== ===================
Basic earnings per share................................. $ 0.86 $ 0.77
Diluted earnings per share............................... $ 0.81 $ 0.72
The computation of book value per common share is as follows:
December 31, September 30,
1998 1998
------------------ -------------------
Common shares outstanding at the end
of the period........................................... 4,353,565 4,520,238
Incremental shares relating to dilutive stock
options outstanding at the end of the period............ 261,781 242,098
------------------ -------------------
4,615,346 4,762,336
================== ===================
Total shareholders' equity at the end of
the period.............................................. $ 113,766,000 $ 121,545,000
Book value per common share............................... $ 24.65 $ 25.52
</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 December 31, 1998, 6,799 shares were reserved for future grants.
Further information concerning the options is as follows:
14
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Three months ended December 31,
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
Average Average
Exercise Exercise
Options Price Options Price
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....... 581,810 $ 21.02 656,566 $ 19.37
Granted.................................. 77,808 39.96 36,667 38.38
Canceled................................. - - (1,000) 10.00
Exercised................................ (45,500) 10.00 (27,313) 10.00
------------- ---------------- ------------ ----------------
Outstanding at end of period............. 614,118 $ 24.24 664,920 $ 20.36
============= ================ ============ ================
Options exercisable...................... 262,006 $10.00 - 38.75 310,913 $10.00 - 38.75
============= ================ ============ ================
</TABLE>
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Three months ended Dec. 31,
1998 1997
-----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Federal income tax expense at statutory rate of 35%.................. $ 1,582 $ 1,648
State income taxes, net of Federal income tax benefit................ 99 61
Tax exempt interest.................................................. (36) -
Non-deductible compensation.......................................... 116 102
Acquisition intangible amortization.................................. 62 62
Affordable housing credits........................................... (1,103) (967)
Other, net........................................................... 36 4
------------ ------------
$ 756 $ 910
============ ============
</TABLE>
Included in other assets is a deferred tax asset of $3.5 million and
$3.6 million at December 31, 1998 and September 30, 1998.
(10) Acquisitions
In January 1999, the Company completed the acquisition of Reliance
Bancshares, Inc. 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 $10.40 in cash in
accordance with elections made by Reliance shareholders and subject to
certain specified allocation and proration procedures. The Company
issued 367,283 shares of common stock in connection with this
transaction. The acquisition will be treated as a purchase transaction
for accounting purposes. The related accounts and results of operations
will be included in the Company's consolidated financial statements
from the date of acquisition. The acquisition of Reliance Bancshares,
Inc. added $40.0 million in assets, including additions of $25.7
million to net loans and $16.6 million to deposits.
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(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 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 will be 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 is not expected to
materially effect results of operations or financial position.
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the Company
with the Securities and Exchange Commission, in quarterly reports or press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, various words or
phrases are intended to identify "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as "will likely result," "are expected
to," "will continue," "is anticipated," "estimate," "project," or similar
expressions and various other statements indicated herein with an asterisk ("*")
after such statements. The Company 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 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.
Moderate and low priority issues are scheduled to be reviewed, tested and, if
necessary remediated, by the middle of 1999.*
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 is in the process of independently testing its activities on
that system to verify that the service provider's system functions in the Year
2000 for those services used by the Company. In October, 1998, the Company
successfully completed the first phase of that testing and is scheduled to
complete testing by the spring of 1999.* 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
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
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. The impact and status of these items are being reviewed
in the same manner as the Company's data processing systems.
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 efforts. 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.
The estimated costs of the Year 2000 issue 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.* Those contingency plans will also be tested as part of the
Company's Year 2000 preparedness.* Additionally, a business resumption plan is
being developed to mitigate risks associated with the failure of mission
critical systems.* The Year 2000 business resumption 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.*
Readers should be cautioned that forward-looking statements contained in the
Year 2000 disclosure should be read in conjunction with the Company's
disclosures regarding "Forward-Looking Statements."
FINANCIAL CONDITION
The Company's total assets increased $159.8 million or 8.6% to $2.02 billion at
December 31, 1998 from $1.86 billion at September 30, 1998. The primary areas of
growth were an increase of $104.1 million in mortgage-backed and related
securities available for sale and a $26.4 million in loans receivable, including
loans held for sale. Funding the increase in assets were increases in deposits
of $38.6 million and increases in borrowings of $137.8 million. The Company's
ratio of shareholders' equity to total assets was 5.62% at December 31, 1998,
compared to 6.52% at September 30, 1998. The Company's book value per share was
$24.65 at December 31, 1998, compared to $25.52 at September 30, 1998.
Loans receivable, including mortgage loans held for sale, increased $26.4
million to $905.4 million at December 31, 1998 from $879.0 million at September
30, 1998. The Company has been actively diversifying its loan portfolio and, as
a result, the increase in loans was due to a variety of lending areas including
commercial real estate, single-family construction, multi-family, commercial and
automobile lending. For the three month period ended December 31, 1998, the
Company originated approximately $236.3 million in loans, as compared to $131.3
million for the same period in the prior year. Of the $236.3 million in loans
originated, $29.9 million were in commercial loans, $56.1 million were in
consumer and interim financing loans and $150.3 million were in first mortgage
loans. The low interest rate environment resulted in significant levels of
activity in the Company's total loan portfolio. Low interest rates generally
lead to a greater volume of loan originations, but
18
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
also tend to result in much higher levels of repayments. In addition, the
Company is more likely to originate fixed rate mortgage loans which are
generally sold into the secondary market.* Thus the higher level of originations
does not necessarily lead to a proportionate increase in loans outstanding.
Mortgage-backed and related securities, including securities available for sale,
increased $98.1 million to $795.2 million at December 31, 1998 from $697.1
million at September 30, 1998. The growth in mortgage-backed securities was done
primarily in anticipation of the increase in the Company's total capital which
occurred as a result of the completion of the Reliance Bancshares acquisition
shortly after the end of this quarter. The assets are financed primarily with
FHLB advances or brokered certificates of deposit that generally match the
expected repricing period or average lives of the respective securities. The
Company purchases mortgage-backed securities that are guaranteed by both
government sponsored enterprises such as FHLMC, FNMA and GNMA, as well as
securities that are issued by private mortgage security conduits. These
securities have credit ratings of "A" or better at the time of purchase and meet
the Federal Financial Institutions Examination Council definition of low-risk
securities. Mortgage-backed securities issued by government sponsored
enterprises generally increase the quality of the Company's assets by virtue of
the guarantees that back them. When the intermediary is a private entity,
neither the principal or interest on such securities is guaranteed. In addition,
loans that back private mortgage-backed securities generally are non-conforming
loans and consequently have a greater amount of credit risk and generally will
have a higher yield. 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.
Deposits increased $38.6 million to $1.255 billion at December 31, 1998 from
$1.217 billion at September 30, 1998. The increase in deposits was primarily due
to increases of $22.2 million in certificates of deposit, $15.8 million in
checking accounts and $10.8 million in money market demand deposits. However,
slight decreases in other types of deposit products have partially offset the
increases. At December 31, 1998, the Company had approximately $209.8 million in
brokered certificates of deposit compared with $214.9 million at September 30,
1998. The brokered deposits generally consist of terms from three months to ten
years in maturity with interest rates that approximate the Company's retail
certificate rates. The Company cannot assure that there will be an increase in
deposits in the future, nor can there be any assurance the Company will retain
the deposits it now has.* The level of deposit flows during any given period is
heavily influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing instruments,
such as money market mutual funds. The Company believes that the likelihood for
retention of brokered certificates of deposit is more a function of the rate
paid on such accounts, as compared to retail deposits which may be established
due to branch location or other intangible reasons.
Advances and other borrowings increased by $137.8 million to $642.5 million at
December 31, 1998 from $504.7 million at September 30, 1998. The increase is
primarily due to borrowings from the FHLB. Short term borrowings decreased $6.3
million to $411.4 million at December 31, 1998, compared to $417.7 million at
September 30, 1998. Long term borrowings increased $144.4 million to $231.1
million at December 31, 1998, compared to $87.0 million at September 30, 1998.
At December 31, 1998, $135.0 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 December 31, 1998, the Company had a
borrowing capacity available of $85.1 million from the FHLB; however, additional
securities may have to be pledged as collateral.
At December 31, 1998, the Company had $170.0 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
$170.0 million at December 31, 1998 and were entered into to hedge interest
rates on brokered deposits used to fund the purchase of floating rate
securities. Fixed receive-floating pay swaps will provide for a lower interest
expense (or interest income) in a falling rate environment while adding to
interest expense in a rising rate environment. During the three month period
ended December 31, 1998, the Company recorded a net reduction of interest
expense of $496,000 as a result of the Company's interest rate swap agreements.
There are certain risks associated with swaps, including the risk that the
counterparty may default and that there may not be an exact correlation between
the indices on which the swap agreements are based and the terms of the hedged
liabilities. In order to offset these risks, the Company generally enters into
swap agreements only with nationally recognized securities firms and monitors
the credit status of counterparties, the level of collateral for such swaps and
the correlation between the hedged liabilities and indices utilized.
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
RESULTS OF OPERATIONS
NET INCOME. Net income for the three month period ended December 31, 1998 was
$3.8 million, unchanged from the same period in the prior year, due to an
increase in other operating income offset by an increase in general and
administrative expenses. Net interest income decreased slightly for the three
month period ended December 31, 1998 compared with the same period during the
previous year due primarily to a lower net interest margin, partially offset by
a higher level of earning assets and an increase in the provision for loan
losses due to loan portfolio growth.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------------------
1998 1997
----------------- ------------------
<S> <C> <C>
Return on average assets........................................... 0.80% 0.91%
Return on average equity........................................... 12.91% 11.48%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $71,000 or 0.7% to $10.5 million for the three month period ended
December 31, 1998 compared to the same period in the prior year. The increase
was due primarily to an increase of $207.1 million in average earning assets for
the three month period ended December 31, 1998. However, the net interest margin
decreased to 2.41% from 2.72% for the three month periods ended December 31,
1998 and 1997, respectively. 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 $1.3 million or 4.5% to $30.8 million for the
three month period ended December 31, 1998, compared to $29.5 million for the
three month period ended December 31, 1997. The increase in interest income was
primarily the result of increases in interest on loans, partially offset by a
decrease in income from securities for the period. The increase in interest on
loans was primarily the result of an increase in the average balance of loans to
$905.9 million from $750.5 million for the three month periods ended December
31, 1998 and 1997, respectively, partially offset by a decrease in the average
yield on loans to 8.12% from 8.47% for the same period in the prior year. The
increase in the average balance of loans is due primarily to the Company's
recent efforts to emphasize commercial, consumer and home equity lending.
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 Company's portfolio by new loans which generally have lower
interest rates than the loans previously put in the portfolio. The decrease in
interest income on mortgage-backed and related securities was due to a decreases
in the average yield on such securities to 5.99% from 7.13% for the three month
periods ended December 31, 1998 and 1997, respectively, partially offset by an
increase in the average balance of such securities to $682.7 million from $648.4
million by for the same periods.
Total interest expense increased $1.3 million or 6.6% to $20.3 million for the
three month period ended December 31, 1998, compared to $19.0 million for the
three month period ended December 31, 1997. The increase in interest expense was
the result of increases in the average balances of deposits and advances and
other borrowings. The average balances of deposits were $1.17 billion for the
three month period ended December 31, 1998, as compared to $1.04 billion for the
same period in the prior year. The increases in the balances of deposits are due
to the Company's offering of additional deposit products and the use of brokers
to sell certificates of deposit. The average cost of deposits decreased to 4.65%
for the three month period ended December 31, 1998, from 5.04% for the same
period in the prior year. As part of a continuing strategy, the
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Company continues to offer deposit products that compete more effectively with
money market funds and other non-financial institutions. 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 $504.3 million for the
three month period ended December 31, 1998, as compared to $406.9 million for
the same period in the prior year. The average cost of advances and other
borrowings decreased to 5.21% for the three month period ended December 31,
1998, from 5.71% for the same period in the prior year. The borrowings are
primarily adjustable-rate FHLB advances which have repriced to reflect the
changes in rate levels associated with the respective borrowing rate indexes
from the same period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the three month periods ended
December 31, 1998 and 1997, 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 Subsidaiary
Item 2: Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------ ------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits $ 30,291 $ 398 5.21 % $ 35,095 $ 460 5.20 %
Trading account securities 539 11 8.10 1,651 29 6.97
Debt and equity securities 90,055 1,152 5.08 69,703 948 5.40
Mortgage-backed and related securities 682,694 10,309 5.99 648,409 11,656 7.13
Loans:
First mortgage 531,146 10,504 7.85 446,947 9,215 8.18
Home equity 142,599 3,003 8.35 121,258 2,822 9.23
Consumer 138,579 3,050 8.73 110,648 2,404 8.62
Commercial and agricultural 93,611 1,980 8.39 71,623 1,573 8.71
------------------------- ------------------------
Total loans 905,935 18,537 8.12 750,476 16,014 8.47
Federal Home Loan Bank stock 23,785 385 6.42 20,843 353 6.72
------------------------- ------------------------
Total earning assets 1,733,299 30,792 7.05 1,526,177 29,460 7.66
----------- -----------
Valuation allowances (10,851) (7,806)
Cash and due from banks 33,059 28,612
Other assets 119,266 110,181
-------------- -------------
Total assets $ 1,874,773 $ 1,657,164
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 68,815 215 1.24 $ 61,585 239 1.54
Money market demand accounts 332,906 3,748 4.47 262,842 3,286 4.96
Passbook 131,060 993 3.01 115,772 917 3.14
Certificates of deposit 636,795 8,766 5.46 603,996 8,812 5.79
------------------------- ------------------------
Total interest-bearing deposits 1,169,576 13,722 4.65 1,044,195 13,254 5.04
Advances and other borrowings 497,288 6,534 5.21 398,751 5,738 5.71
Advances from borrowers for taxes and 7,014 7 0.40 8,108 10 0.49
insurance ------------------------- ------------------------
Total interest-bearing liabilities 1,673,878 20,263 4.80 1,451,054 19,002 5.20
----------- -----------
Non-interest bearing deposits 72,939 59,017
Other liabilities 12,282 15,781
Shareholders' equity 115,674 131,312
-------------- -------------
Total liabilities and shareholders' equity $ 1,874,773 1,657,164
============== =============
Net interest income $ 10,529 $ 10,458
=========== ===========
Net yield on interest-earning assets
2.41 2.72
Interest rate spread
2.25 2.46
Ratio of earning assets to interest-bearing
liabilities 103.55 105.18
</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>
Three months ended
December 31,
1998 1997
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Beginning balance...................................... $ 7,530 $ 6,202
Provision for loan losses.............................. 480 200
Recoveries............................................. 6 6
Charge-offs............................................ (52) (374)
----------------- ------------------
Ending balance......................................... $ 7,964 $ 6,034
================= ==================
Ratio of allowance for loan losses to gross loans
receivable at the end of the period............... 0.79% 0.76%
Ratio of allowance for loan losses to total non-
performing loans at the end of the period......... 247.48% 190.95%
Ratio of net charge-offs to average gross loans
(annualized)...................................... 0.02% 0.20%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for potential losses as of December 31, 1998, based upon its current evaluation
of loan delinquencies, non-performing loans, charge-off trends, economic
conditions and other factors. Such evaluation, which includes a review of all
loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an accurate provision for loan
losses. At December 31, 1998, the provision for loan losses was $480,000
compared to $200,000 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 three month period ended
December 31, 1998 were $52,000 compared to $374,000 for the three months ended
December 31, 1997. Repossessed autos sold during the three month period ended
December 31, 1997 resulted in charge-offs of $307,000 compared to no charge-offs
in the current period. While additional charge-offs may be incurred, it is
expected they will happen at lower levels than in the previous year (See "Asset
Quality").* The Company believes that the allowance for loan losses is adequate
to provide for potential anticipated losses based upon current known conditions.
OTHER OPERATING INCOME. Other operating income increased by $1.1 million to $5.5
million for the three month period ended December 31, 1998, compared to $4.4
million for the same period in the prior year. The following table shows the
percentage of other operating income to average assets for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
1998 1997
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Other operating income................................... $ 5,465 4,417
Percent of average assets (annualized)................... 1.16% 1.06%
</TABLE>
The increases were due primarily to increases in gains on sales of mortgage
loans, increases in depository fees and service charges, increases in income
from the Company's affordable housing subsidiary and a gain on the sale of real
estate held for
23
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
sale. Gains on the sale of mortgage loans increased to $1.3 million for the
three month period ended December 31, 1998, compared to gains of $1.0 million
for the same period in the prior year, due to an increased level of sales. The
Company's volume of mortgage loan sales was $84.0 million for the three month
period ended December 31, 1998, compared to $52.1 million for the three month
period ended December 31, 1997. The decreasing interest rate environment has
increased the level of the Company's fixed rate loan production which is sold
into the secondary market. During the three month period ended December 31,
1998, the Company realized gains on the sale of securities of $28,000 compared
with gains of $610,000 for the three month period ended December 31, 1997. 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. Income from depository fees and service charges increased to
$952,000 from $809,000 for the three month periods ended December 31, 1998 and
1997, respectively. The Company has been increasing the number of checking
accounts in its deposit base which has resulted in higher levels of fee income.
Income from the operations of the Company's affordable housing subsidiary (which
represents primarily rental income) increased to $1.3 million from $1.0 million
for the three month periods ended December 31, 1998 and 1997, respectively. The
Company realized a gain of $733,000 on the sale of 9 affordable housing
properties which had been classified as real estate held for sale at September
30, 1998. The Company currently has 16 properties fully in operation compared to
25 in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.0 million or 10.3% to $11.0 million for the three month period
ended December 31, 1998, compared to $10.0 million for the same period in the
prior year. The following table shows the percentage of general and
administrative expenses to average assets for each period:
<TABLE>
<CAPTION>
Three months ended
December 31,
1998 1997
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
General and administrative expenses...................... 10,993 9,967
Percent of average assets (annualized)................... 2.33% 2.39%
</TABLE>
The increase in costs is due primarily to the costs associated with additional
personnel and other activity connected with the Company's higher level of
earning assets. In addition, the affordable housing subsidiary showed an
increase in operating expenses of $229,000 for the three month period ended
December 31, 1998, as compared to the same period in the prior year.
INCOME TAX EXPENSE. Income tax expense decreased to $154,000 to $756,000 for the
three month period ended December 31, 1998, compared to the same period in the
prior year. The effective tax rate for the three month period ended December 31,
1998 was 16.72%, compared to 19.33% for the three month period ended December
31, 1997. The decrease in the effective tax rate is due to the decrease in
income before income tax expense and the effect of the tax credits earned by the
Company's affordable housing subsidiary. Income tax credits increased to $1.1
million for the three month period ended December 31, 1998, compared to $967,000
for the three month period ended December 31, 1997.
ASSET QUALITY
Total non-performing assets were $3.4 million, or 0.17% of total assets at
December 31, 1998, 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.
24
<PAGE> 25
St. Francis Capital Corporation and Subsidiary
Item 2: Management's Discussion and Analysis Continued
Non-performing assets as of December 31, 1998 included $151,000 of auto loans
purchased in 1995 and 1996 which are past due or in default, compared to
$172,000 at September 30, 1998. Non-performing assets also includes a single
$829,000 commercial real estate loan on a shopping center.
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ ----------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans.............................. $ 3,218 $ 2,861
Foreclosed properties............................. 208 63
------------------ ----------------
Non-performing assets............................. $ 3,426 $ 2,924
================== ================
Non-performing loans to gross loans............... 0.32% 0.29%
Non-performing assets to gross assets............. 0.17% 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 $979,000 at December 31, 1998 compared to $1.0 million at
September 30, 1998. These loans had associated impairment reserves of $504,000
and $529,000 at December 31, 1998 and September 30, 1998, respectively. The
average balance of impaired loans was $991,000 and $1.4 million at December 31,
1998 and September 30, 1998, respectively. Interest income on impaired loans for
the three month period ended December 31, 1998 was $16,000, 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. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter interest
rate characteristics. Although management believes that its asset/liability
management strategies have reduced the potential effects of changes in interest
rates on its operations, increases in interest rates may adversely affect the
Company's results of operations because interest-bearing liabilities will
reprice more quickly than interest-earning assets.
At December 31, 1998, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 7.53% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest earning assets. The Company's three-year
cumulative gap as of December 31, 1998 was a negative 9.73% 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 December 31,
1998.
<TABLE>
<CAPTION>
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed............................ $ 34,692 $ 19,094 $ 45,000 $ 35,068 $ 72,872 $ 206,726
Variable......................... 132,170 85,212 70,732 88,030 15,674 391,908
Consumer loans (2).................... 142,030 56,933 9,410 32,458 41,067 281,898
Mortgage-backed and related securities 5,682 15,670 29,307 6,399 - 57,058
Assets available for sale:
Mortgage loans................... 25,855 - - - - 25,855
Fixed rate mortgagE related...... 49,558 131,493 138,204 31,029 - 350,284
Variable rate mortgage related... 278,468 109,361 - - - 387,829
Other............................ 82,645 38,436 1,515 - - 122,596
Trading account securities............ - - - - - -
Investment securities and other assets 49,867 - - 811 - 50,678
---------------------------------------------------------------------------------
Total............................ $ 800,967 $ 456,199 $ 294,168 $ 193,795 $129,703 $1,874,832
=================================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts..................... $ 7,278 $ 21,833 $ 29,894 11,865 7,808 78,678
Passbook savings accounts........ 3,760 11,281 22,846 15,738 34,851 88,476
Money market deposit accounts.... 84,631 253,892 24,334 6,083 1,545 370,485
Certificates of deposit.......... 270,006 309,394 66,668 8,364 97 654,529
Borrowings (4)........................ 312,474 125,000 205,000 - - 642,474
Impact of interest rate swap ......... 170,000 (160,000) (10,000) - - -
---------------------------------------------------------------------------------
Total............................ $ 848,149 $ 561,400 $ 338,742 $ 42,050 $ 44,301 $1,834,642
=================================================================================
Excess (deficiency) of interest-
earning assets over interest-bearing
liabilities........................... $ (47,182) $(105,201) $ (44,574) $ 151,745 $ 85,402 $ 40,190
=================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities................... (47,182) (152,383) (196,957) (45,212) 40,190
===================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets.......................... (2.33%) (7.53%) (9.73%) (2.23%) 1.99%
===================================================================
- --------------------------------------------------------------------------------------------------------------------------
</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 $100.3 million at December 31,
1998.
(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 $307.3 million or 15.2% 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 the withdrawal and prepayment are based on historical
experience, and management believes such assumptions reasonable, although the
actual withdrawal and repayment of assets and liabilities may vary
substantially.* Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and liabilities
may have similar maturities to repricing, they may react in different degrees to
changes in market interest rates.* Also, the interest rates on other types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates.* Additionally, certain assets, such as adjustable-rate loans and
mortgage-backed and related securities, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in calculating the data in the
table.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $56.2 million and
$30.7 million as of December 31, 1998 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 December 31, 1998, the Company had
a borrowing capacity available of $85.1 million from the FHLB; however,
additional securities may have to be pledged as collateral in event the Company
utilizes its greater borrowing capacity.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity minus
certain intangible assets. Core capital generally consists of tangible capital
plus qualifying intangible assets. The risk-based capital requirements presently
address credit risk related to both recorded and off-balance sheet commitments
and obligations.
The Bank is required to follow OTS capital regulations which require savings
institutions to meet 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. Savings institutions must meet all of
the standards in order to comply with the capital requirements.
27
<PAGE> 28
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 December 31, 1998:
Tangible capital.............. 120,504 5.98% >80,590 >4.0% >100,737 > 5.0%
- - - -
Core capital ................. 120,504 5.98% >80,590 >4.0% >100,737 > 5.0%
- - - -
Tier 1 risk-based capital..... 120,504 9.81% >49,151 >4.0% > 73,726 > 6.0%
- - - -
Risk-based capital............ 128,468 10.45% >98,302 >8.0% >122,877 >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>
As evidenced by the foregoing, the capital of the Company's financial
institution subsidiary exceeded all capital requirements as mandated by the
requirements of the OTS.
28
<PAGE> 29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
December 31, 1998.
<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
------------------ ----------------- ------------------ -------------------
Interest Earning Assets (Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
Commercial loans:
Fixed rate $ 51.7 7.92% $ 49.6 7.86% $ 14.5 7.88% $ 20.7 7.88%
Adjustable rate 101.9 7.90% 54.9 7.89% 35.3 7.80% 43.1 7.75%
Consumer loans:
Fixed rate 12.8 8.31% 20.0 8.51% 12.8 8.52% 15.7 8.52%
Adjustable rate 30.7 8.20% 22.3 8.30% 50.1 8.35% 26.5 8.40%
Mortgage-backed
Securities:
Fixed rate 202.4 6.51% 80.4 6.61% 80.4 6.69% 18.7 6.61%
Adjustable rate 77.5 6.18% 58.2 6.20% 54.3 6.30% 46.5 6.50%
Debt and equity
securities 121.1 6.15% 1.5 6.15% - - - -
Other 49.9 5.29% - - - - - -
Total interest
--------- --------- ---------- ----------
earning assets $ 648.0 6.76% $ 286.9 7.25% $ 247.4 7.26% $ 171.2 7.47%
========= ========= ========== ==========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 29.1 1.00% $ 14.9 1.00% $ 14.9 1.00% 5.9 1.00%
Passbooks 15.0 1.89% 11.4 1.89% 11.4 1.89% 7.9 1.89%
Money market 338.0 4.31% 12.2 4.31% 12.2 4.31% 3.0 4.31%
Certificates 526.7 5.34% 110.4 5.36% 9.4 5.61% 4.7 5.92%
Borrowings
fixed rate 57.3 4.54% 0.1 6.95% - - - -
adjustable rate 220.2 5.50% 35.0 5.50% - - - -
Total interest
--------- --------- ---------- ----------
bearing $1,186.3 4.89% $ 184.0 4.75% $ 47.9 2.96% $ 21.5 2.86%
liabilities ========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
------------------ ----------------- ------------------ ---------
Interest Earning Assets (Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
Commercial loans:
Fixed rate $ 20.7 7.85% $ 49.6 8.00% $206.8 7.91% $208.6
Adjustable rate 50.9 7.64% 131.7 7.84% 417.8 7.82% 423.2
Consumer loans:
Fixed rate 18.5 8.52% 62.7 8.54% 142.5 8.51% 144.8
Adjustable rate 9.8 8.51% 6.7 6.90% 139.4 8.33% 141.1
Mortgage-backed
Securities:
Fixed rate 18.7 6.89% 108.6 6.70% 407.3 6.54% 407.8
Adjustable rate 42.7 6.60% - - 387.8 6.43% 384.0
Debt and equity
securities - - - - 122.6 6.15% 122.4
Other - - 0.8 5.15% 50.7 5.29% 50.7
Total interest
---------- ---------- ---------- ---------
earning assets $ 161.3 7.46% $ 360.1 7.62% $ 1,874.9 7.19% $1,882.6
========== ========== ========== =========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 5.9 1.00% $ 7.8 1.00% $ 78.5 1.00% $ 78.5
Passbooks 7.9 1.89% 34.9 1.89% 88.5 1.89% 88.5
Money market 3.0 4.31% 2.0 4.31% 370.4 4.31% 371.0
Certificates 3.3 5.57% 0.1 8.45% 654.6 5.35% 654.6
Borrowings
fixed rate 35.0 4.52% 295.0 4.72% 387.4 4.68% 387.4
adjustable rate - - - - 255.2 5.50% 255.2
Total interest ---------- ---------- ---------- ---------
bearing liabilities $ 55.1 3.82% $ 339.8 4.34% $ 1,834.6 4.67% $1,835.2
========== ========== ========== =========
</TABLE>
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank is involved in any pending
legal proceedings involving amounts in the aggregate which
management believes are material to the financial condition and
results of operations of the Registrant and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On January 25, 1999, the Company announced the declaration of a
dividend of $0.16 per share on the Company's common stock for the
quarter ended December 31, 1998. The dividend is payable on
February 19, 1999 to shareholders of record as of February 10,
1999. This will be the fourteenth 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: February 16, 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 THREE MONTHS ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 35,452
<INT-BEARING-DEPOSITS> 20,712
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 860,709
<INVESTMENTS-CARRYING> 58,871
<INVESTMENTS-MARKET> 59,110
<LOANS> 905,387
<ALLOWANCE> 7,964
<TOTAL-ASSETS> 2,024,008
<DEPOSITS> 1,255,434
<SHORT-TERM> 411,612
<LIABILITIES-OTHER> 12,091
<LONG-TERM> 231,105
0
0
<COMMON> 73
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<TOTAL-LIABILITIES-AND-EQUITY> 2,024,008
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<INTEREST-TOTAL> 30,792
<INTEREST-DEPOSIT> 13,722
<INTEREST-EXPENSE> 20,263
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<LOAN-LOSSES> 480
<SECURITIES-GAINS> 28
<EXPENSE-OTHER> 10,993
<INCOME-PRETAX> 4,521
<INCOME-PRE-EXTRAORDINARY> 4,521
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> 0.86
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</TABLE>
