<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 June 30, 1999
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
WISCONSIN 39-1747461
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203
---------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(414) 486-8700
-------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
----- ----
(2) Yes x No
----- ----
The number of shares outstanding of the issuer's common stock, $.01
par value per share, was 10,136,770 at July 31, 1999.
<PAGE> 2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition...................................................... 3
Consolidated Statements of Income................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. 5
Consolidated Statements of Cash Flows............................................................... 6
Notes to Consolidated Financial Statements.......................................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 29
ITEM 2. Changes In Securities and Use of Proceeds........................................................... 29
ITEM 3. Defaults Upon Senior Securities..................................................................... 29
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 29
ITEM 5. Other Information................................................................................... 29
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 29
SIGNATURES.................................................................................................... 30
</TABLE>
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................... $ 27,508 $ 23,861
Federal funds sold and overnight deposits ................................. 9,635 6,885
------------ ------------
Cash and cash equivalents ................................................. 37,143 30,746
------------ ------------
Assets available for sale, at fair value:
Debt and equity securities ............................................ 213,314 109,061
Mortgage-backed and related securities ................................ 946,878 634,003
Mortgage loans held for sale, at lower of cost or market .................. 15,298 23,864
Securities held to maturity, at amortized cost:
Debt securities (market values of $837 and $1,875, respectively)....... 810 1,817
Mortgage-backed and related securities (market values of $44,807
and $63,497, respectively) ......................................... 44,876 63,087
Loans receivable, net ..................................................... 1,006,511 855,132
Federal Home Loan Bank stock, at cost ..................................... 29,902 23,453
Accrued interest receivable ............................................... 14,355 9,726
Foreclosed properties ..................................................... 604 63
Real estate held for investment ........................................... 28,688 29,997
Real estate held for sale ................................................. -- 20,772
Premises and equipment, net ............................................... 33,455 32,165
Other assets .............................................................. 41,784 30,290
------------ ------------
Total assets .............................................................. $ 2,413,618 $ 1,864,176
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 1,484,684 $ 1,216,874
Short term borrowings ..................................................... 465,641 417,672
Long term borrowings ...................................................... 311,037 87,005
Advances from borrowers for taxes and insurance ........................... 6,210 8,553
Accrued interest payable and other liabilities ............................ 13,219 12,527
------------ ------------
Total liabilities ......................................................... 2,280,791 1,742,631
------------ ------------
Commitments and contingencies ............................................. -- --
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued ........................................................... -- --
Common stock $.01 par value: Authorized 24,000,000 shares;
Issued, 14,579,240 shares;
Outstanding, 10,136,770 and 9,575,366 shares, respectively ............ 146 146
Additional paid-in-capital ................................................ 82,106 75,237
Unearned ESOP compensation ................................................ (2,363) (2,678)
Retained earnings, substantially restricted ............................... 119,428 112,362
Accumulated other comprehensive income (loss) ............................. (7,289) 381
Treasury stock at cost (4,442,470 and 5,003,874 shares, respectively) ..... (59,201) (63,903)
------------ ------------
Total shareholders' equity ................................................ 132,827 121,545
------------ ------------
Total liabilities and shareholders' equity ................................ $ 2,413,618 $ 1,864,176
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans .............................................. $ 58,342 $ 49,551 $ 20,340 $ 17,207
Mortgage-backed and related securities ............. 37,293 32,451 14,383 10,611
Debt and equity securities ......................... 6,562 2,754 3,038 1,174
Federal funds sold and overnight deposits .......... 715 847 129 230
Federal Home Loan Bank stock ....................... 1,363 1,049 465 328
Trading account securities ......................... 19 57 3 19
--------- --------- --------- ---------
Total interest and dividend income ...................... 104,294 86,709 38,358 29,569
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits ........................................... 41,459 38,584 14,220 12,976
Advances and other borrowings ...................... 25,429 17,323 10,161 6,005
--------- --------- --------- ---------
Total interest expense .................................. 66,888 55,907 24,381 18,981
--------- --------- --------- ---------
Net interest income before provision for loan losses .... 37,406 30,802 13,977 10,588
Provision for loan losses ............................... 1,440 2,000 480 300
--------- --------- --------- ---------
Net interest income ..................................... 35,966 28,802 13,497 10,288
--------- --------- --------- ---------
OTHER OPERATING INCOME, NET:
Loan servicing and loan related fees ............... 1,385 1,564 481 450
Depository fees and service charges ................ 3,027 2,564 1,104 997
Securities gains (losses) .......................... (248) 956 124 464
Gain on sales of loans ............................. 2,544 3,238 420 894
Insurance, annuity and brokerage commissions ....... 1,299 917 594 386
Gain (loss) on foreclosed properties ............... (34) 2 (1) 23
Income from affordable housing ..................... 3,275 3,743 1,103 1,308
Gain on sale of real estate held for sale .......... 1,225 -- -- --
Other income ....................................... 670 1,287 167 159
--------- --------- --------- ---------
Total other operating income, net ....................... 13,143 14,271 3,992 4,681
--------- --------- --------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits ................. 16,236 14,569 5,843 4,998
Office building, including depreciation ............ 3,199 2,348 1,017 818
Furniture and equipment, including depreciation .... 3,256 2,357 1,146 840
Federal deposit insurance premiums ................. 533 479 185 163
Affordable housing expenses ........................ 3,277 4,009 932 1,288
Other general and administrative expenses .......... 6,429 7,314 1,909 2,636
--------- --------- --------- ---------
Total general and administrative expenses ............... 32,930 31,076 11,032 10,743
--------- --------- --------- ---------
Income before income tax expense ........................ 16,179 11,997 6,457 4,226
Income tax expense ...................................... 4,265 1,062 1,978 672
--------- --------- --------- ---------
Net income .............................................. $ 11,914 $ 10,935 $ 4,479 $ 3,554
========= ========= ========= =========
Basic earnings per share ................................ $ 1.29 $ 1.11 $ 0.46 $ 0.36
========= ========= ========= =========
Diluted earnings per share .............................. $ 1.23 $ 1.04 $ 0.45 $ 0.34
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income
<TABLE>
<CAPTION>
Accumulated
Shares of Other
Common Additional Unearned Comprehensive
Stock Common Paid-In ESOP Retained Income/
Outstanding Stock Capital Compensation Earnings (Loss)
---------- --------- ---------- ---------- ----------- ----------
(In thousands, except Shares of Common Stock Outstanding)
<S> <C> <C> <C> <C> <C> <C>
Nine months ended June 30, 1998
Balance at September 30, 1997-as
previously reported ..................... 5,226,998 $ 73 $ 73,541 $ (3,088) $ 101,469 $ 1,046
2-for-1 stock split declared March 23, 1999 .. 5,226,998 73 (73) -- -- --
---------- --------- ---------- ---------- ----------- ----------
Balance at September 30, 1997 ................ 10,453,996 $ 146 $ 73,468 $ (3,088) $ 101,469 $ 1,046
Net income ................................... -- -- -- -- 10,935 --
Unrealized gain on securities available
for sale ................................ -- -- -- -- -- 351
Reclassification adjustment for gains
realized in net income .................. -- -- -- -- -- (956)
Incomes taxes ................................ -- -- -- -- -- 252
Comprehensive income .........................
Cash dividend - $0.21 per share .............. -- -- -- (2,201) --
Purchase of treasury stock ................... (399,976) -- -- -- -- --
Exercise of stock options, net ............... 167,346 -- 296 -- (992) --
Amortization of unearned compensation ........ -- -- 1,209 307 -- --
---------- --------- ---------- ---------- ----------- ----------
Balance at June 30, 1998 ..................... 10,221,366 $ 146 $ 74,973 $ (2,781) $ 109,211 $ 693
========== ========= ========== ========== =========== ==========
Nine months ended June 30, 1999
Balance at September 30, 1998-as
previously reported ..................... 4,787,683 $ 73 $ 75,310 $ (2,678) $ 112,362 $ 381
2-for-1 stock split declared March 23, 1999 .. 4,787,683 73 (73) -- -- --
---------- --------- ---------- ---------- ----------- ----------
Balance at September 30, 1998 ................ 9,575,366 $ 146 $ 75,237 $ (2,678) $ 112,362 $ 381
Net income ................................... -- -- -- -- 11,914 --
Unrealized loss on securities available
for sale ................................ -- -- -- -- -- (12,853)
Reclassification adjustment for losses
realized in net income .................. -- -- -- -- -- 248
Incomes taxes ................................ -- -- -- -- -- 4,935
Comprehensive income .........................
Cash dividend - $0.24 per share .............. -- -- -- -- (2,351) --
Shares of common stock issued for acquisition 734,564 -- 5,556 -- -- --
Purchase of treasury stock ................... (479,974) -- -- -- -- --
Exercise of stock options, net ............... 306,814 -- 88 -- (2,497) --
Amortization of unearned compensation ........ -- -- 1,225 315 -- --
---------- --------- ---------- ---------- ----------- ----------
Balance at June 30, 1999 ..................... 10,136,770 $ 146 $ 82,106 $ (2,363) $ 119,428 $ (7,289)
========== ========= ========== ========== =========== ==========
<CAPTION>
Treasury
Stock Total
------------- -------------
<S> <C> <C>
Nine months ended June 30, 1998
Balance at September 30, 1997-as
previously reported ..................... $ (44,511) $ 128,530
2-for-1 stock split declared March 23, 1999 .. -- --
------------- -------------
Balance at September 30, 1997 ................ $ (44,511) $ 128,530
Net income ................................... -- 10,935
Unrealized gain on securities available
for sale ................................ -- 351
Reclassification adjustment for gains
realized in net income .................. -- (956)
Incomes taxes ................................ -- 252
-------------
Comprehensive income ......................... 10,582
Cash dividend - $0.21 per share .............. -- (2,201)
Purchase of treasury stock ................... (8,533) (8,533)
Exercise of stock options, net ............... 1,768 1,072
Amortization of unearned compensation ........ -- 1,516
------------- -------------
Balance at June 30, 1998 ..................... $ (51,276) $ 130,966
============= =============
Nine months ended June 30, 1999
Balance at September 30, 1998-as
previously reported ..................... $ (63,903) $ 121,545
2-for-1 stock split declared March 23, 1999 .. -- --
------------- -------------
Balance at September 30, 1998 ................ $ (63,903) $ 121,545
Net income ................................... -- 11,914
Unrealized loss on securities available
for sale ................................ -- (12,853)
Reclassification adjustment for losses
realized in net income .................. -- 248
Incomes taxes ................................ -- 4,935
------------- -------------
Comprehensive income ......................... 4,244
Cash dividend - $0.24 per share .............. -- (2,351)
Shares of common stock issued for acquisition 9,727 15,283
Purchase of treasury stock ................... (8,988) (8,988)
Exercise of stock options, net ............... 3,963 1,554
Amortization of unearned compensation ........ -- 1,540
------------- -------------
Balance at June 30, 1999 ..................... $ (59,201) $ 132,827
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
June 30,
------------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 11,914 $ 10,935
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .................................................... 1,440 2,000
Depreciation, accretion and amortization ..................................... 7,177 5,840
Deferred income taxes ........................................................ 1,905 (3,021)
Securities (gains) losses .................................................... 248 (956)
Originations of loans held for sale .......................................... (174,095) (158,916)
Proceeds from sales of loans held for sale ................................... 180,117 160,385
Stock-based compensation expense ............................................. 1,540 1,516
Gain on sale of real estate held for sale .................................... (1,225) --
Other, net ................................................................... (11,389) (12,443)
--------- ---------
Total adjustments .................................................................. 5,718 (5,595)
--------- ---------
Net cash provided by operating activities .......................................... 17,632 5,340
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity ................... 1,004 2,012
Proceeds from maturities of mortgage-backed and related securities ............. 3,909 1,575
Principal repayments on mortgage-backed and related securities
held to maturity ........................................................... 14,302 --
Purchases of mortgage-backed securities available for sale ..................... (579,780) (388,209)
Proceeds from sales of mortgage-backed securities available for sale ........... 42,169 187,304
Principal repayments on mortgage-backed securities available for sale .......... 225,093 252,465
Purchase of debt and equity securities available for sale ...................... (226,784) (82,326)
Proceeds from sales of debt and equity securities available for sale ........... 94,722 38,511
Proceeds from maturities of debt and equity securities available for sale ...... 35,269 12,587
Net cash used for acquisitions ................................................. (4,286) --
Purchases of Federal Home Loan Bank stock ...................................... (15,849) (3,350)
Redemption of Federal Home Loan Bank stock ..................................... 9,554 1,840
Purchase of loans .............................................................. (15,857) (50,993)
Increase in loans, net of loans held for sale .................................. (123,660) (45,568)
Proceeds from sale of real estate held for sale ................................ 21,997 --
Increase in real estate held for investment .................................... (375) (1,649)
Purchases of premises and equipment, net ....................................... (3,794) (7,800)
--------- ---------
Net cash used in investing activities .............................................. (522,366) (83,601)
--------- ---------
</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>
Nine months ended
June 30,
----------------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................... 251,258 42,309
Proceeds from advances and other borrowings ................................ 1,392,615 427,066
Repayments on advances and other borrowings ................................ (1,256,575) (370,174)
Increase in securities sold under agreements to repurchase ................. 135,961 --
Decrease in advances from borrowers for taxes and insurance ................ (2,343) (3,621)
Dividends paid ............................................................. (2,351) (2,201)
Stock option transactions .................................................. 1,554 1,072
Purchase of treasury stock ................................................. (8,988) (8,533)
----------- -----------
Net cash provided by financing activities ...................................... 511,131 85,918
----------- -----------
Increase in cash and cash equivalents .......................................... 6,397 7,657
Cash and cash equivalents:
Beginning of period ...................................................... 30,746 42,858
----------- -----------
End of period ............................................................ $ 37,143 $ 50,515
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 65,019 $ 57,002
Income taxes ............................................................. 1,702 3,207
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing and financing
activities:
Mortgage loans secured as mortgage-backed securities ..................... $ 6,961 $ 14,634
Transfer from loans to foreclosed properties ............................. 807 470
Transfer of mortgage loans to mortgage loans held for sale ............... 39,214 50,928
Acquisitions:
Assets acquired .......................................................... $ 42,866 $ --
Common stock issued for acquisition ...................................... 15,283 --
Cash paid for purchase of stock .......................................... (10,132) --
Cash acquired ............................................................ 5,846 --
----------- -----------
Net cash used for acquisitions ...................................... (4,286) --
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and
balances of St. Francis Capital Corporation (the "Company"), its
wholly-owned subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and
the Bank's wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations or
cash flows in accordance with generally accepted accounting
principles. However, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the consolidated financial statements have been
included. Operating results for the three and nine month periods ended
June 30, 1999 are not necessarily indicative of the results which may
be expected for the entire year ending September 30, 1999.
Certain previously reported balances have been reclassified to conform
with the 1999 presentation.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement established
standards for reporting the components of comprehensive income
prominently within the financial statements. Comprehensive income
includes net income plus certain transactions that are reported
directly within stockholders' equity. The Company adopted this
statement with the first quarter of 1999 financial statements and has
restated the prior period amounts. The adoption of this statement did
not have any impact on the financial position or the results of
operations of the Company.
On March 23, 1999, the Company declared a two-for-one stock split of
its common stock payable on April 19, 1999, in the form of a stock
dividend for shareholders of record at the close of business on April
10, 1999. All share and per share amounts on the accompanying
consolidated financial statements have been restated to give effect to
the stock split.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The contractual or notional amounts
of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for the commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments
that are reflected in the consolidated financial statements.
8
<PAGE> 9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The contractual or notional amounts of off-balance sheet financial instruments
are as follows:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
June 30, September 30,
1999 1998
-------- --------
(In thousands)
Commitments to extend credit:
<S> <C> <C>
Fixed-rate loans ............................. $ 5,598 $ 10,637
Variable-rate loans .......................... 24,747 19,647
Mortgage loans sold with recourse ................ 18,647 35,558
Guarantees under IRB issues ...................... 24,484 18,301
Interest rate swap agreements (notional amount) .. 270,000 225,000
Interest rate corridors (notional amount) ........ -- 10,000
Commitments to:
Sell mortgage-backed securities ................ -- 37,000
Unused and open-ended lines of credit:
Consumer ....................................... 169,460 158,210
Commercial ..................................... 31,841 25,061
Open option contracts written:
Short-call options ............................. 5,000 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 June 30, 1999 have interest rates ranging from
7.13% to 8.00%. Because some commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent cash
requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained
consists primarily of one- to four-family residences and other
residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans
that are sold to secondary market agencies, primarily the 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 where, 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 June
30, 1999, appraised values of the real estate collateral exceeded the
amount of the guarantees.
Interest rate swap agreements generally involve the exchange of fixed
and variable 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 pay-floating receive agreement was entered into
as a hedge of the interest rates on the debt and equity securities
portfolio. The fixed receive-floating pay agreements were entered into
as hedges of the interest rates on fixed rate certificates. Interest
receivable or payable on interest rate swaps is recognized using the
accrual method. The use of interest rate swaps enables the Company to
synthetically alter the repricing characteristics of designated
interest-bearing liabilities.
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The agreements at June 30, 1999 consist of the following:
<TABLE>
<CAPTION>
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
-------- -------------------------- ---- -------------- ----- -----
<S> <C> <C> <C> <C> <C>
$ 10,000 Fixed Pay-Floating Receive 2001 not applicable 7.05% 6.09%
5,000 Fixed Receive-Floating Pay 2003 1999 6.47% 5.07%
5,000 Fixed Receive-Floating Pay 2003 1999 6.43% 5.10%
15,000 Fixed Receive-Floating Pay 2003 1999 6.00% 4.82%
15,000 Fixed Receive-Floating Pay 2005 1999 6.00% 4.91%
15,000 Fixed Receive-Floating Pay 2005 1999 6.25% 5.08%
15,000 Fixed Receive-Floating Pay 2005 1999 6.10% 4.83%
15,000 Fixed Receive-Floating Pay 2007 1999 7.05% 4.83%
10,000 Fixed Receive-Floating Pay 2007 1999 7.13% 4.83%
15,000 Fixed Receive-Floating Pay 2007 1999 6.90% 4.82%
10,000 Fixed Receive-Floating Pay 2008 1999 5.85% 5.03%
15,000 Fixed Receive-Floating Pay 2008 1999 6.30% 4.86%
15,000 Fixed Receive-Floating Pay 2009 1999 7.00% 5.14%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 5.04%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 4.76%
10,000 Fixed Receive-Floating Pay 2004 2000 6.00% 4.94%
10,000 Fixed Receive-Floating Pay 2006 2000 6.13% 4.89%
10,000 Fixed Receive-Floating Pay 2009 2000 6.00% 4.90%
10,000 Fixed Receive-Floating Pay 2009 2000 6.00% 4.86%
10,000 Fixed Receive-Floating Pay 2009 2000 6.05% 4.81%
10,000 Fixed Receive-Floating Pay 2009 2000 6.25% 4.84%
10,000 Fixed Receive-Floating Pay 2009 2000 6.30% 4.83%
15,000 Fixed Receive-Floating Pay 2009 2000 7.00% 5.08%
5,000 Fixed Receive-Floating Pay 2009 2001 6.25% 5.01%
</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. At June 30, 1999, the
gross unrealized gains and losses of $2.0 million and $4.1 million,
respectively, equals the fair value loss of the interest rate swaps of
$2.1 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. 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 consumer and commercial
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 June 30,
1999 were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and obligations of
U.S. Government Agencies .................... $ 216,240 $ 57 $ 4,368 $ 211,929
Corporate notes and bonds ....................... 1,000 -- -- 1,000
Marketable equity securities .................... 385 -- -- 385
------------ ------------ ------------ ------------
TOTAL DEBT AND EQUITY SECURITIES ................. $ 217,625 $ 57 $ 4,368 $ 213,314
============ ============ ============ ============
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC ......................................... $ 1,167 $ -- $ 10 $ 1,157
FNMA .......................................... 32,051 -- 852 31,199
Private issue ................................. 81,006 508 1,469 80,045
REMICs:
FHLMC ......................................... 167,246 186 2,054 165,378
FNMA .......................................... 45,895 74 287 45,682
GNMA .......................................... 2,381 4 -- 2,385
Private issue ................................. 624,811 805 4,620 620,996
CMO residual .................................... 36 -- -- 36
------------ ------------ ------------ ------------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ................................. $ 954,593 $ 1,577 $ 9,292 $ 946,878
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
--------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
DEBT SECURITIES:
State and municipal obligations ............ $ 810 $ 27 $ -- $ 837
----------- ----------- ----------- -----------
TOTAL DEBT SECURITIES ...................... $ 810 $ 27 $ -- $ 837
=========== =========== =========== ===========
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FNMA ..................................... $ 485 $ -- $ 2 $ 483
Private issue ............................ 44,391 64 131 44,324
----------- ----------- ----------- -----------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES ............................ $ 44,876 $ 64 $ 133 $ 44,807
=========== =========== =========== ===========
</TABLE>
During the nine month periods ended June 30, 1999 and 1998, gross
proceeds from the sale of securities available for sale totaled
approximately $136.9 million and $225.8 million, respectively. The
gross realized gains on such sales totaled approximately $177,000 and
$3.2 million for the nine month periods ended June 30, 1999 and 1998,
respectively. The
11
<PAGE> 12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
gross realized losses on such sales totaled approximately $506,000 and
$2.1 million for the nine month periods ended June 30, 1999 and 1998,
respectively.
During the three month periods ended June 30, 1999 and 1998, gross
proceeds from the sale of securities available for sale totaled
approximately $32.8 million and $56.6 million, respectively. The gross
realized gains on such sales totaled approximately $47,000 and
$952,000 for the three month periods ended June 30, 1999 and 1998,
respectively. The gross realized losses on such sales totaled
approximately $8,000 and $185,000 for the three month periods ended
June 30, 1999 and 1998, respectively.
At June 30, 1999 and 1998, $499.8 million and $280.4 million,
respectively, of mortgage-related securities were pledged as
collateral for Federal Home Loan Bank ("FHLB") advances.
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
First mortgage - one- to four-family .......... $ 241,751 $ 254,047
First mortgage - residential construction ..... 100,591 71,092
First mortgage - multi-family ................. 147,558 105,380
Commercial real estate ........................ 252,145 170,562
Home equity ................................... 147,360 142,993
Commercial and agriculture .................... 110,602 93,927
Consumer secured by real estate ............... 92,839 85,595
Interim financing and consumer loans .......... 14,643 13,375
Indirect auto ................................. 43,877 32,173
Education ..................................... 477 2,529
------------ ------------
Total gross loans ......................... 1,151,843 971,673
------------ ------------
Less:
Loans in process .......................... 119,533 83,436
Unearned insurance premiums ............... 67 292
Deferred loan and guarantee fees .......... 911 848
Purchased loan discount ................... 489 571
Allowance for loan losses ................. 9,034 7,530
------------ ------------
Total deductions .......................... 130,034 92,677
------------ ------------
Total loans receivable ........................ 1,021,809 878,996
Less: First mortgage loans held for sale ..... 15,298 23,864
------------ ------------
Loans receivable, net ......................... $ 1,006,511 $ 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>
Nine months ended Three months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Beginning Balance ............ $ 7,530 $ 6,202 $ 8,678 $ 6,034
Charge-offs:
Real estate - mortgage ..... (40) (175) (40) (175)
Commercial real estate ..... -- -- -- --
Commercial loans ........... (11) (12) -- (12)
Home equity loans .......... (37) (23) (17) --
Consumer ................... (192) (638) (79) (224)
---------- ---------- ---------- ----------
Total charge-offs ............ (280) (848) (136) (411)
---------- ---------- ---------- ----------
Recoveries:
Real estate - mortgage ..... -- -- -- --
Commercial real estate ..... -- -- -- --
Commercial loans ........... -- -- -- --
Home equity loans .......... 16 -- -- --
Consumer ................... 25 24 12 7
---------- ---------- ---------- ----------
Total recoveries ............. 41 24 12 7
---------- ---------- ---------- ----------
Net charge-offs .............. (239) (824) (124) (404)
---------- ---------- ---------- ----------
Acquired bank's allowance .... 303 -- -- --
Provision .................... 1,440 2,000 480 300
---------- ---------- ---------- ----------
Ending balance ............... $ 9,034 $ 7,378 $ 9,034 $ 7,378
========== ========== ========== ==========
</TABLE>
Total non-performing assets were $3.1 million, or 0.13% of total
assets at June 30, 1999, compared with $2.9 million, or 0.16% of
total assets at September 30, 1998. Non-performing assets include
loans which have been placed on nonaccrual status and property upon
which a judgment of foreclosure has been entered, but prior to the
foreclosure sale, as well as property acquired as a result of
foreclosure. Non-performing assets includes a single $820,000
commercial real estate loan on a shopping center.
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Non-performing loans .................... $ 2,523 $ 2,861
Foreclosed properties ................... 604 63
---------- ----------
Non-performing assets ................... $ 3,127 $ 2,924
========== ==========
Non-performing loans to gross loans ..... 0.22% 0.29%
Non-performing assets to total assets ... 0.13% 0.16%
</TABLE>
13
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
There are no material loans of 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 $886,000 at June 30, 1999 compared to $1.0
million at September 30, 1998. These loans had associated impairment
reserves of $424,000 and $529,000 at June 30, 1999 and September 30,
1998, respectively. The average balance of impaired loans was $950,000
and $1.4 million at June 30, 1999 and September 30, 1998,
respectively.
(7) Earnings Per Share
Basic earnings per share of common stock for the nine and three month
periods ended June 30, 1999 and 1998, have been determined by dividing
net income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share
of common stock for the nine and three month periods ended June 30,
1999 and 1998, have been determined by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period, adjusted for the dilutive effect of
outstanding stock options. Book value per share of common stock at
June 30, 1999 and September 30, 1998 have been determined by dividing
total shareholders' equity by the number of shares of common stock
outstanding during the period, adjusted for the dilutive effect of
outstanding stock options at the respective dates. Stock options are
regarded as potential common stock and are, therefore, considered in
per share calculations. Total shares outstanding for earnings per
share calculation purposes have been reduced by the Employee Stock
Ownership Plan ("ESOP") shares that have not been committed to be
released.
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income for the period ........................ $ 11,914,000 $ 10,935,000 $ 4,479,000 $ 3,554,000
============ ============ ============ ============
Common shares issued ............................. 14,579,240 14,579,240 14,579,240 14,579,240
Net Treasury shares .............................. 4,838,923 4,131,090 4,448,474 4,212,884
Unallocated ESOP shares .......................... 492,725 575,354 471,872 555,394
------------ ------------ ------------ ------------
Weighted average common shares
outstanding during the period ................ 9,247,592 9,872,796 9,658,894 9,810,962
Assumed incremental common stock issued upon
exercise of stock options .................... 450,366 606,782 372,376 543,176
------------ ------------ ------------ ------------
Total weighted average common shares and
equivalents outstanding ...................... 9,697,958 10,479,578 10,031,270 10,354,138
============ ============ ============ ============
Basic earnings per share ......................... $ 1.29 $ 1.11 $ 0.46 $ 0.36
Diluted earnings per share ....................... $ 1.23 $ 1.04 $ 0.45 $ 0.34
</TABLE>
14
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of book value per common share is as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
Common shares outstanding at the end
of the period ................................... 9,664,900 9,040,476
Incremental shares relating to dilutive stock
options outstanding at the end of the period .... 437,353 484,196
------------ ------------
10,102,253 9,524,672
============ ============
Total shareholders' equity at the end of
the period ...................................... $132,827,000 $121,545,000
Book value per common share ........................ $ 13.15 $ 12.76
</TABLE>
(8) Stock Option Plans
The Company has adopted stock option plans for the benefit of
directors and officers of the Company. The option exercise price
cannot be less than the fair value of the underlying common stock as
of the date of the option grant, and the maximum term cannot exceed
ten years. Stock options awarded to directors may be exercised at any
time or on a cumulative basis over varying time periods, provided the
grantee remains a director of the Company. The stock options awarded
to officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may
include provisions for acceleration of vesting periods.
At June 30, 1999, 189,548 shares were reserved for future grants.
Further information concerning the options is as follows:
<TABLE>
<CAPTION>
Nine months ended June 30,
----------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
Average Average
Exercise Exercise
Options Price Options Price
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period ..... 1,163,620 $ 10.76 1,313,132 $ 9.69
Granted ................................ 785,264 18.66 73,334 19.19
Canceled ............................... (41,550) 17.25 (49,500) 14.50
Exercised .............................. (321,652) 5.50 (173,346) 5.14
------------- ------------- ------------- -------------
Outstanding at end of period ........... 1,585,682 $ 15.57 1,163,620 $ 10.76
============= ============= ============= =============
Options exercisable .................... 416,408 $5.00 - 19.38 587,534 $5.00 - 19.38
============= ============= ============= =============
</TABLE>
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(9) Income Taxes
Actual income tax expense differs from the "expected" income tax
expense computed by applying the statutory Federal corporate tax rate
to income before income tax expense, as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Federal income tax expense at statutory rate of 35% ...... $ 5,663 $ 4,199 $ 2,260 $ 1,479
State income taxes, net of Federal income tax benefit .... 437 (305) 204 83
Tax exempt interest ...................................... (103) (101) (33) (101)
Non-deductible compensation .............................. 337 332 108 113
Acquisition intangible amortization ...................... 173 185 56 62
Affordable housing credits ............................... (2,316) (3,117) (662) (1,069)
Other, net ............................................... 74 (131) 45 106
---------- ---------- ---------- ----------
$ 4,265 $ 1,062 $ 1,978 $ 673
========== ========== ========== ==========
</TABLE>
The decrease in affordable housing credits for the nine and three
month periods ended June 30, 1999 is due to the sale of 13 affordable
housing properties which had been classified as real estate held for
sale at September 30, 1998.
Included in other assets is a deferred tax asset of $3.3 million and
$3.6 million at June 30, 1999 and September 30, 1998.
(10) Acquisitions
In January 1999, the Company completed the acquisition of Reliance
Bancshares, Inc. ("Reliance") for $25.4 million in stock and cash.
Under the terms of the agreement each share of Reliance common stock
was converted into either .25 shares of common stock of the Company or
$5.20 in cash in accordance with elections made by Reliance
shareholders and subject to certain specified allocation and proration
procedures. The Company issued 734,564 shares of common stock in
connection with this transaction. The acquisition was treated as a
purchase transaction for accounting purposes. The related accounts and
results of operations are included in the Company's consolidated
financial statements from the date of acquisition. The acquisition of
Reliance added $43.0 million in assets, including additions of $25.7
million to net loans and $16.6 million to deposits. Proforma results
for the prior period are not materially different from the historical
information. All share and per share amounts have been restated to
give effect to the two-for-one stock split effective April 19, 1999.
The excess of cost over the fair value of tangible assets acquired is
accounted for as goodwill and is amortized over fifteen years using
the straight-line method. The amount of goodwill recorded due to the
acquisition was $2.9 million.
(11) Future Accounting Pronouncements
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, 2000, 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
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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, 2000 and expects that it will not
materially effect results of operations or financial position.
The FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise: an amendment of FASB
Statement No. 65," which is effective for the first fiscal quarter
beginning after December 15, 1998 and was adopted by the Company on
January 1, 1999. This statement requires that after the securitization
of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or
hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of
mortgage loans held by a mortgage banking entity with the required
accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. Adoption did not
materially effect results of operations or financial position.
The FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133" in June
1999. Statement No. 137 defers the effective date of Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"
for one year. Statement No. 133, as amended, is now effective for all
fiscal quarters beginning after June 15, 2000.
Statement No. 133 generally requires that derivatives embedded in
hybrid instruments be separated from their host contracts and be
accounted for separately as derivative contracts. For instruments
existing at the date of adoption, Statement No. 133 provides an entity
the option of not applying this provision to such hybrid instruments
entered into before January 1, 1998 and not substantially modified
thereafter. Consistent with the deferral of the effective date for one
year, Statement No. 137 provides an entity the option of not applying
this provision to hybrid instruments entered into before January 1,
1998 or 1999 and not substantially modified thereafter.
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Forward-looking statements with respect to the financial condition, results of
operations and business of the Company, which include words and phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions and various other statements
indicated herein with an asterisk ("*") after such statements. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors could affect the Company's financial performance and could
cause actual results for future periods to differ materially from those
anticipated or projected. Such factors include, but are not limited to: (i)
general market rates, (ii) general economic conditions, (iii)
legislative/regulatory changes, (iv) monetary and fiscal policies of the U.S.
Treasury and Federal Reserve, (v) changes in the quality or composition of the
Company's loan and investment portfolios, (vi) demand for loan products, (vii)
deposit flows, (viii) competition, (ix) demand for financial services in the
Company's markets, and (x) changes in accounting principles, policies or
guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
YEAR 2000
Advances and changes in available technology can significantly impact the
business and operations of the Company. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs or programs of third-party
providers that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected, Year 2000 issues
could result in a major system failure or miscalculations and material costs to
the Company.
The Company is in compliance with 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. In addition, the Company is examined for
Year 2000 readiness on a periodic basis by its primary federal regulator.
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 remediation and testing of all critical,
moderate and low priority systems is complete at this time. The Company is
currently on schedule to complete Year 2000 compliance activities within its
designated time frame. The project is being overseen by a steering committee
composed of representatives from all areas of the Company and being directed by
the Company's Information Services division.
The Company utilizes a national third party provider for the bulk of its data
processing needs. As a result, a large part of the Company's mission critical
Year 2000 testing is for products and services processed by that service
provider. The service provider has completed the remediation and testing of its
systems and has had its Year 2000 compliant systems in production since June
30, 1998. The Company has successfully completed its testing of that system to
verify that the service provider's system functions in the Year 2000 for those
services used by the Company. The Company has no custom developed system code.
Therefore, the remediation phase of the Company's Year 2000 plan does not
include code renovation.
In addressing the Year 2000 issue, the Company has also taken into
consideration technology issues beyond its data processing activities. Non-data
processing systems include equipment in use which is not defined as computer
hardware or software. Such equipment could result in service or product
breakdown if not Year 2000 compliant. As part of its Year 2000 plan, the
Company has addressed such items as alarm systems, elevators, keyless entry
systems, telephone and data systems and others. As of this time successful
testing of all such systems have been completed.
The Year 2000 issue also may affect the Company's customers who may experience
a disruption in business that could potentially result in financial
difficulties and eventually result in an inability to repay their loans. The
Company includes as part of its normal underwriting standards consideration of
the Year 2000 credit risk. The assessment is made through personal contact and
a questionnaire, which allows the Company to review a customer's Year 2000
awareness and compliance status. This process results in an overview of the
customer's preparedness, but does not give absolute assurance that the customer
will not have problems with
18
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Year 2000 issues. The potential impact of Year 2000 on the customer's ability
to repay loans cannot be determined at this time, however, it has been
considered as a factor in establishing the Company's loan loss allowance.
The estimated costs of the Year 2000 issues are not expected to have a
significant impact on the Company's results of operations, liquidity or capital
resources. Direct costs of the Year 2000 issue have been estimated to not
exceed $500,000 per year for the fiscal years ending September 30, 1999 and
2000. The primary direct costs include compensation and benefits paid to staff
dedicated solely to the Year 2000 issue, direct costs paid to vendors or others
related to Year 2000 preparedness and the income statement effect of hardware
and software purchased to replace items not Year 2000 compliant. The figure
does not include costs considered by the Company to be indirect costs. The
primary indirect cost includes the time and effort of many of the Company's
employees to prepare for the Year 2000 in addition to performing their normal
work routines. The costs of the Year 2000 project are based on the Company's
best estimates, which include numerous assumptions about future events. Actual
costs may differ due to actual events being different than those assumed at the
time the cost estimates were prepared.
The Company presently believes that the compliance effort can and will be
completed prior to the Year 2000.* However, if required product or service
upgrades are not complete by that time, the Year 2000 issues could disrupt
normal business operations.* Although not expected at this time, the most
likely worst case scenario includes the Company being unable to process some or
all of its transactions on a temporary basis.* Because of the nature of this
scenario, the Company has established contingency plans for all mission
critical services.* All contingency plans have been completed at this time. The
contingency plans will be tested and modified, if necessary, throughout the
remainder of 1999.* The Year 2000 contingency plan will be designed to ensure
that mission critical core banking processes will continue if one or more
supporting systems fail, and to allow for limited transaction processing until
the Year 2000 problems are fixed.*
FINANCIAL CONDITION
The Company's total assets increased $549.4 million or 29.5% to $2.41 billion
at June 30, 1999, from $1.86 billion at September 30, 1998, and included
approximately $43 million from the acquisition of Reliance Bancshares in
January 1999. The primary areas of growth were an increase of $312.9 million in
mortgage-backed and related securities available for sale, a $104.3 million
increase in investment securities available for sale and a $142.8 million
increase in loans receivable, including loans held for sale. Funding the
increase in assets were increases in deposits of $267.8 million and increases
in borrowings of $272.0 million. The Company's ratio of shareholders' equity to
total assets was 5.50% at June 30, 1999, compared to 6.52% at September 30,
1998. The Company's fully diluted book value per share was $13.15 at June 30,
1999, compared to $12.76 at September 30, 1998.
Loans receivable, including mortgage loans held for sale, increased $142.8
million to $1.02 billion at June 30, 1999 from $879.0 million at September 30,
1998. The Company has been actively growing its loan portfolio particularly in
the areas of commercial real estate, single-family construction, multi-family,
commercial and automobile lending. For the nine month period ended June 30,
1999, the Company originated approximately $638.5 million in loans, as compared
to $479.3 million for the same period in the prior year. Of the $638.5 million
in loans originated, $67.5 million were in commercial loans, $166.8 million
were in consumer and interim financing loans and $404.2 million were in first
mortgage loans.
Mortgage-backed and related securities, including securities available for
sale, increased $294.7 million to $991.8 million at June 30, 1999, from $697.1
million at September 30, 1998. The growth in mortgage-backed securities was due
primarily in response to the increase in the Company's total capital which
occurred as a result of the completion of the Reliance Bancshares acquisition.
The Company has been an active purchaser of adjustable rate mortgage-backed
securities as well as short-term mortgage-related securities because of their
lower level of interest rate risk and low credit risk in relation to the
interest earned on such securities.
Debt and equity securities, including those available for sale, increased
$103.2 million to $214.1 million at June 30, 1999 from $110.9 million at
September 30, 1998. The growth in debt and equity securities was due primarily
in response to the increase in the Company's total capital which occurred as a
result of the completion of the Reliance Bancshares acquisition. Debt and
equity securities are comprised primarily of U.S. Treasury and agency
securities.
Deposits increased $267.8 million to $1.485 billion at June 30, 1999 from
$1.217 billion at September 30, 1998. The increase in deposits was primarily
due to increases of $226.5 million in certificates of deposit and $43.3 million
in money market demand deposits. However, slight decreases in other types of
deposit products have partially offset the increases. At June 30, 1999, the
Company had approximately $422.8 million in brokered certificates of deposit
compared with $214.9 million at September 30, 1998.
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Advances and other borrowings increased by $272.0 million to $776.7 million at
June 30, 1999, from $504.7 million at September 30, 1998. The increase is
primarily due to borrowings from the FHLB and reverse repurchase agreements.
Wholesale funding sources are primarily utilized by the Company to fund its
mortgage-backed and related securities and debt and equity securities
portfolios. The increase in these borrowings for the current year is due to the
increase that has occurred in the securities portfolio. Short term borrowings
increased $47.9 million to $465.6 million at June 30, 1999, compared to $417.7
million at September 30, 1998. Long term borrowings increased $224.0 million to
$311.0 million at June 30, 1999, compared to $87.0 million at September 30,
1998. At June 30, 1999, $155.0 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 June 30, 1999, the Company had an
additional borrowing capacity available of $102.9 million from the FHLB;
however, additional securities and/or loans may have to be pledged as
collateral in the event the Company utilizes its greater borrowing capacity.
At June 30, 1999, the Company had $270.0 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 pay-floating receive swaps totaled
$10.0 million at June 30, 1999 and were entered into as a hedge of the interest
rates on the debt and equity securities portfolio. Fixed receive-floating pay
swaps totaled $260.0 million at June 30, 1999 and were entered into to hedge
interest rates on brokered deposits used to fund the purchase of floating rate
securities. Fixed pay-floating receive swaps will provide for a lower interest
expense (or interest income) in a rising rate environment while adding to
interest expense in a falling rate environment. Fixed receive-floating pay
swaps 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 nine month period ended June 30, 1999, the Company
recorded a net reduction of interest expense of $1.9 million as a result of the
Company's interest rate swap agreements.
RESULTS OF OPERATIONS
NET INCOME. Net income for the nine month period ended June 30, 1999 was $11.9
million, compared to $10.9 million for the nine month period ended June 30,
1998. Net income for the three month period ended June 30, 1999 was $4.5
million compared to $3.6 million for the three month period ended June 30,
1998. The increase for the nine month period was primarily the result of a $7.2
million increase in net interest income, partially offset by a $1.1 million
decrease in other operating income, a $1.9 million increase in general and
administrative expenses and a $3.2 million increase in income tax expense. The
increase for the three month period was primarily the result of a $3.2 million
increase in net interest income, partially offset by a $689,000 decrease in
other operating income and a $1.3 million increase in income tax expense.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Return on average assets.................. 0.75% 0.88% 0.76% 0.83%
Return on average equity.................. 12.77% 11.07% 13.42% 10.78%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $6.6 million or 21.4%, and $3.4 million or 32.1% for the nine and
three month periods ended June 30, 1999, respectively, compared to the same
periods in the prior year. The increase was due primarily to an increase of
$473.8 million and $669.6 million in average earning assets for the nine and
three month periods ended June 30, 1999, respectively. The net interest margin
decreased to 2.50% for the nine month period ended June 30, 1999, compared with
2.70% in the prior year and decreased to 2.50% for the three month period ended
June 30, 1999, compared with 2.69% in the prior year.
Total interest income increased $17.6 million or 20.3% to $104.3 million for
the nine month period ended June 30, 1999, compared to $86.7 million for the
nine month period ended June 30, 1998, and increased $8.8 million or 29.7% to
$38.4 million for the three
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
month period ended June 30, 1999, compared to $29.6 million for the three month
period ended June 30, 1998. The increase in interest income was primarily the
result of increases in interest on loans and securities. The increase in
interest on loans was primarily the result of an increase in the average
balance of loans to $961.1 million from $779.8 million for the nine month
period ended June 30, 1999 and 1998, respectively, partially offset by a
decrease in the average yield on loans to 8.12% from 8.50% for the same period
in the prior year. The increase in net interest income on loans for the three
month period ended June 30, 1999 compared with the three month period ended
June 30, 1998 was the result of an increase in the average balance of loans to
$1.02 billion from $817.2 million, partially offset by decreases in the average
yield on loans to 8.00% from 8.45% 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 consumer, commercial and commercial real estate
lending. However, such loans, while potentially resulting 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 increase in
interest income on mortgage-backed and related securities was due to an
increase in the average balance of such securities to $827.4 million from
$638.2 million for the nine month period ended June 30, 1999 and 1998,
respectively, partially offset by decreases in the average yield on such
securities to 6.03% from 6.80% for the same periods. The increase in interest
income on mortgage-backed and related securities for the three month period
ended June 30, 1999 compared with the three month period ended June 30, 1998
was due to an increase in the average balance of such securities to $962.4
million from $643.3 million, partially offset by decreases in the average yield
on such securities to 5.99% from 6.62% for the same periods. The decrease in
the average yield on securities is the result of the current interest rate
environment. As new securities are added to the portfolio they have the effect
of decreasing the overall yield of the portfolio. In addition, securities which
are repaid generally have a higher yield than current production.
Total interest expense increased $11.0 million, or 19.6%, to $66.9 million for
the nine month period ended June 30, 1999, compared to $55.9 million for the
nine month period ended June 30, 1998. For the three month period ended June
30, 1998, total interest expense increased $5.4 million, or 28.5%, to $24.4
million compared to $19.0 million for the three month period ended June 30,
1998. The increase in interest expense was the result of increases in the
average balances of deposits and advances and other borrowings, partially
offset by decreases in the costs. The average balances of deposits were $1.24
billion and $1.33 billion for the nine and three month periods ended June 30,
1999, as compared to $1.04 billion and $1.07 billion for the same periods in
the prior year. The increases in the balances of deposits are due to the
Company's offering of additional deposit products and the use of brokers to
sell certificates of deposit. The average cost of deposits decreased to 4.46%
and 4.30% for the nine and three month periods ended June 30, 1999,
respectively, from 4.96% and 4.88% for the same periods in the prior year. As
part of a continuing strategy, the Company continues to offer deposit products
that compete more effectively with money market funds and other non-financial
deposit products. Such accounts have generally changed the Company's
traditional mix of deposit accounts to one that is more adjustable to current
interest rates such as the money market demand account. The average balance of
advances and other borrowings were $679.0 million and $823.2 million for the
nine and three month periods ended June 30, 1999, respectively, as compared to
$412.6 million and $442.6 million for the same periods in the prior year. The
average cost of advances and other borrowings decreased to 5.01% and 4.95% for
the nine and three month periods ended June 30, 1999, respectively, from 5.61%
and 5.44% for the same periods in the prior year. The borrowings are primarily
adjustable-rate FHLB advances which have repriced to reflect the slight
decrease in rate levels associated with the respective borrowing rate indexes
from the same period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the nine and three month periods
ended June 30, 1999 and 1998, respectively. Tax-exempt investments are
immaterial and the tax-equivalent method of presentation is not included in the
schedule.
21
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
----------------------------------------------------------------
1999 1998
------------------------------- ----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- ------- ------- -------- -------
(In thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and overnight deposits.... $ 18,803 $ 715 5.08% $ 20,774 $ 847 5.45%
Trading account securities................... 346 19 7.34 1,110 57 6.87
Debt and equity securities................... 161,420 6,562 5.44 63,053 2,754 5.84
Mortgage-backed and related securities....... 827,410 37,293 6.03 638,191 32,451 6.80
Loans:
First mortgage............................. 568,688 33,800 7.95 455,120 27,944 8.21
Home equity................................ 142,178 8,730 8.21 129,328 8,736 9.03
Consumer .................................. 145,183 9,293 8.56 114,608 7,642 8.92
Commercial and agricultural................ 105,033 6,519 8.30 80,785 5,229 8.65
----------- ------- ----------- ------
Total loans............................ 961,082 58,342 8.12 779,841 49,551 8.50
Federal Home Loan Bank stock................. 28,604 1,363 6.37 20,852 1,049 6.73
----------- ------- ----------- ------
Total earning assets................... 1,997,665 104,294 6.98 1,523,821 86,709 7.61
------- ------
Valuation allowances......................... (14,128) (7,490)
Cash and due from banks...................... 33,565 29,270
Other assets................................. 114,171 116,389
----------- -----------
Total assets........................... $ 2,131,273 $ 1,661,990
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts .............................. $ 71,532 629 1.18 $ 63,371 648 1.37
Money market demand accounts............... 346,485 10,921 4.21 272,975 10,067 4.93
Passbook................................... 127,509 2,580 2.71 125,972 3,075 3.26
Certificates of deposit.................... 696,993 27,329 5.24 578,485 24,794 5.73
----------- ------- ----------- ------
Total interest-bearing deposits............... 1,242,519 41,459 4.46 1,040,803 38,584 4.96
Advances and other borrowings................. 678,989 25,418 5.01 412,585 17,305 5.61
Advances from borrowers for taxes and
insurance..................................... 4,499 11 0.33 4,935 18 0.49
----------- ------- ----------- ------
Total interest-bearing liabilities 1,926,007 66,888 4.64 1,458,323 55,907 5.13
Non interest-bearing deposits................. 68,950 58,111
Other liabilities............................. 11,548 13,530
Shareholders' equity.......................... 124,768 132,026
----------- -----------
Total liabilities and shareholders' equity $ 2,131,273 $ 1,661,990
=========== ===========
Net interest income........................... $37,406 $30,802
======= =======
Net yield on interest-earning assets.......... 2.50 2.70
Interest rate spread.......................... 2.34 2.48
Ratio of earning assets to
interest-bearing liabilities.................. 103.72 104.49
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------
1999 1998
----------------------------- --------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- -------- ------- -------- -------
(In thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and overnight deposits.... $ 10,717 $ 129 4.83% $ 17,094 $ 230 5.40%
Trading account securities................... 192 3 6.27 1,134 19 6.72
Debt and equity securities................... 221,374 3,038 5.50 76,657 1,174 6.14
Mortgage-backed and related securities....... 962,398 14,383 5.99 643,315 10,611 6.62
Loans:
First mortgage............................. 605,682 11,859 7.85 469,832 9,560 8.16
Home equity................................ 144,532 2,890 8.02 137,198 3,026 8.85
Consumer .................................. 151,021 3,171 8.42 120,972 2,720 9.02
Commercial and agricultural................ 118,277 2,420 8.21 89,151 1,901 8.55
----------- -------- ----------- -------
Total loans............................ 1,019,512 20,340 8.00 817,153 17,207 8.45
Federal Home Loan Bank stock................. 31,660 465 5.89 20,870 328 6.30
----------- -------- ----------- -------
Total earning assets................... 2,245,853 38,358 6.85 1,576,223 29,569 7.52
-------- -----------
Valuation allowances......................... (16,626) (8,802)
Cash and due from banks...................... 33,985 29,402
Other assets................................. 107,761 123,899
----------- -----------
Total assets........................... $ 2,370,973 $ 1,720,722
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts .............................. $ 74,550 205 1.10 $ 65,975 210 1.28
Money market demand accounts............... 361,389 3,632 4.03 288,351 3,501 4.87
Passbook................................... 124,823 723 2.32 135,480 1,115 3.30
Certificates of deposit.................... 766,981 9,660 5.05 577,777 8,150 5.66
----------- -------- ----------- -------
Total interest-bearing deposits............... 1,327,743 14,220 4.30 1,067,583 12,976 4.88
Advances and other borrowings................. 823,241 10,159 4.95 442,621 5,999 5.44
Advances from borrowers for taxes and
insurance..................................... 4,701 2 0.17 4,763 6 0.51
----------- -------- ----------- -------
Total interest-bearing liabilities 2,155,685 24,381 4.54 1,514,967 18,981 5.03
Non interest-bearing deposits................. 70,656 61,501
Other liabilities............................. 10,770 12,058
Shareholders' equity.......................... 133,862 132,196
----------- -----------
Total liabilities and shareholders' equity $ 2,370,973 $ 1,720,722
=========== ===========
Net interest income........................... $ 13,977 $10,588
======== =======
Net yield on interest-earning assets.......... 2.50 2.69
Interest rate spread.......................... 2.31 2.50
Ratio of earning assets to
interest-bearing liabilities.................. 104.18 104.04
</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>
Nine months ended Three months ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance ........................... $ 7,530 $ 6,202 $ 8,678 $ 7,482
Provision for loan losses ................... 1,440 2,000 480
300
Recoveries .................................. 41 24 12 7
Charge-offs ................................. (280) (848) (136)
(411)
Acquired bank's allowance ................... 303 -- -- --
---------- ---------- ---------- ----------
Ending balance .............................. $ 9,034 $ 7,378 $ 9,034 $ 7,378
========== ========== ========== ==========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period .......................... 0.78% 0.82% 0.78% 0.82%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period ...................... 358.07% 243.10% 358.07% 243.10%
Ratio of net charge-offs to average
gross loans (annualized) ............... 0.03% 0.14% 0.05% 0.20%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for probable losses as of June 30, 1999, based upon its evaluation of loan
delinquencies, non-performing loans, underlying collateral, charge-off trends,
economic conditions and other factors. At June 30, 1999, the provision for loan
losses was $1.4 million compared to $2.0 million for the same period in the
prior year. The Company's loan portfolio is significantly more diversified than
in previous years. The Company has and continues to expect to increase its
consumer, commercial 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 nine and three month periods ended June 30, 1999
were $280,000 and $136,000, respectively, compared to $848,000 and $411,000 for
the nine and three month periods ended June 30, 1998. The lower provision for
1999 reflects the reduction in net charge-offs compared to 1998 as well as
reduced non-performing loans at June 30, 1999 compared to the last fiscal year
end. The Company believes that the allowance for loan losses is adequate to
provide for anticipated probable losses based upon current known conditions.*
OTHER OPERATING INCOME. Other operating income decreased by $1.1 million and
$689,000 for the nine and three month periods ended June 30, 1999, compared to
the same periods in the prior year. The following table shows the percentage of
other operating income to average assets for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Other operating income.................... $ 13,143 $ 14,271 $ 3,992 $ 4,681
Percent of average assets (annualized).... 0.82% 1.15% 0.68% 1.09%
</TABLE>
The decreases were due primarily to decreases in gains on sales of mortgage
loans, gains on securities, income from the Company's affordable housing
subsidiary and other income, partially offset by a gain on the sale of real
estate held for sale. Gains on the sale of mortgage loans decreased to $2.5
million and $420,000 for the nine and three month periods ended June 30, 1999,
respectively, compared to gains of $3.2 million and $894,000 for the same
periods in the prior year. The level of gains on loans is highly
23
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
dependent on the interest rate environment and resulting level of origination
of mortgage loans. The recent increase in interest rates on mortgage loans has
resulted in a lower level of loan originations and also in a higher proportion
of adjustable rate mortgage loans which the Company retains in its own
portfolio. During such periods, the Company generally realizes less gains on
the sale of loans than during periods of falling interest rates. During the
nine month period ended June 30, 1999, the Company realized losses on the sale
of securities of $248,000 compared with gains of $956,000 for the nine month
period ended June 30, 1998. During the three month period ended June 30, 1999,
the Company realized gains on the sale of securities of $124,000 compared with
gains of $464,000 for the three month period ended June 30, 1998. The Company
does not consider gains on the sale of securities as a predictable source of
earnings, as such sales are based on the Company's ongoing review of the
individual securities within the Company's available for sale portfolio whereby
securities may be sold and replaced with ones that offer a different
combination of interest income, interest rate risk or credit risk than the
security sold. The prior year's nine month period included the refund of state
income taxes related to an earlier year's tax audit. The interest portion of
the refund ($795,000) was included in other operating income while the portion
that was a refund of previous taxes paid ($780,000) was a reduction in income
tax expense. Income from the operations of the Company's affordable housing
subsidiary (which represents primarily rental income) decreased to $3.3 million
and $1.1 million for the nine and three month periods ended June 30, 1999,
compared with $3.7 million and $1.3 million for the same periods in the prior
year. During the nine month period ended June 30, 1999, the Company realized
gains of $1.2 million on the sale of 13 affordable housing properties which had
been classified as real estate held for sale at September 30, 1998. The Company
currently has 12 properties in operation compared to 25 in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.9 million or 6.0%, and $289,000 or 2.7% for the nine and three
month periods ended June 30, 1999, compared to the same periods in the prior
year. The following table shows the percentage of general and administrative
expenses to average assets for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
General and administrative expenses....... $ 32,930 $ 31,076 $ 11,032 $ 10,743
Percent of average assets (annualized).... 2.07% 2.50% 1.87% 2.50%
</TABLE>
The increase in costs are due primarily to increases in personnel and other
activity connected with the Company's increase in its loan and deposit
portfolio, partially offset by a decrease in affordable housing expenses
resulting from the sale of investments during the year. Included in other
general and administrative expenses for the three and nine months ended June
30, 1998 is the effect of a settlement reached on July 9, 1998 regarding a
lawsuit brought in connection with a contractor that went out of business
before completing home improvement work on which the Bank was the lender. The
settlement resulted in an expense of $630,000 and $480,000 during the nine and
three months ended June 30, 1998, respectively.
INCOME TAX EXPENSE. Income tax expense increased to $4.3 million and $2.0
million for the nine and three month periods ended June 30, 1999, compared to
the same period in the prior year. The effective tax rate for the nine and
three month periods ended June 30, 1999 was 26.36% and 30.63%, respectively,
compared with 8.85% and 15.90% for the nine and three month periods ended June
30, 1998. The increase in the effective tax rate is due to the aforementioned
refund of state income taxes of $780,000 included in the prior year's nine
month period, and the decrease in tax credits earned by the Company's
affordable housing subsidiary due to the sale of 13 of the properties in the
current year's nine and three month periods. Income tax credits decreased to
$2.3 million and $662,000 for the nine and three month periods ended June 30,
1999, respectively, compared to $3.1 and $1.1 million for the nine and three
month periods ended June 30, 1998.
ASSET QUALITY
Total non-performing assets were $3.1 million, or 0.13% of total assets at June
30, 1999, compared with $2.9 million, or 0.16% of total assets at September 30,
1998. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure. Non-performing assets include a single $820,000 commercial real
estate loan secured by a first mortgage on a strip shopping center.
24
<PAGE> 25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Non-performing loans.............................. $ 2,523 $ 2,861
Foreclosed properties............................. 604
63
----------------- -----------------
Non-performing assets............................. $ 3,127 $ 2,924
================= =================
Non-performing loans to gross loans............... 0.22% 0.29%
Non-performing assets to total assets............. 0.13% 0.16%
</TABLE>
There are no material loans of 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 $886,000 at June 30, 1999 compared to $1.0 million at
September 30, 1998. These loans had associated impairment reserves of $424,000
and $529,000 at June 30, 1999 and September 30, 1998, respectively. The average
balance of impaired loans was $950,000 and $1.4 million at June 30, 1999 and
September 30, 1998, respectively. Interest income on impaired loans for the
nine month period ended June 30, 1999 was $48,000, compared to $63,000 at
September 30, 1998. Interest income on impaired loans is recognized only to the
extent that payments are expected to exceed the amount of principal due on the
loans.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities.
At June 30, 1999, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 12.01% 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 June 30, 1999 was a negative 6.51% 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 June 30, 1999.
<TABLE>
<CAPTION>
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
<S> <C> <C> <C> <C> <C> <C>
Fixed .............................. $ 55,077 $ 42,528 $ 53,080 $ 32,142 $ 64,236 $ 247,063
Variable ........................... 159,634 72,721 85,240 123,396 20,412 461,403
Consumer loans (2) ...................... 165,111 56,172 40,124 19,291 17,347 298,045
Mortgage-backed and related securities .. 6,374 15,134 19,821 3,547 -- 44,876
Assets available for sale:
Mortgage loans ..................... 15,298 -- -- -- -- 15,298
Fixed rate mortgagE related ........ 92,747 138,238 219,481 137,401 -- 587,867
Variable rate mortgage related ..... 263,924 95,087 -- -- -- 359,011
Other .............................. 52,243 2,501 50,783 77,787 30,000 213,314
Investment securities and other assets .. 39,537 -- -- 810 -- 40,347
----------- ----------- ----------- ----------- ----------- -----------
Total .............................. $ 849,945 $ 422,381 $ 468,529 $ 394,374 $ 131,995 $ 2,267,224
=========== =========== =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts ....................... $ 6,443 $ 19,328 $ 26,464 $ 10,504 $ 6,912 $ 69,651
Passbook savings accounts .......... 3,784 11,351 22,988 15,837 35,068 89,028
Money market deposit accounts ...... 89,049 274,293 24,801 6,200 2,067 396,410
Certificates of deposit ............ 366,474 425,083 46,204 20,926 103 858,790
Borrowings (4) .......................... 341,326 -- 240,352 170,000 25,000 776,678
Impact of interest rate swap ............ 280,000 (255,000) (25,000) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total .............................. $ 1,087,076 $ 475,056 $ 335,809 $ 223,467 $ 69,150 $ 2,190,557
=========== =========== =========== =========== =========== ===========
Excess (deficiency) of
interest-earning
assets over interest-bearing ............ $ (237,131) $ (52,675) $ 132,720 $ 170,907 $ 62,845 $ 76,667
=========== =========== =========== =========== =========== ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-
bearing liabilities ..................... $ (237,131) $ (289,805) $ (157,085) $ 13,822 $ 76,667
=========== =========== =========== =========== ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets ................. (9.82%) (12.01%) (6.51%) 0.57% 3.18%
=========== =========== =========== =========== ===========
</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 $130.0 million at June
30, 1999.
(3) Although the Company's negotiable order of withdrawal ("NOW")
accounts, passbook savings accounts and money market deposit accounts
generally are subject to immediate withdrawal, management considers a
certain portion of such accounts to be core deposits having
significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments. NOW
accounts, passbook savings accounts and money market deposit accounts
are assumed to be withdrawn at annual rates of 37%, 17% and 88%,
respectively, of the declining balance of such accounts during the
period shown. The withdrawal rates used are higher than the Company's
historical rates, but are considered by management to be more
indicative of expected withdrawal rates in a rising interest rate
environment. If all of 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 $440.6 million or 18.3% of total assets.
(4) Adjustable and floating rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in
the period in which they are due.
26
<PAGE> 27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding withdrawals and prepayments are based on historical
experience, and management believes such assumptions are reasonable, although
actual withdrawals and repayments of assets and liabilities may vary
substantially. Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and
liabilities may have similar maturities to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest rates
on other types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans and mortgage-backed and related securities, have features which restrict
changes in interest rates both on a short-term basis and over the life of the
asset. Further, in the event of an actual change in interest rates, actual
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the data in the table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. Cash and cash equivalents totaled $37.1 million and
$30.7 million as of June 30, 1999 and September 30, 1998, respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At June 30, 1999, the Company had an
additional borrowing capacity available of $102.9 million from the FHLB;
however, additional securities and/or loans may have to be pledged as
collateral in the event the Company utilizes its greater borrowing capacity.
Under federal and state laws and regulations, the Company and the Bank 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 the Office of Thrift Supervision's ("OTS")
capital regulations which require savings institutions to meet two capital
standards: (i) "tier 1 core capital" in an amount not less than 4% of adjusted
total assets and (ii) "risk-based capital" of at least 8% of risk-weighted
assets.
The following table summarizes the Bank's capital ratios at the dates
indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----------- ------------ --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Tangible capital.............. 143,222 5.95% > 96,350 > 4.0% > 120,437 > 5.0%
= = = =
Core capital ................. 143,222 5.95% > 96,350 > 4.0% > 120,437 > 5.0%
= = = =
Tier 1 risk-based capital..... 143,222 10.36% > 55,292 > 4.0% > 82,939 > 6.0%
= = = =
Risk-based capital............ 152,255 11.01% > 110,585 > 8.0% > 138,231 > 10.0%
= = = =
As of September 30, 1998:
Tangible capital.............. 119,843 6.48% > 73,966 > 4.0% > 92,458 > 5.0%
= = = =
Core capital ................. 119,843 6.48% > 73,966 > 4.0% > 92,458 > 5.0%
= = = =
Tier 1 risk-based capital..... 119,843 10.23% > 46,846 > 4.0% > 70,270 > 6.0%
= = = =
Risk-based capital............ 127,373 10.88% > 93,693 > 8.0% > 117,116 > 10.0%
= = = =
</TABLE>
The capital of the Company and the Bank exceed all regulatory capital
requirements.
27
<PAGE> 28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
June 30, 1999.
<TABLE>
<CAPTION>
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years To Four Years
------------------ ---------------- ---------------- ----------------
Interest earning assets (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
commercial loans:
Fixed rate $ 80.6 7.92% $ 52.8 7.86% $ 15.3 7.88% $ 21.9 7.88%
Adjustable rate 119.7 7.90% 63.6 7.89% 40.9 7.80% 50.0 7.75%
Consumer loans:
Fixed rate 13.1 8.30% 20.9 8.47% 13.5 8.52% 14.8 8.52%
Adjustable rate 30.7 8.03% 22.3 8.03% 50.9 8.03% 26.8 8.03%
Mortgage-backed
securities:
Fixed rate 252.5 6.14% 119.6 6.44% 119.6 6.46% 72.2 6.60%
Adjustable rate 71.8 5.75% 53.9 5.75% 50.3 5.75% 43.1 5.75%
Debt and equity
securities 54.7 4.76% 25.4 5.72% 25.4 5.72% 38.9 6.10%
Other 39.5 4.51% -- -- -- -- -- --
Total interest
-------- ------ ------ ------
earning assets $ 662.6 6.55% $358.5 6.97% $315.9 6.87% $267.7 6.96%
======== ====== ====== ======
Interest bearing
liabilities
Deposits:
NOW accounts $ 25.8 1.00% $ 13.2 1.00% $ 13.2 1.00% $ 5.3 1.00%
Passbooks 15.1 1.89% 11.5 1.89% 11.5 1.89% 7.9 1.89%
Money market 363.3 4.31% 12.4 4.31% 12.4 4.31% 3.1 4.31%
Certificates 772.9 5.10% 68.6 5.23% 6.5 5.41% 5.2 5.88%
Borrowings
Fixed rate 394.7 4.83% 165.1 4.73% 55.0 4.83% -- --
Adjustable rate 131.9 5.15% 30.0 5.13% -- -- -- --
Total interest
-------- ------ ------ ------
bearing liabilities $1,703.7 4.78% $300.8 4.59% $ 98.6 3.95% $ 21.5 2.98%
======== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
---------------- ---------------- ------------------ ---------
Interest earning assets (In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage and
commercial loans:
Fixed rate $ 22.2 7.85% $ 54.3 8.00% $ 247.1 7.91% $ 248.3
Adjustable rate 59.1 7.64% 143.4 7.84% 476.7 7.82% 489.6
Consumer loans:
Fixed rate 18.9 8.52% 70.3 9.07% 151.5 8.75% 153.4
Adjustable rate 15.9 8.03% -- -- 146.6 8.03% 147.7
Mortgage-backed
securities:
Fixed rate 68.7 6.60% -- -- 632.6 6.21% 627.0
Adjustable rate 39.5 5.75% 100.5 5.75% 359.1 5.75% 356.9
Debt and equity
securities 38.9 6.25% 30.0 6.30% 213.3 5.72% 209.6
Other -- -- 0.8 5.15% 40.3 4.52% 47.2
Total interest
------ ------ -------- --------
earning assets $263.2 6.98% $399.3 7.43% $2,267.2 6.92% $2,279.7
====== ====== ======== ========
Interest bearing
liabilities
Deposits:
NOW accounts $ 5.3 1.00% $ 6.9 1.00% $ 69.7 1.00% $ 69.7
Passbooks 7.9 1.89% 35.1 1.89% 89.0 1.89% 89.0
Money market 3.1 4.31% 2.1 4.31% 396.4 4.31% 396.4
Certificates 5.6 5.91% -- -- 858.8 5.12% 859.4
Borrowings
Fixed rate -- -- -- -- 614.8 4.80% 602.6
Adjustable rate -- -- -- -- 161.9 5.15% 161.9
Total interest
------ ------ -------- --------
bearing liabilities $ 21.9 3.05% $ 44.1 1.87% $2,190.6 4.62% $2,179.0
====== ====== ======== ========
</TABLE>
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Company and the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 20, 1999, the Company announced the declaration of a
dividend of $0.08 per share on the Company's common stock for the
quarter ended June 30, 1999. The dividend is payable on August
20, 1999 to shareholders of record as of August 10, 1999. This
will be the sixteenth consecutive cash dividend payment since the
Company became a publicly-held company in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per
Share (See Footnote 7 in "Notes to Unaudited
Consolidated Financial Statements")
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
for which this report was filed.
29
<PAGE> 30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: August 12, 1999 By: /s/ Jon D. Sorenson
----------------- ---------------------------------------
Jon D. Sorenson
Chief Financial Officer
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: By:
----------------- ---------------------------------------
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 NINE MONTHS ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 27,508
<INT-BEARING-DEPOSITS> 9,635
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,160,192
<INVESTMENTS-CARRYING> 45,686
<INVESTMENTS-MARKET> 45,644
<LOANS> 1,021,809
<ALLOWANCE> 9,034
<TOTAL-ASSETS> 2,413,618
<DEPOSITS> 1,484,684
<SHORT-TERM> 465,641
<LIABILITIES-OTHER> 19,429
<LONG-TERM> 311,037
0
0
<COMMON> 146
<OTHER-SE> 132,681
<TOTAL-LIABILITIES-AND-EQUITY> 2,413,618
<INTEREST-LOAN> 58,342
<INTEREST-INVEST> 43,855
<INTEREST-OTHER> 2,097
<INTEREST-TOTAL> 104,294
<INTEREST-DEPOSIT> 41,459
<INTEREST-EXPENSE> 66,888
<INTEREST-INCOME-NET> 37,406
<LOAN-LOSSES> 1,440
<SECURITIES-GAINS> (248)
<EXPENSE-OTHER> 32,930
<INCOME-PRETAX> 16,179
<INCOME-PRE-EXTRAORDINARY> 16,179
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,179
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 2.50
<LOANS-NON> 2,523
<LOANS-PAST> 29
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,530
<CHARGE-OFFS> (280)
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 9,034
<ALLOWANCE-DOMESTIC> 9,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
