1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1747461
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(414) 486-8700
----------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
--- ---
(2) Yes x No
--- ---
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 5,215,683 at April 30, 1998.
2
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Statements of Financial Condition .............. 3
Consolidated Statements of Income ........................... 4
Consolidated Statements of Changes in Shareholders' Equity .. 5
Consolidated Statements of Cash Flows ....................... 6
Notes to Consolidated Financial Statements .................. 8
ITEM 2. Management's Discussion and Analysis ........................ 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .. 30
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ........................................... 31
ITEM 2. Changes In Securities ....................................... 31
ITEM 3. Defaults Upon Senior Securities ............................. 31
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 31
ITEM 5. Other Information ........................................... 31
ITEM 6. Exhibits and Reports on Form 8-K ............................ 32
SIGNATURES ........................................................... 33
2
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
March 31, September 30,
1998 1997
----------- ----------------
(In thousands)
ASSETS
Cash and due from banks....................................................... $ 23,154 $ 22,899
Federal funds sold and overnight deposits..................................... 7,804 19,959
----------- -----------
Cash and cash equivalents..................................................... 30,958 42,858
----------- -----------
Trading account securities, at fair value..................................... - -
Assets available for sale, at fair value:
Debt and equity securities............................................. 52,908 56,247
Mortgage-backed and related securities................................. 577,406 620,716
Mortgage loans held for sale, at lower of cost or market...................... 21,677 24,630
Securities held to maturity, at amortized cost:
Debt securities (market values of $1,893 and $3,908,
respectively).......................................................... 1,825 3,833
Mortgage-backed and related securities (market values of $66,344
and $66,219, respectively)............................................. 66,140 66,849
Loans receivable, net......................................................... 755,998 712,875
Federal Home Loan Bank stock, at cost......................................... 20,843 20,843
Accrued interest receivable................................................... 8,924 9,250
Foreclosed properties......................................................... 591 416
Real estate held for investment............................................... 51,997 51,476
Premises and equipment, net................................................... 28,961 24,711
Other assets.................................................................. 29,652 25,945
----------- -----------
Total assets.................................................................. $ 1,647,880 $ 1,660,649
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits...................................................................... $ 1,089,294 $ 1,087,136
Short term borrowings......................................................... 194,563 129,381
Long term borrowings.......................................................... 216,117 290,847
Advances from borrowers for taxes and insurance............................... 3,187 9,563
Accrued interest payable and other liabilities................................ 12,838 15,192
----------- -----------
Total liabilities............................................................. 1,515,999 1,532,119
----------- -----------
Commitments and contingencies................................................. - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized, 6,000,000 shares;
None issued............................................................ - -
Common stock $.01 par value: Authorized 12,000,000 shares;
Issued, 7,289,620 shares;
Outstanding, 5,213,683 and 5,226,998 shares, respectively 73 73
Additional paid-in-capital.................................................... 74,724 73,541
Unrealized gain on securities available for sale, net of tax.................. 474 1,046
Unearned ESOP compensation.................................................... (2,883) (3,088)
Treasury stock at cost (2,075,937 and 2,062,622 shares, respectively)......... (46,920) (44,511)
Retained earnings, substantially restricted................................... 106,413 101,469
----------- -----------
Total shareholders' equity.................................................... 131,881 128,530
----------- -----------
Total liabilities and shareholders' equity.................................... $ 1,647,880 $ 1,660,649
=========== ===========
See accompanying Notes to Consolidated Financial Statements
3
4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- -------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans.................................................. $32,344 $26,902 $16,330 $13,637
Mortgage-backed and related securities................. 21,840 20,148 10,184 10,247
Debt and equity securities............................. 1,580 2,013 632 1,004
Federal funds sold and overnight deposits.............. 617 644 157 385
Federal Home Loan Bank stock........................... 721 695 368 365
Trading account securities............................. 38 123 9 53
------- ------- -------- -------
Total interest and dividend income....................... 57,140 50,525 27,680 25,691
------- ------- -------- -------
INTEREST EXPENSE:
Deposits............................................... 25,608 21,749 12,354 10,990
Advances and other borrowings.......................... 11,318 10,447 5,570 5,322
------- ------- -------- -------
Total interest expense................................... 36,926 32,196 17,924 16,312
------- ------- -------- -------
Net interest income before provision for loan losses..... 20,214 18,329 9,756 9,379
Provision for loan losses................................ 1,700 372 1,500 111
------- ------- -------- -------
Net interest income...................................... 18,514 17,957 8,256 9,268
------- ------- -------- -------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees................... 1,114 969 559 511
Depository fees and service charges.................... 1,567 846 758 443
Trading securities gains and commitment fees, net...... 151 507 68 122
Gain (loss) on debt and equity and mortgage-backed
and related securities, net. 341 627 (186) 151
Gain on sales of mortgage loans held for sale, net..... 2,344 370 1,302 143
Investment product and insurance commissions........... 531 218 284 137
Gain (loss) on foreclosed properties................... (21) (7) (26) 7
Income from affordable housing......................... 2,435 1,490 1,418 940
Other income........................................... 1,128 287 996 196
------- ------- -------- -------
Total other operating income, net........................ 9,590 5,307 5,173 2,650
------- ------- -------- -------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits..................... 9,571 7,319 4,583 3,693
Office building, including depreciation................ 1,530 1,181 829 638
Furniture and equipment, including depreciation........ 1,517 1,105 828 578
Federal deposit insurance premiums..................... 316 463 170 132
Real estate held for investment........................ 2,721 1,831 1,541 1,210
Other general and administrative expenses.............. 4,678 3,850 2,415 2,036
------- ------- -------- -------
Total general and administrative expenses................ 20,333 15,749 10,366 8,287
------- ------- -------- -------
Income before income tax expense......................... 7,771 7,515 3,063 3,631
Income tax expense (benefit)............................. 390 1,382 (520) 655
------- ------- -------- -------
Net income............................................... $7,381 $6,133 $3,583 $2,976
======= ======= ======== =======
Basic earnings per share................................. $1.49 $1.21 $0.72 $0.59
======= ======= ======== =======
Diluted earnings per share............................... $1.40 $1.15 $0.68 $0.56
======= ======= ======== =======
See accompanying Notes to Consolidated Financial Statements
4
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
Unrealized
Gains
Shares of (Losses) on
Common Additional Securities
Stock Common Paid-In Available
Outstanding Stock Capital For Sale
--------------------------------------------------
(In thousands, except shares of common stock outstanding)
Six months ended March 31, 1997
- -------------------------------
Balance at September 30, 1996.......... 5,475,509 $ 73 $ 72,243 $ (1,765)
Net income............................. - - - -
Cash dividend - $0.24 per share........ - - - -
Purchase of treasury stock............. (119,430) - - -
Exercise of stock options.............. 30,114 - - -
Amortization of unearned compensation.. - - 497 -
Unrealized loss on securities available
for sale, net of tax.................. - - - (252)
---------- ------ -------- --------
Balance at March 31, 1997.............. 5,386,193 $ 73 $ 72,740 $ (2,017)
========== ====== ======== ========
Six months ended March 31, 1998
- -------------------------------
Balance at September 30, 1997.......... 5,226,998 $ 73 $ 73,541 $ 1,046
Net income............................. - - - -
Cash dividend - $0.28 per share........ - - - -
Purchase of treasury stock............. (94,988) - - -
Exercise of stock options.............. 81,673 - 296 -
Amortization of unearned compensation.. - - 887 -
Unrealized loss on securities available
for sale, net of tax.................. - - - (572)
---------- ------ -------- --------
Balance at March 31, 1998.............. 5,213,683 $ 73 $ 74,724 $ 474
========== ====== ======== ========
Unearned
ESOP Treasury Retained
Compensation Stock Earnings Total
--------------------------------------------
(In thousands, except shares of common stock outstanding)
Six months ended March 31, 1997
- -------------------------------
Balance at September 30, 1996.......... $ (3,488) $ (35,529) $ 93,645 $ 125,179
Net income............................. - - 6,133 6,133
Cash dividend - $0.24 per share........ - - (1,167) (1,167)
Purchase of treasury stock............. - (3,056) - (3,056)
Exercise of stock options.............. - 601 (300) 301
Amortization of unearned compensation.. 217 - - 714
Unrealized loss on securities available
for sale, net of tax.................. - - - (252)
--------- --------- -------- ---------
Balance at March 31, 1997.............. $ (3,271) $ (37,984) $ 98,311 $ 127,852
========= ========= ======== =========
Six months ended March 31, 1998
- -------------------------------
Balance at September 30, 1997.......... $ (3,088) $ (44,511) $101,469 $ 128,530
Net income............................. - - 7,381 7,381
Cash dividend - $0.28 per share........ - - (1,470) (1,470)
Purchase of treasury stock............. - (4,132) - (4,132)
Exercise of stock options.............. - 1,723 (967) 1,052
Amortization of unearned compensation.. 205 - - 1,092
Unrealized loss on securities available
for sale, net of tax.................. - - - (572)
--------- --------- -------- ---------
Balance at March 31, 1998.............. $ (2,883) $ (46,920) $106,413 $131,881
========= ========= ======== ========
See accompanying Notes to Consolidated Financial Statements
5
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
- --------------------------------------------------------------------------------
Six Months ended
March 31,
----------------------------
1998 1997
---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................................................... $ 7,381 $ 6,133
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses.................................................... 1,700 372
Depreciation, accretion and amortization..................................... 2,470 1,592
Deferred income taxes........................................................ 263 2,311
Gain on debt and equity, mortgage-backed and related
securities and trading account securities, net............................. (492) (1,134)
Gains on the sales of mortgage loans held for sale, net (2,344) (370)
Stock-based compensation expense............................................. 1,092 714
(Increase) decrease in loans held for sale................................... 2,953 (3,505)
Other, net................................................................... (6,842) 4,909
---------- ----------
Total adjustments............................................................... (1,200) 4,889
---------- ----------
Net cash provided by operating activities....................................... 6,181 11,022
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt securities held to maturity................. 2,008 2,001
Purchases of debt securities held to maturity................................ - (459)
Principal repayments on mortgage-backed and related securities
held to maturity........................................................... 709 639
Purchases of mortgage-backed securities available for sale................... (197,217) (131,067)
Proceeds from sales of mortgage-backed securities available
for sale................................................................... 142,722 57,482
Principal repayments on mortgage-backed securities available
for sale................................................................... 97,805 40,352
Purchase of debt and equity securities available for sale.................... (35,774) (27,121)
Proceeds from sales of debt and equity securities available for sale......... 26,514 18,845
Principal repayments on debt and equity securities available for sale........ 12,599 12,091
Net cash used for acquisitions............................................... - (7,118)
Purchases of Federal Home Loan Bank stock.................................... - (1,491)
Purchase of loans............................................................ (27,114) (7,678)
(Increase) decrease in loans, net of loans held for sale..................... (16,009) 5,069
Increase in real estate held for investment.................................. (521) (4,492)
Purchases of premises and equipment, net..................................... (5,487) (5,935)
---------- ----------
Net cash provided by (used in) investing activities............................. 235 (48,882)
---------- ----------
See accompanying Notes to Consolidated Financial Statements
6
7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow, cont.
- --------------------------------------------------------------------------------
Six Months ended
March 31,
----------------------------
1998 1997
---------- ----------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................................... 2,158 73,191
Proceeds from advances and other borrowings............................ 99,786 72,688
Repayments on advances and other borrowings............................ (103,157) (38,139)
Decrease in securities sold under agreements to repurchase............. (6,177) -
Decrease in advances from borrowers for taxes and insurance............ (6,376) (7,624)
Dividends paid......................................................... (1,470) (1,167)
Stock option transactions.............................................. 1,052 301
Purchase of treasury stock............................................. (4,132) (3,056)
---------- ----------
Net cash provided by (used in) financing activities...................... (18,316) 96,194
---------- ----------
Increase in cash and cash equivalents.................................... (11,900) 58,334
Cash and cash equivalents:
Beginning of period................................................... 42,858 22,459
---------- ----------
End of period......................................................... $ 30,958 $ 80,793
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................................................. $ 38,127 $ 32,262
Income taxes.......................................................... 105 15
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities.................. $ 9,680 $ 31,945
Transfer from loans to foreclosed properties.......................... 470 143
Transfer of mortgage loans to mortgage loans held for sale 33,713 15,964
Acquisitions:
Assets acquired..................................................... - 93,044
Cash paid for purchase of stock..................................... - (25,283)
Cash acquired....................................................... - 18,165
---------- ----------
Net cash used for acquisitions...................................... - $ (7,118)
========== ==========
See accompanying Notes to Consolidated Financial Statements
7
8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances of
St. Francis Capital Corporation (the "Company"), its wholly-owned
subsidiary, St. Francis Bank, F.S.B. (the "Bank"), and the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations or cash flows
in accordance with generally accepted accounting principles. However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three-month and
six-month periods ended March 31, 1998 are not necessarily indicative of
the results which may be expected for the entire year ending September 30,
1998. The September 30, 1997 Consolidated Statement of Financial
Condition presented with the interim financial statements was audited and
the auditors' report thereon was unqualified.
Certain previously reported balances have been reclassified to conform
with the 1998 presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and involve, to varying degrees, elements of credit and interest rate risk
in excess of the amounts recognized in the consolidated financial
statements. The contractual or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
8
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:
Contractual or Notional Amount(s)
March 31, September 30,
1998 1997
----------- ----------
(In thousands)
Commitments to extend credit:
Fixed-rate loans............................................ $ 7,209 $ 10,890
Variable-rate loans......................................... 36,292 16,792
Mortgage loans sold with recourse............................. 35,876 39,763
Guarantees under letters of credit............................ 18,316 11,220
Interest rate swap agreements (notional amount)............... 188,000 163,000
Interest rate corridors (notional amount)..................... 40,000 30,000
Commitments to:
Purchase mortgage-backed securities......................... 65,800 1,930
Sell mortgage-backed securities............................. 1,950 1,930
Unused and open-ended lines of credit:
Consumer.................................................... 147,998 122,970
Commercial.................................................. 30,368 14,075
Open option contracts written:
Short-put options........................................... - -
Short-call options.......................................... 23,500 2,000
Long-put options............................................ 10,000 -
Commitments to fund equity investments........................ - 2,903
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates of 45 days or less or other termination
clauses and may require a fee. Fixed rate loan commitments as of March 31, 1998
have interest rates ranging from 6.50% to 7.63%. Because some commitments
expire without being drawn upon, the total commitment amounts do notnecessarily
represent cash requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counterparty. The Company generally extends credit on
a secured basis. Collateral obtained consists primarily of one- to four-family
residences and other residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans that
are sold to secondary market agencies, primarily FNMA, with the servicing of
these loans being retained by the Company. The Company receives a larger
servicing spread on those loans being serviced than it would if the loans had
been sold without recourse.
The Company has entered into agreements whereby, for an initial and annual fee,
it will guarantee payment on letters of credit backing industrial revenue bond
issues ("IRB"). The IRBs are issued by municipalities to finance real estate
owned by a third party. Potential losses on the letters of credit are the
notional amount of the guarantees less the value of the real estate collateral.
At March 31, 1998, appraised values of the real estate collateral exceeded the
amount of the guarantees.
Interest rate swap agreements generally involve the exchange of fixed and
variable rate interest rate payments without the exchange of the underlying
notional amount on which the interest rate payments are calculated. The
notional amounts of these agreements represent the amounts on which interest
payments
9
10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
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 agreements were entered into as hedges of the interest
rates on Federal Home Loan Bank (the "FHLB") advances. The fixed
receive-floating pay agreements were entered into as hedges of the interest
rates on fixed rate brokered certificates. Interest receivable or payable on
interest rate swaps is recognized using the accrual method. The use of interest
rate swaps enables the Company to synthetically alter the repricing
characteristics of designated interest-bearing liabilities.
The agreements at March 31, 1998 consist of the following:
Notional
Amount Maturity Call Fixed Variable
(000s) Type Date Date Rate Rate
- ------------------------------------------------------------------------------
$10,000 Fixed Pay-Floating Receive 1998 not applicable 5.04% 5.69%
10,000 Fixed Pay-Floating Receive 1998 not applicable 4.93% 5.70%
15,000 Fixed Pay-Floating Receive 1998 not applicable 5.25% 5.63%
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.23% 5.63%
10,000 Fixed Pay-Floating Receive 1998 not applicable 5.43% 5.69%
10,000 Fixed Receive-Floating Pay 1998 not applicable 6.10% 5.69%
15,000 Fixed Receive-Floating Pay 2002 1998 7.00% 5.48%
8,000 Fixed Receive-Floating Pay 2002 1998 7.00% 4.97%
20,000 Fixed Receive-Floating Pay 2004 1998 7.00% 5.52%
15,000 Fixed Receive-Floating Pay 2005 1999 6.25% 5.55%
10,000 Fixed Receive-Floating Pay 2007 1998 6.90% 5.50%
15,000 Fixed Receive-Floating Pay 2007 1999 7.15% 5.54%
15,000 Fixed Receive-Floating Pay 2007 1999 7.05% 5.64%
10,000 Fixed Receive-Floating Pay 2007 1999 7.13% 5.64%
15,000 Fixed Receive-Floating Pay 2007 1999 6.90% 5.45%
The fair value of interest rate swaps, which is based on the present value
of the swap using dealer quotes, represent the estimated amount the Company
would receive or pay to terminate the agreements taking into account current
interest rates and market volatility. The interest rate swaps are off-balance
sheet items; therefore, at March 31, 1998, the gross unrealized gains and losses
of $909,000 and $622,000, respectively, equals the fair value of the interest
rate swaps of $287,000.
The Company uses interest rate corridors to help protect its net interest margin
in various interest rate environments. The corridors are of two general types.
One type of corridor pays 1.0% per annum of the notional amount over its life
only when the three-month LIBOR rate is between the corridor strike rates
(inclusive of the strike rate). There are no payments due to the Company when
the three-month LIBOR rate is outside the corridor strike rates. The other type
of corridor pays the Company a percent per annum equal to the three-month LIBOR
rate minus the lower corridor strike rate on the notional amount when the
three-month LIBOR rate is within the corridor strike rates. When the
three-month LIBOR rate is above the upper strike rate (equal to 1.0% above the
lower strike rate), the corridor pays the Company 1.0% per annum.
10
11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The interest rate corridors consist of the following:
Notional
Amount Maturity
(000s) Payment Type Date Strike Rates
- ------------------------------------------------------------------------------------------
$10,000 Three-month LIBOR minus lower strike price (up to 1.0%) 2001 7.75% - 8.75%
15,000 1.0% when three-month LIBOR within corridor 1999 6.50% - 7.50%
5,000 1.0% when three-month LIBOR within corridor 2000 7.00% - 8.00%
5,000 1.0% when three-month LIBOR within corridor 2000 7.50% - 8.50%
5,000 1.0% when three-month LIBOR within corridor 2001 7.75% - 8.75%
These instruments do not qualify as hedges and are accounted for on a
mark-to-market basis, and therefore, are valued at fair value. The fair
value of the interest rate corridors is $31,000 at March 31, 1998.
Commitments to purchase and sell mortgage-backed securities are contracts
which represent notional amounts to purchase and sell mortgage-backed securities
at a future date and specified price. Such commitments generally have fixed
settlement dates.
The unused and open consumer lines of credit are conditional commitments
issued by the Company for extensions of credit such as home equity, auto, credit
card, or other similar consumer type financing. Furthermore, the unused and
open commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, agricultural
production, equipment or other similar commercial type financing. The credit
risk involved in extending lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for these
commitments may include, but may not be limited to, real estate, investment
securities, equipment, accounts receivable, inventory, and Company deposits.
The open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage-backed
securities at a future date and specified price. The Company receives a
premium/fee for option contracts written which gives the purchaser the right,
but not the obligation to buy or sell mortgage-backed securities within a
specified time period for a contracted price. The Company has been primarily
utilizing these items to manage the interest rate and market value risk relating
to mortgage-backed securities that result from the MBS loan swap program and
mortgage loan pipeline.
The commitments to fund equity investments represent amounts St. Francis Equity
Properties ("SFEP"), a subsidiary of the Bank, is committed to invest in
low-income housing projects, which would qualify for tax credits under Section
42 of the Internal Revenue Code (the "Code"). The investment in the low-income
housing projects is included in the Company's balance sheet as real estate held
for investment.
11
12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(4) Securities
The Company's securities available for sale and held to maturity at March 31,
1998 were as follows:
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- --------- ---------
(In thousands)
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and
obligations of U.S. Government
Agencies............................. $ 42,006 $ 141 $ 104 $ 42,043
Corporate notes and bonds.............. 3,004 8 - 3,012
Marketable equity securities........... 7,853 - - 7,853
-------- -------- -------- --------
TOTAL DEBT AND EQUITY SECURITIES....... $ 52,863 $ 149 $ 104 $ 52,908
======== ======== ======== ========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC................................ $ 3,132 $ 10 $ 4 $ 3,138
FNMA................................. 8,133 - 85 8,048
Private issue........................ 168,019 1,684 1,902 167,801
REMICs:
FHLMC................................ 115,803 448 569 115,682
FNMA................................. 40,419 295 207 40,507
GNMA................................. 3,751 - 4 3,747
Private issue........................ 237,486 1,244 401 238,329
CMO residual........................... 36 118 - 154
-------- -------- -------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES........................... $576,779 $ 3,799 $ 3,172 $577,406
======== ======== ======== ========
SECURITIES HELD TO MATURITY
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- -------- -------- --------
(In thousands)
DEBT SECURITIES:
U. S. Treasury obligations and
obligations of U.S. Government
Agencies........................... 1,015 $ 22 $ - $ 1,037
State and municipal obligations...... 810 46 - 856
-------- -------- -------- --------
TOTAL DEBT SECURITIES................ $ 1,825 $ 68 $ - $ 1,893
======== ======== ======== =======
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FHLMC.............................. $ 1,357 $ 15 $ 1 $ 1,371
FNMA............................... 1,996 11 4 2,003
Private issue...................... 62,787 293 110 62,970
-------- -------- -------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES......................... $ 66,140 $ 319 $ 115 $ 66,344
======== ======== ======== ========
12
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
During the six months ended March 31, 1998 and 1997, gross proceeds from
the sale of securities available for sale totaled approximately $169.2
million and $76.3 million, respectively. The gross realized gains on such
sales totaled approximately $2.2 million and $661,000 for the six months
ended March 31, 1998 and 1997, respectively. The gross realized losses on
such sales totaled approximately $1.9 million and $34,000 for the six
months ended March 31, 1998 and 1997, respectively. During the three
months ended March 31, 1998 and 1997, gross proceeds from the sale of
securities available for sale totaled approximately $43.9 million and $12.2
million, respectively. The gross realized gains on such sales totaled
approximately $80,000 and $152,000 for the three months ended March 31,
1998 and 1997, respectively. The gross realized losses on such sales
totaled approximately $266,000 and $1,000 for the three months ended
March 31, 1998 and 1997, respectively.
During the year ended September 30, 1997, the Company recorded an
impairment loss of $3.4 million to reflect other than temporary impairment
of the carrying value of certain private issue mortgage-backed securities.
The securities, carried at $12.5 million prior to the writedown, were
adjusted to fair value of $9.1 million at September 30, 1997. The cost
basis of impaired securities is $798,000 at March 31, 1998. The decline
in the cost basis during the year is due to repayments and the sale of one
issue of the mortgage-backed securities which was determined to be
impaired at September 30, 1997. The security sold had an adjusted cost
basis of $7.2 million and a $151,000 gain was recorded on the sale.
At March 31, 1998 and 1997, $222.9 million and $252.6 million,
respectively, of mortgage-related securities were pledged as collateral
for FHLB advances.
(5) Loans
Loans receivable are summarized as follows:
March 31, September 30,
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------
First mortgage - one- to four-family.................... $242,290 $240,522
First mortgage - residential construction............... 50,087 46,340
First mortgage - multi-family........................... 90,960 101,289
Commercial real estate.................................. 110,599 87,950
Home equity............................................. 132,063 115,293
Commercial and agriculture.............................. 85,315 72,144
Consumer secured by real estate......................... 80,344 89,627
Interim financing and consumer loans.................... 13,047 15,255
Indirect auto........................................... 21,787 15,423
Education............................................... 1,985 948
-------- --------
Total gross loans.................................... 828,477 784,791
-------- --------
Less:
Loans in process..................................... 40,972 38,200
Unearned insurance premiums.......................... 481 552
Deferred loan and guarantee fees..................... 986 1,290
Purchased loan discount.............................. 881 1,042
Allowance for loan losses............................ 7,482 6,202
-------- --------
Total deductions..................................... 50,802 47,286
-------- --------
Total loans receivable.................................. 777,675 737,505
Less: First mortgage loans held for sale............... 21,677 24,630
-------- --------
Loans receivable, net................................... $755,998 $712,875
======== ========
13
14
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:
Six months ended Three months ended
March 31, March 31,
----------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
Beginning Balance........ $6,202 $5,217 $6,034 $5,060
Charge-offs:
Real estate - mortgage... - - - -
Commercial real estate... - - - -
Commercial loans......... - - - -
Home equity loans........ - - - -
Consumer................. (437) (1,219) (63) (746)
------- ------ ------ ------
Total charge-offs........ (437) (1,219) (63) (746)
------- ------ ------ ------
Recoveries:
Real estate - mortgage... - - - -
Commercial real estate... - - - -
Commercial loans......... - - - -
Home equity loans........ - - - -
Consumer................. 17 74 11 19
------- ------ ------ ------
Total recoveries......... 17 74 11 19
------- ------ ------ ------
Net charge-offs.......... (420) (1,145) (52) (727)
------- ------ ------ ------
Acquired bank's allowance - 1,678 - 1,678
Provision................ 1,700 372 1,500 111
------- ------ ------ ------
Ending balance........... $7,482 $6,122 $7,482 $6,122
====== ====== ====== ======
(7) Earnings Per Share
Basic earnings per share of common stock for the six and three months
ended March 31, 1998 and 1997, have been determined by dividing net income
for the period by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share of common stock
for the six and three months ended March 31, 1998 and 1997, have been
determined by dividing net income for the period by the weighted average
number of shares of common stock and common stock equivalents outstanding
during the period. Book value per share of common stock at March 31, 1998
and September 30, 1997 have been determined by dividing total
shareholders' equity by the number of shares of common stock and common
stock equivalents considered outstanding at the respective dates. Stock
options are regarded as common stock equivalents and are, therefore,
considered in per share calculations. Common stock equivalents are
computed using the treasury stock method. Total shares outstanding for
earnings per share calculation purposes have been reduced by the ESOP
shares that have not been committed to be released.
14
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
The computation of earnings per common share is as follows:
Six months ended Three months ended
March 31, March 31,
--------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------- --------------
Net income for the period................ $ 7,381,000 $ 6,133,000 $ 3,583,000 $ 2,976,000
============ ============ ============ ============
Common shares issued..................... 7,289,620 7,289,620 7,289,620 7,289,620
Net Treasury shares...................... 2,045,096 1,906,013 2,036,879 1,921,795
Unallocated ESOP shares.................. 292,668 332,245 287,947 326,160
---------- ---------- ---------- ----------
Weighted average common shares
outstanding during the period............ 4,951,856 5,051,362 4,964,794 5,041,665
Common stock equivalents based on the
treasury stock method.................... 314,310 288,707 298,022 293,368
---------- ---------- ---------- ----------
Total weighted average common shares and
equivalents outstanding.................. 5,266,166 5,340,069 5,262,816 5,335,033
============ ============ ============ ============
Basic earnings per share................. $1.49 $1.21 $0.72 $0.59
Diluted earnings per share............... $1.40 $1.15 $0.68 $0.56
The computation of book value per common share is as follows:
March 31, September 30,
1998 1997
----------- -------------
Common shares outstanding at the end
of the period.......................................... 4,925,736 4,918,891
Incremental shares relating to dilutive stock
options outstanding at the end of the period........... 297,679 319,567
------------ ------------
5,223,415 5,238,458
============ ============
Total shareholders' equity at the end of
the period............................................. $131,881,000 $128,530,000
Book value per common share.............................. $ 25.25 $ 24.54
(8) Acquisitions
In February 1997, the Company completed the acquisition of Kilbourn
State Bank for $25.3 million in cash. Under the terms of the
agreement, the Company acquired all of the outstanding shares of
Kilbourn State Bank, with Kilbourn subsequently merging into Bank
Wisconsin, the Company's commercial banking subsidiary. The
acquisition was accounted for as a purchase. The related accounts and
results of operations are included in the Company's consolidated
financial statements from the date of acquisition. The acquisition of
Kilbourn State Bank added $93.0 million to assets, including additions
of $62.6 million to net loans and $67.8 million to deposits.
The excess of cost over the fair value of tangible assets acquired is
accounted for as goodwill and will be amortized over fifteen years
using the straight-line method. The amount of goodwill recorded due to
the acquisition was $9.1 million.
15
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements, continued
(9) Changes in Accounting Policy
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers.
16
17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Finanical Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company with the Securities and Exchange Commission, in quarterly reports or
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, various
words or phrases are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include words and phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions and various other statements indicated herein
with an asterisk after such statements. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors could
affect the Company's financial performance and could cause actual results for
future periods to differ materially from those anticipated or projected. Such
factors include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Company's total assets decreased $13.0 million or 0.8% to $1.648 billion at
March 31, 1998 from $1.661 billion at September 30, 1997. The primary reason
for the decrease was a decline in mortgage-backed and related securities
available for sale of $43.3 million to $577.4 million. Partially offsetting
the decrease in mortgage-backed securities was an increase of $43.1 million in
loans receivable to $756.0 million. The Company's ratio of shareholders'
equity to total assets was 8.00% at March 31, 1998, compared to 7.74% at
September 30, 1997. The Company's book value per share was $25.25 at March 31,
1998, compared to $24.54 at September 30, 1997.
Loans receivable, including mortgage loans held for sale, increased $40.2
million to $777.7 million at March 31, 1998 from $737.5 million at September
30, 1997. The increase was due primarily to the increase in loans originated
for retention in the Company's loan portfolio. Long-term 15- and 30- year
fixed-rate loans are generally originated to be sold in the secondary market as
are five and seven year balloon loans. Shorter-term ARM loans are originated
both for sale in the secondary market and for the Company's loan portfolio.
Additionally, the Company has increased its emphasis on commercial, commercial
real estate and consumer loans, which are primarily retained in the Company's
loan portfolio. For the six months ended March 31, 1998, the Company
originated approximately $297.3 million in loans, compared to $156.0 million
for the same period in the prior year. Of the $297.3 million in loans
originated, $46.2 million were in commercial loans, $91.9 million were in
consumer and interim financing loans and $159.2 million were in first mortgage
loans. Loan repayments and sales of mortgage loans partially offset the
increases in loan originations. Consumer and commercial lending represent a
different level of risk than mortgage lending which is primarily collateral
based lending. Consumer and commercial loans are primarily based on the
assessment of cash flow and repayment ability of the customer or business to
which funds have been lent.
17
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Mortgage-backed and related securities, including mortgage-backed and related
securities available for sale, decreased $44.0 million to $643.6 million at
March 31, 1998 from $687.6 million at September 30, 1997. This decrease is due
primarily to the sale of mortgage-backed and related securities of $142.7
million as well as repayments of $98.5 million, partially offset by purchases
of $197.2 million during the six months ended March 31, 1998. At March 31,
1998, private-issue mortgage-backed and related securities totaled $468.9
million compared to $441.4 million at September 30, 1997. Private-issue
mortgage-backed and related securities represent a significant portion of the
Company's portfolio due to the Company's view of the benefit of higher interest
rates generally available on private-issue mortgage-backed and related
securities outweighing the additional credit risk associated with such
securities in comparison with agency securities. Mortgage-backed securities
issued by government sponsored enterprises generally increase the quality of
the Company's assets by virtue of the guarantees that back them. When the
intermediary is a private entity, neither the principal or interest on such
securities is guaranteed. In addition, loans that back private mortgage-backed
securities generally are non-conforming loans and consequently have a greater
amount of credit risk and generally will have a higher yield. The Company has
been an active purchaser of adjustable rate mortgage-backed securities as well
as short-term mortgage-related securities because of their lower level of
interest rate risk and low credit risk in relation to the interest earned on
such securities.
At September 30, 1997, the Company recorded declines in fair value
judged to be other than temporary on four of its private issue
mortgage-backed securities. The Company believed that these four
securities, two of which were rated "A" and the other two of which were
rated "BBB" at September 30, 1997, were impaired at September 30, 1997.
Therefore, in accordance with generally accepted accounting
principles, these securities were written down to fair value and the
impairment loss was recorded in the Company's income statement. Prior
to the adjustment, the Company's cost basis in these securities was
$12.5 million. The impairment loss resulted in a new cost basis of
$9.1 million for these four issues. The four issues under impairment
were private issue mortgage-backed securities backed by single-family
loans relating to properties located primarily in California. The
underlying loans have experienced significant delinquencies and
foreclosures and the Company learned that recoveries on these loans
were less than previously realized and that the various subordinate and
cash positions within the mortgage-backed structures may no longer
protect the Company's position in the securities. The Company wrote
these securities down to fair value which is a level where the
remaining cash flows should provide a return at a market rate of
interest income on the remaining cost basis.
During the six months ended March 31, 1998, the Company sold securities
totaling $180.2 million at a net gain of $341,000. The net gain
consisted of gross gains of $2.2 million and gross losses of $1.9
million. However, the Company does not consider gains on the sales of
securities as a predictable source of earnings as such sales are
primarily based on the Company's ongoing review of the individual
securities within the Company's available for sale portfolio whereby
securities may be sold and replaced with ones that offer a better
combination of interest income, interest rate risk or credit risk than
the security sold. Included in the sale of securities for the six
months ended March 31, 1998 is the sale of one issue of the
mortgage-backed securities which were determined to be impaired at
September 30, 1997. The security sold had an adjusted cost basis of
$7.2 million and a $151,000 gain was recorded on the sale. At March
31, 1998, the cost basis and market value of impaired securities is
$798,000 and $1.2 million, respectively, compared to $9.1 million and
$9.1 million, respectively, at September 30, 1997.
Deposits increased $2.2 million to $1.089 billion at March 31, 1998 from $1.087
billion at September 30, 1997. The increase in deposits was primarily due to
increases of $10.0 million in brokered certificates of deposit and $17.2 million
in money market demand deposits. However, slight decreases in other types of
deposit products have partially offset the increases. The Company has continued
to offer new deposit products in an effort to attract new deposits and maintain
current relationships with customers. At March 31, 1998, the Company had
approximately $138.9 million in brokered certificates of deposit compared with
$140.8 million at September 30, 1997. The brokered deposits generally are of
terms from three months to eight years in maturity with interest rates that
approximate the Company's retail certificate rates. At March 31, 1998, $114.9
million of the brokered deposits having longer maturities were callable within
one to two years. There can be no assurance that there will be an increase in
deposits in the future, nor can there be any assurance the Company will retain
the deposits it now has.*
18
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The level of deposit flows during any given period is heavily
influenced by factors such as the general level of interest rates as
well as alternative yields that investors may obtain on competing
instruments, such as money market mutual funds. The Company believes
that the likelihood for retention of brokered certificates of deposit
is more a function of the rate paid on such accounts as compared to
retail deposits which may be established due to branch location or
other intangible reasons.
Advances and other borrowings decreased by $9.5 million to $410.7
million at March 31, 1998 from $420.2 million at September 30, 1997.
The decrease is due to repayments of Federal Home Loan Bank advances
which were funded by the proceeds of the sales of mortgage-backed and
related securities. Short term borrowings increased $65.2 million to
$194.6 million at March 31, 1998, compared to $129.4 million at
September 30, 1997. Long term borrowings decreased $74.7 million to
$216.1 million at March 31, 1998, compared to $290.8 million at
September 30, 1997. The change in short term and long term borrowings
is due to adjustable rate borrowings moving from the greater than one
year maturity to the less than one year maturity category. At March
31, 1998, the Company had a borrowing capacity of $169.2 million
available from the FHLB; however, additional securities may have to be
pledged as collateral.
At March 31, 1998, the Company had $188.0 million in interest rate
swaps outstanding compared with $163.0 million at September 30, 1997.
The swaps are designed to offset the changing interest payments of some
of the Company's borrowings and brokered certificates. Fixed
pay-floating receive swaps totaled $55.0 million at March 31, 1998 and
were entered into to hedge interest rates on borrowings from the FHLB
used to fund purchases of fixed rate securities. Fixed pay-floating
receive swaps will provide for a lower interest expense (or interest
income) in a rising rate environment while adding to interest expense
in a falling rate environment. Fixed receive-floating pay swaps
totaled $133.0 million at March 31, 1998 and were entered into to hedge
interest rates on brokered deposits used to fund the purchase of
floating rate securities. Fixed receive-floating pay swaps will
provide for a lower interest expense (or interest income) in a falling
rate environment while adding to interest expense in a rising rate
environment. During the six months ended March 31, 1998, the Company
recorded a net reduction of interest expense of $933,000 as a result of
the Company's interest rate swap agreements.
At March 31, 1998, the Company had $40.0 million in interest rate
corridors outstanding compared with $30.0 million at September 30,
1997. The Company uses interest rate corridors to help protect its net
interest margin in various interest rate environments. $30.0 million
of the interest rate corridors pay the Company the range difference or
a full 1.0% when the three-month Libor rate is in the corridor strike
rates. There are no payments due to the Company when three-month Libor
rates are outside of the corridor strike rates. $10.0 million of the
interest rate corridors pay the Company the difference between the
three-month Libor and the low limit of the corridor strike rate up to
the full amount of the corridor strike rate. There are no payments due
to the Company when three-month Libor rates are below the corridor
strike rate. When rates are above the corridor strike rate, the
corridor pays the Company the full corridor range of 1.0%.
There are certain risks associated with swaps and corridors, including the risk
that the counterparty may default and that there may not be an exact
correlation between the indices on which the swap agreements are based and the
terms of the hedged liabilities. In order to offset these risks, the Company
generally enters into swap and corridor agreements only with nationally
recognized securities firms and monitors the credit status of counterparties,
the level of collateral for such swaps and corridors and the correlation
between the hedged liabilities and indices utilized.
During the year ended September 30, 1997, the Company's Board of
Directors adopted a shareholders' rights plan (the "Rights Plan").
Under the terms of the Rights Plan, the Board of Directors declared a
dividend of one preferred share purchase right for each outstanding
share of common stock. If the rights become exercisable, holders of
each right, other than the acquirer, upon payment of the exercise
price, will have the right to purchase the Company's common stock (in
lieu of preferred shares) having a value equal to two times the
exercise price. Rights are redeemable by the Company at any time until
they are excercisable at the exchange rate of $.01 per right. Issuance
19
20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
of the rights has no immediate dilutive effect, does not currently affect
reported earnings per share, is not taxable to the Company or its shareholders,
and will not change the way in which the Company's shares are traded. The
rights expire in ten years.
Advances and changes in available technology can significantly impact the
business and operations of the Company. The Company is in the process of
conducting a review of its computer systems and its third-party systems to
identify those that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs or programs
of third-party providers that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If not corrected, Year
2000 issues could result in a major system failure or miscalculations and
material costs to the Company. The Company presently believes that, with
modifications to existing software and converting to new software, the Year
2000 problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, the Year 2000 problem may have a
material impact on the operations of the Company. The Company expects to incur
costs associated with the Year 2000 issue of approximately $200,000 to $500,000
on an annual basis in each of its fiscal years ending September 30, 1998, 1999
and 2000. *
RESULTS OF OPERATIONS
NET INCOME. Net income for the six months ended March 31, 1998 was $7.4
million compared to $6.1 million for the six months ended March 31, 1997. Net
income for the three months ended March 31, 1998 was $3.6 million compared to
$3.0 million for the three months ended March 31, 1997. The increase for the
six month period was primarily the result of a $1.9 million increase in net
interest income, a $4.3 million increase in other operating income and a
$992,000 decrease in income tax expense, partially offset by a $1.3 million
increase in provision for loan losses and a $4.6 million increase in general
and administrative expenses. The increase for the three month period was
primarily the result of a $2.5 million increase in other operating income and a
$1.2 million decrease in income tax expense, partially offset by a $1.4 million
increase in provision for loan losses and a $2.1 million increase in general
and administrative expenses.
The following table shows the return on average assets and return on average
equity ratios for each period:
Six months ended Three months ended
March 31, March 31,
---------------- ------------------
1998 1997 1998 1997
------ ------ ------ ------
Return on average assets.............. 0.91% 0.85% 0.90% 0.83%
Return on average equity.............. 11.22% 9.73% 10.96% 9.46%
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $1.9 million or 10.3% and $377,000 or 4.0% for the six and three
months ended March 31, 1998, respectively, compared to the same periods in the
prior year. The increase was due primarily to an increase of $151.0 million
and $104.9 million in average earning assets for the six and three months ended
March 31, 1998, respectively. In addition, the net interest margin was 2.71%
and 2.73% for the six months ended March 31, 1998 and 1997, respectively, and
2.69% and 2.79% for the three months ended March 31, 1998 and 1997,
respectively. Over the last several years, the margin has been affected by
decreasing interest rate spreads that the Company has been experiencing in its
asset and liability base and a changing asset mix which includes a higher level
of non-interest earning assets. Over the last year, the net interest margin
has been relatively constant, fluctuating by only a few basis points between
each quarter. The
20
21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Company increased its investment in affordable housing units to $52.0 million
at March 31, 1998 compared with $41.4 million at March 31, 1997. At March 31,
1998, the Company has not committed to any additional equity investments. This
investment strategy provides returns primarily through income tax credits but
is not an interest earning asset and thus has the effect of decreasing the
Company's net interest margin.
Total interest income increased $6.6 million or 13.1% to $57.1 million for the
six months ended March 31, 1998, compared to $50.5 million for the six months
ended March 31, 1997, and increased $2.0 million or 7.7% to $27.7 million for
the three months ended March 31, 1998, compared to $25.7 million for the three
months ended March 31, 1997. 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 $761.2 million from $645.8 million for the six months ended March
31, 1998 and 1997, respectively, and an increase in the average yield on loans
to 8.52% from 8.35% for the same period in the prior year. The increase in net
interest income on loans for the three months ended March 31, 1998 compared with
the three months ended March 31, 1997 was the result of an increase in the
average balance of loans to $771.9 million from $654.9 million, and an increase
in the average yield on loans to 8.58% from 8.45% for the same period in the
prior year. The increase in the average balance of loans and average yield on
loans is due primarily to the Company's recent efforts to emphasize commercial,
consumer and home equity lending in addition to the Kilbourn State Bank
acquisition. However, such loans, while potentially resulting ultimately in
higher yields for the Company, may result in a higher level of credit risk than
conventional mortgage loans. The increase in interest income on mortgage-backed
and related securities was due to an increase in the average balance of such
securities to $635.6 million from $584.1 million for the six months ended March
31, 1998 and 1997, respectively, partially offset by decreases in the average
yield on such securities to 6.89% from 6.92% for the same periods. The slight
decrease in interest income on mortgage-backed and related securities for the
three months ended March 31, 1998 compared with the three months ended March 31,
1997 was due to decreases in the average yield on such securities to 6.63% from
7.07%, partially offset by an increase in the average balance of such securities
to $622.8 million from $588.2 million, for the same periods. The Company
has been active during the past quarter repositioning its available for sale
mortgage-backed and related securities portfolio by selling significant amounts
of securities and replacing them with securities with more favorable maturity
positions and characteristics which reflect the Company's overall
asset/liability management strategies.
Total interest expense increased $4.7 million or 14.7% to $36.9 million for the
six months ended March 31, 1998, compared to $32.2 million for the six months
ended March 31, 1997. For the three months ended March 31, 1998, total
interest expense increased $1.6 million, or 9.9%, to $17.9 million compared to
$16.3 million for the three months ended March 31, 1997. The increase in
interest expense was the result of increases in the average balances and costs
of deposits and advances and other borrowings. The average balances of
deposits were $1.03 billion and $1.01 billion for the six and three months
ended March 31, 1998, respectively, as compared to $874.0 million and $889.2
million for the same periods in the prior year. The increases in the balances
of deposits are due to the Company's offering of additional deposit products,
the use of brokers to sell certificates of deposit and the Kilbourn State Bank
acquisition. The average cost of deposits increased slightly to 5.00% and
decreased to 4.96% for the six and three months ended March 31, 1998,
respectively, from 4.99% and 5.01% for the same periods in the prior year. As
part of a continuing strategy, the Company continues to offer deposit products
that compete more effectively with money market funds and other non-financial
deposit products. Such accounts have generally changed the Company's
traditional mix of deposit accounts to one that is more adjustable to current
interest rates such as the money market demand account. This has resulted in
passbook and certificate of deposit accounts representing a lower percentage of
the Company's total deposit portfolio. The average balance of advances and
other borrowings were $397.6 million and $396.4 million for the six and three
months ended March 31, 1998, respectively, as compared to $383.3 million and
$396.0 million for the same periods in the prior year. The average cost of
advances and other borrowings increased to 5.70% for the six and three months
ended March 31, 1998, respectively, from 5.46% and 5.45% for the same periods
in the prior year. The borrowings are primarily adjustable-rate FHLB advances
which have repriced to reflect the slight increase in rate levels associated
with the respective borrowing rate indexes from the same period in the prior
year.
21
22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the six and three month periods
ended March 31, 1998 and 1997, respectively.
22
23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
SIX MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits................. $ 22,614 $ 617 5.47 % $ 24,601 $ 644 5.25 %
Trading account securities................................ 1,098 38 6.94 3,530 123 6.99
Debt and equity securities................................ 56,251 1,580 5.63 69,013 2,013 5.85
Mortgage-backed and related securities.................... 635,629 21,840 6.89 584,071 20,148 6.92
Loans:
First mortgage........................................... 447,764 18,384 8.23 416,981 16,755 8.06
Home equity.............................................. 125,393 5,710 9.13 95,525 4,450 9.34
Consumer................................................. 111,426 4,922 8.86 100,442 4,429 8.84
Commercial and agricultural.............................. 76,602 3,328 8.71 32,827 1,268 7.75
---------------------- ----------------------
Total loans............................................. 761,185 32,344 8.52 645,775 26,902 8.35
Federal Home Loan Bank stock.............................. 20,843 721 6.94 19,658 695 7.09
---------------------- ----------------------
Total earning assets.................................... 1,497,620 57,140 7.65 1,346,648 50,525 7.52
------- -------
Valuation allowances...................................... (6,834) (7,222)
Cash and due from banks................................... 29,204 18,403
Other assets.............................................. 112,634 80,899
---------- ----------
Total assets............................................ $1,632,624 $1,438,728
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts............................................. $ 62,069 438 1.42 $ 45,541 365 1.61
Money market demand accounts............................. 265,287 6,566 4.96 196,617 4,535 4.63
Passbook................................................. 121,218 1,960 3.24 80,253 1,135 2.84
Certificates of deposit.................................. 578,839 16,644 5.77 551,621 15,714 5.71
---------------------- ----------------------
Total interest-bearing deposits........................... 1,027,413 25,608 5.00 874,032 21,749 4.99
Advances and other borrowings............................. 397,567 11,306 5.70 383,254 10,433 5.46
Advances from borrowers for taxes and insurance........... 5,021 12 0.48 5,304 14 0.53
---------------------- ----------------------
Total interest-bearing liabilities...................... 1,430,001 36,926 5.18 1,262,590 32,196 5.11
Non interest-bearing deposits............................. 56,416 35,575
Other liabilities......................................... 14,266 14,171
Shareholders' equity...................................... 131,941 126,392
---------- ----------
Total liabilities and shareholders' equity................ $1,632,624 $1,438,728
========== ==========
Net interest income....................................... $20,214 $18,329
======= =======
Net yield on interest-earning assets...................... 2.71 2.73
Interest rate spread...................................... 2.47 2.41
Ratio of earning assets to interest-bearing liabilities... 104.73 106.66
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Federal funds sold and overnight deposits................. $ 10,133 $ 157 6.28 % $ 28,743 $ 385 5.43 %
Trading account securities................................ 545 9 6.70 2,691 53 7.99
Debt and equity securities................................ 42,799 632 5.99 69,613 1,004 5.85
Mortgage-backed and related securities.................... 622,849 10,184 6.63 588,201 10,247 7.07
Loans:
First mortgage........................................... 448,581 9,169 8.29 416,581 8,407 8.18
Home equity.............................................. 129,528 2,888 9.04 97,974 2,321 9.61
Consumer................................................. 112,204 2,518 9.10 99,945 2,242 9.10
Commercial and agricultural.............................. 81,581 1,755 8.72 40,380 667 6.70
---------------------- ----------------------
Total loans............................................. 771,894 16,330 8.58 654,880 13,637 8.45
Federal Home Loan Bank stock.............................. 20,843 368 7.16 20,057 365 7.38
---------------------- ----------------------
Total earning assets.................................... 1,469,063 27,680 7.64 1,364,185 25,691 7.64
------- -------
Valuation allowances...................................... (5,862) (7,522)
Cash and due from banks................................... 29,796 20,368
Other assets.............................................. 115,087 83,614
---------- ----------
Total assets............................................ $1,608,084 $1,460,645
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts............................................. $ 62,553 199 1.29 $ 47,583 209 1.78
Money market demand accounts............................. 267,732 3,280 4.97 206,044 2,361 4.65
Passbook................................................. 126,664 1,043 3.34 83,469 582 2.83
Certificates of deposit.................................. 553,682 7,832 5.74 552,107 7,838 5.76
---------------------- ----------------------
Total interest-bearing deposits........................... 1,010,631 12,354 4.96 889,203 10,990 5.01
Advances and other borrowings............................. 396,383 5,568 5.70 395,968 5,320 5.45
Advances from borrowers for taxes and insurance........... 1,934 2 0.42 2,130 2 0.38
---------------------- ----------------------
Total interest-bearing liabilities...................... 1,408,948 17,924 5.16 1,287,301 16,312 5.14
Non interest-bearing deposits............................. 53,815 35,422
Other liabilities......................................... 12,751 10,281
Shareholders' equity...................................... 132,570 127,641
---------- ----------
Total liabilities and shareholders' equity................ $1,608,084 $1,460,645
========== ==========
Net interest income....................................... $ 9,756 $ 9,379
======= =======
Net yield on interest-earning assets...................... 2.69 2.79
Interest rate spread...................................... 2.48 2.50
Ratio of earning assets to interest-bearing liabilities... 104.27 105.97
23
24
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:
Six months ended Three months ended
March 31, March 31,
----------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
(Dollars in thousands)
Beginning balance...................... $ 6,202 $ 5,217 $ 6,034 $ 5,060
Provision for loan losses.............. 1,700 372 1,500 111
Recoveries............................. 17 74 11 19
Charge-offs............................ (437) (1,219) (63) (746)
Acquired bank's allowance.............. - 1,678 - 1,678
------- ------- ------- -------
Ending balance......................... $ 7,482 $ 6,122 $ 7,482 $ 6,122
======= ======= ======= =======
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period........................ 0.90% 0.84% 0.90% 0.84%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period.................... 270.40% 156.77% 270.40% 156.77%
Ratio of net charge-offs to average
gross loans (annualized)............. 0.11% 0.36% 0.03% 0.45%
Management believes that the allowance for loan losses is adequate to provide
for potential losses as of March 31, 1998, based upon its current evaluation of
loan delinquencies, non-performing loans, charge-off trends, economic
conditions and other factors. Such evaluation, which includes a review of all
loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an accurate provision for
loan losses. For the six months ended March 31, 1998, the provision for loan
losses was $1.7 million compared to $372,000 for the same period in the prior
year. Although non-performing assets have been trending downward, the
Company's loan portfolio is significantly more diversified than in previous
years. The Company has and continues to expect to increase its commercial,
consumer and commercial real estate loan portfolios which are generally
presumed to have more risk than standard single-family mortgage loans.* Loan
types other than single-family loans constitute a larger percentage of total
loans than in previous years and the trend is expected to continue.*
Charge-offs for the six and three months ended March 31, 1998 were $437,000 and
$63,000, respectively, compared to $1.2 million and $746,000 for the same
periods in the prior year. Repossessed autos sold during the six and three
months ended March 31, 1998 resulted in charge-offs of $317,000 and $10,000,
respectively. The balance of the purchased auto loans was $275,000 as of March
31, 1998. While additional charge-offs may be incurred, it is expected they
will happen at lower levels than in the previous year (See "Asset Quality").*
The Company believes that the allowance for loan losses is adequate to provide
for potential anticipated losses based upon current known conditions.
OTHER OPERATING INCOME. Other operating income increased by $4.3 million and
$2.5 million for the six and three months ended March 31, 1998, 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:
24
25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Six months ended Three months ended
March 31, March 31,
--------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
(Dollars in thousands)
Other operating income...................... $9,590 $5,307 $5,173 $2,650
Percent of average assets (annualized)...... 1.18% 0.74% 1.30% 0.74%
The increases were due primarily to increases in gains on sales of mortgage
loans, increases in depository fees and service charges, increases in other
income and income from the Company's affordable housing subsidiary. Gains on
the sale of mortgage loans increased $2.0 million to $2.3 million, and $1.2
million to $1.3 million for the six and three months ended March 31, 1998,
respectively, compared to gains of $370,000 and $143,000 for the same periods
in the prior year. The Company's volume of mortgage loan sales was $103.0
million and $50.9 million for the six and three months ended March 31, 1998,
respectively, compared to $51.8 million and $24.7 million for the same periods
in the prior year. The decreasing interest rate environment has increased the
level of the Company's fixed rate loan production which is sold into the
secondary market. In addition to the increased loan production, the falling
interest rates have led to a greater gain level on loans than in the prior
year. For the six months ended March 31, 1998, securities gains totaled
$341,000 compared with $627,000 in the prior year. For the three months ended
March 31, 1998, the Company realized losses on the sale of securities of
$186,000 compared with gains of $151,000 for the three months ended March
31,1997. The Company does not consider gains on the sale of securities as a
predictable source of earnings as such sales are based on the Company's ongoing
review of the individual securities within the Company's available for sale
portfolio whereby securities may be sold and replaced with ones that offer a
better combination of interest income, interest rate risk or credit risk than
the security sold. Income from depository fees and service charges increased
to $1.6 million from $846,000, and $758,000 from $443,000, for the six and
three months ended March 31, 1998 and 1997, respectively. The results for
the three and six months ended March 31, 1998 included the refund of state
income taxes related to a prior year's tax audit. The interest portion of the
refund ($795,000) is included in other income while the portion that is a
refund of previous taxes paid ($780,000) reduces income tax expense. Income
from the operations of the Company's affordable housing subsidiary (which
represents primarily rental income) increased to $2.4 million from $1.5
million, and $1.4 million from $940,000 for the six and three months ended
March 31, 1998 and 1997, respectively. The Company currently has 25 properties
fully in operation compared to 19 in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $4.6 million or 29.1% and $2.1 million or 20.1% for the six and
three months ended March 31, 1998, 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:
Six months ended Three months ended
March 31, March 31,
---------------------- --------------------
1998 1997 1998 1997
-------- ------- ------ ------
(Dollars in thousands)
General and administrative expenses......... $20,333 $15,749 $10,366 $8,287
Percent of average assets (annualized)...... 2.50% 2.20% 2.61% 2.30%
The current three and six month period include the expenses of Kilbourn State
Bank which was purchased in February, 1997, and thus is only partially included
in the prior period numbers, and also includes increased levels
25
26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
of compensation and other costs associated with new branches and other activity
connected with the Company's higher level of earning assets. In addition, the
affordable housing subsidiary had an increase in operating expenses of $890,000
and $331,000 for the six and three months ended March 31, 1998, compared to the
same period in the prior year, primarily as a result of the Company currently
having 25 properties fully in operation compared to 19 in the prior year.
INCOME TAX EXPENSE. Income tax expense decreased to $390,000 and a benefit of
$520,000 for the six and three months ended March 31, 1998, from $1.4 million
and $655,000 for the six and three months ended March 31, 1997. The
effective tax rate for the six and three months ended March 31, 1998 was 5.02%
and negative 16.98%, respectively, compared with 18.39% and 18.04% for the six
and three months ended March 31, 1997. The decrease in effective tax rates is
due to the aforementioned refund of state income taxes of $780,000 related to a
prior year's tax audit as well as the effect of the tax credits earned by the
Company's affordable housing subsidiary. Income tax credits increased to $2.0
million and $1.1 million for the six and three months ended March 31, 1998,
compared to $1.4 million and $719,000 for the same periods in the prior year.
ASSET QUALITY
Total non-performing assets were $3.4 million or 0.20% of total assets at March
31, 1998 compared with $3.4 million or 0.21% of total assets at September 30,
1997. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure.
Non-performing assets as of March 31, 1998 included $275,000 of purchased auto
loans which are past due or in default. These auto loans were purchased in
1995 and 1996 under a warehouse financing arrangement the Company had with the
originator of the sub-prime automobile loans. The intent of the financing was
to warehouse the loans until the originator could originate sufficient
quantities to securitize the loans and sell to institutional investors. At
that time, the loans would be sold back to the originator. The loans were
serviced by an independent third party servicer and the loans had various
levels of insurance and in addition were guaranteed as to principal and
interest payments by the originator of the loans. The maximum amount that the
Company had outstanding at any point in time was a balance of $14.6 million
during February, 1996. The Company has not funded any loans since that time
and as of March 31, 1998, the balance of the sub-prime auto loans was $275,000
compared to $1.1 million at September 30, 1997. The decrease in the loan
balance since September 30, 1997 is due to cash payments received of $468,000
and charge-offs of $317,000. Actions have been taken to repossess the
collateral on the delinquent loans and to enforce the guarantee of the
originator of these loans; however, it is anticipated that some portion of
these loans will ultimately result in a charge-off due to the possible
inability of the originator to perform under its guaranty.* In addition, the
level of insurance collected on policies paying for credit losses on the loans
has been lower than anticipated. Non-performing assets also includes a single
$843,000 commercial real estate loan on a shopping center.
26
27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Non-performing assets are summarized as follows:
March 31, September 30,
1998 1997
---------- -------------
(Dollars in thousands)
Non-performing loans........................ $ 2,767 $ 2,995
Foreclosed properties....................... 591 416
---------- -------------
Non-performing assets....................... $ 3,358 $ 3,411
========== =============
Non-performing loans to gross loans......... 0.33% 0.38%
Non-performing assets to gross assets....... 0.20% 0.21%
There are no material loans about which management is aware that there exists
serious doubts as to the ability of the borrower to comply with the loan terms,
except as disclosed above.
Impaired loans totaled $1.1 million at March 31, 1998 compared to $1.9 million
at September 30, 1997. These loans had associated impairment reserves of
$448,000 and $782,000 at March 31, 1998 and September 30, 1997, respectively.
The average balance of impaired loans was $1.5 million and $4.1 million at
March 31, 1998 and September 30, 1997, respectively. Interest income on
impaired loans for the six months ended March 31, 1998 was $26,000, compared to
zero at September 30, 1997.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter
interest rate characteristics. Although management believes that its
asset/liability management strategies have reduced the potential effects of
changes in interest rates on its operations, increases in interest rates may
adversely affect the Company's results of operations because interest-bearing
liabilities will reprice more quickly than interest-earning assets.
At March 31, 1998, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 12.60% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest earning assets. The Company's three-year
cumulative gap as of March 31, 1998 was a negative 7.76% 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.*
27
28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of March 31,
1998.
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
-------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed...................................... $ 34,263 $ 25,420 $ 45,072 $ 37,206 $ 55,051 $ 197,012
Variable................................... 103,037 88,663 41,232 52,987 23,841 309,760
Consumer loans (2)............................ 120,046 61,882 13,881 19,476 33,941 249,226
Mortgage-backed and related securities........ 2,896 8,690 36,324 10,488 7,742 66,140
Assets available for sale:
Mortgage loans............................. 21,677 - - - - 21,677
Fixed rate mortgagE related................ 16,509 49,258 104,059 29,027 6,123 204,976
Variable rate mortgage related............. 249,098 123,332 - - - 372,430
Other...................................... 15,875 14,993 12,016 10,024 - 52,908
Trading account securities.................... - - - - - -
Investment securities and other assets........ 29,661 - - - 811 30,472
-------------------------------------------------------------------------------
Total...................................... $ 593,062 $ 372,238 $ 252,584 $159,208 $127,509 $1,504,601
===============================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts............................... $ 5,628 $ 16,884 $ 23,118 $ 9,175 $ 6,039 $ 60,844
Passbook savings accounts.................. 3,840 11,619 23,239 16,071 35,588 90,357
Money market deposit accounts.............. 72,210 216,632 25,701 6,425 2,142 323,110
Certificates of deposit.................... 241,727 154,207 138,487 25,801 - 560,222
Borrowings.................................... 405,267 5,000 2,181 - - 412,448
Impact of interest rate swap (4).............. 63,000 (23,000) (40,000) - - -
-------------------------------------------------------------------------------
Total...................................... $ 791,672 $ 381,342 $ 172,726 $ 57,472 $ 43,769 $1,446,981
===============================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities...... $ (198,610) $ (9,104) $ 79,858 $101,736 $ 83,740 $ 57,618
===============================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities........................... (198,610) (207,714) (127,856) (26,120) 57,620
=================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets........................................ (12.05%) (12.60%) (7.76%) (1.59%) 3.50%
=================================================================
- --------------------------------------------------------------------------------
(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 $50.8 million at March 31,
1998.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
of 37%, 17% and 88%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher
than the Company's historical rates but are considered by management to be
more indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $355.2 million or 21.6% 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.
28
29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding the withdrawal and prepayment are based on historical
experience, and management believes such assumptions reasonable, although the
actual withdrawal and repayment of assets and liabilities may vary
substantially.* Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and
liabilities may have similar maturities to repricing, they may react in
different degrees to changes in market interest rates.* Also, the interest
rates on other types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates.* Additionally, certain assets, such as
adjustable-rate loans and mortgage-backed and related securities, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the data in the table.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these
assets is dependent on the Company's operating, financing and investing
activities during any given period. Cash and cash equivalents totaled $31.0
million and $42.9 million as of March 31, 1998 and September 30, 1997,
respectively.
The Company's primary sources of funds are deposits, including brokered
certificates of deposit, borrowings from the FHLB and proceeds from principal
and interest payments on loans and mortgage-backed and related securities.
Although maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At March 31, 1998, the Company had
a borrowing capacity available of $169.2 million from the FHLB; however,
additional securities may have to be pledged as collateral.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiary are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity
minus certain intangible assets. Core capital generally consists of tangible
capital plus qualifying intangible assets. The risk-based capital requirements
presently address credit risk related to both recorded and off-balance sheet
commitments and obligations.
The Bank is required to follow OTS capital regulations which require savings
institutions to meet three capital standards: (i) "tangible capital" in an
amount not less than 1.5% of adjusted total assets; (ii) "core capital" in an
amount not less than 3% of adjusted total assets; and (iii) "risk-based
capital" of at least 8% of risk-weighted assets. Savings institutions must
meet all of the standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios at the dates
indicated:
March 31, 1998 September 30, 1997
---------------- ------------------
Capital Capital
---------------- ------------------
Capital Standard Amount Percent Amount Percent
- --------------------- ------ ------- ------ -------
(Dollars in thousands)
Tangible capital 118,362 7.25% 117,337 7.14%
Core capital 118,362 7.25% 117,337 7.14%
Risk-based capital 125,727 12.15% 122,856 12.21%
As evidenced by the foregoing, the capital of the Company's financial
institution subsidiary exceeded all capital requirements as mandated by the
requirements of the OTS.
29
30
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Item 3: Quantitative and Qualitiative Disclosures About Market Risk
The following table sets forth the amounts of estimated cash flows for the
various interest-earning assets and interest-bearing liabilities outstanding at
March 31, 1998.
More than More than More than
Within One Year Two Years Three Years
One Year to Two Years to Three Years to Four Years
-----------------------------------------------------------------------------------
Interest Earning Assets (Dollars in millions)
Mortgage and
commercial loans:
Fixed rate $ 49.2 8.12% 27.6 8.06% $ 15.8 8.08% $14.8 8.08%
Adjustable rate 89.8 8.20% 46.5 8.27% 40.3 8.23% 31.0 8.20%
Consumer loans:
Fixed rate 10.5 8.75% 17.6 8.68% 10.5 8.67% 14.1 9.12%
Adjustable rate 29.0 9.50% 21.1 9.48% 48.8 9.28% 25.1 9.13%
Mortgage-backed
Securities:
fixed rate 77.4 7.12 70.2 6.99% 70.2 6.99% 19.7 7.06%
adjustable rate 58.8 7.01% 49.0 7.03% 36.8 7.03% 32.0 7.06%
Debt and equity
securities 30.9 6.41% 12.0 6.40% 10.0 6.40% - -
Other 29.7 5.85% - - - - - -
Total interest ------ ---- ------ ---- ------ ---- ------ ----
earning assets $375.3 7.56% $244.0 7.66% $232.4 7.54% $136.7 8.02%
====== ==== ====== ==== ====== ==== ====== ====
Interest Bearing Liabilities
Deposits:
NOW accounts $ 22.5 1.42% $ 11.6 1.42% $ 11.5 1.42% $ 4.6 1.42%
Passbooks 15.4 1.80% 11.7 1.80% 11.7 1.80% 8.0 1.80%
Money market 288.8 4.58% 12.9 4.58% 12.9 4.58% 3.2 4.58%
Certificates 395.9 6.00% 127.0 6.00% 11.4 5.94% 12.9 5.81%
Borrowings
fixed rate 61.8 5.10% - - 0.1 6.94% - -
adjustable rate 156.7 5.46% 188.9 5.72% - - 5.0 5.72%
------ ---- ------ ---- ------ ---- ------ ----
Total interest bearing liabilities $941.1 5.24% $352.1 5.51% $ 47.6 3.46% $ 33.7 4.13%
====== ==== ====== ==== ====== ==== ====== ====
More than Fair
Four Years Over Market
to Five Years Five Years Total Value
---------------------------------------------------------------------------
Interest Earning Assets
Mortgage and
commercial loans:
Fixed rate $ 9.9 8.05% $ 79.8 8.20% $ 197.1 8.13% $ 198.2
Adjustable rate 21.7 8.10% 102.2 8.19% 331.5 8.20% 339.6
Consumer loans:
Fixed rate 15.2 9.15% 49.3 9.00% 117.2 8.93% 117.8
Adjustable rate 7.9 10.37% - - 131.9 9.40% 133.2
Mortgage-backed
Securities:
fixed rate 19.7 7.11% 13.9 6.73% 271.1 7.03% 271.6
adjustable rate 28.5 7.07% 167.3 6.93% 372.4 6.99% 372.9
Debt and equity
securities - - - - 52.9 6.40% 53.0
Other - - 0.8 5.15% 30.5 5.83% 32.0
------ ----- ------ ---- -------- ---- --------
Total interest earning assets $102.9 7.95% $413.2 7.70% $1,504.6 7.68% $1,518.3
====== ===== ====== ==== ======== ==== ========
Interest Bearing Liabilities
Deposits:
NOW accounts $ 4.6 1.42% $ 6.0 1.42% $ 60.8 1.42% $ 60.8
Passbooks 8.0 1.80% 35.6 1.80% 90.4 1.80% 90.4
Money market 3.2 4.58% 2.1 4.58% 323.1 4.58% 323.1
Certificates 12.9 6.14% 0.1 8.45% 560.2 6.00% 560.8
Borrowings
fixed rate - - - - 61.9 5.10% 61.9
adjustable rate - - - - 350.6 5.60% 350.7
------ ----- ------ ---- -------- ---- --------
Total interest bearing liabilities $ 28.7 4.00% $ 43.8 1.90% $1,447.0 5.09% $1,447.7
====== ===== ====== ==== ======== ==== ========
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Registrant and the Bank.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on January 28, 1998. Only
shareholders of record at the close of business on December 1, 1997
(the "Voting Record Date") were entitled to vote at the annual meeting.
On the Voting Record Date, there were 5,251,011 shares of Common Stock
outstanding, and 4,111,421 shares present at the meeting by the holders
thereof in person or by proxy, which constituted a quorum. The
following is a summary of the matters voted upon at the meeting.
NUMBER OF VOTES
BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--------- -------- ----------- ---------
NOMINEES FOR DIRECTOR FOR
THREE-YEAR TERM EXPIRING IN
2001
Edward W. Mentzer 4,093,772 17,649 - -
Julia H. Taylor 4,091,597 19,824 - -
RATIFICATION OF APPOINTMENT OF
KPMG PEAT MARWICK LLP AS
AUDITORS 4,094,352 5,787 11,282 -
The following directors' terms of office continued after the Annual
Meeting: Messrs. David J. Drury, Rudolph T. Hoppe, Thomas R. Perz,
Jeffrey A. Reigle, John C. Schlosser and Edmund O. Templeton.
ITEM 5. OTHER INFORMATION
On April 24, 1998, the Company announced the declaration of a dividend
of $0.14 per share on the Company's common stock for the quarter ended
March 31, 1998. The dividend is payable on May 22, 1998 to
shareholders of record as of May 11, 1998. This will be the eleventh
cash dividend payment since the Company became a publicly-held company
in June 1993.
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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
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report was filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: May 15, 1998 By: /s/ Jon D. Sorenson
--------------------- ---------------------------
Jon D. Sorenson
Chief Financial Officer
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