10-Q 1 c79067e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 Commission File Number 0-21298 ST. FRANCIS CAPITAL CORPORATION ------------------------------- (Exact name of Registrant as Specified in its Charter) WISCONSIN 39-1747461 ----------------------------- --------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 13400 BISHOPS LANE, SUITE 350, BROOKFIELD, WISCONSIN 53005-6203 --------------------------------------------------------------- (Address of Principal Executive Offices, Including Zip Code) (262) 787-8700 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --------- ---------- Indicate by check mark whether the registrant is an accelerated filer (as determined in Rule 12b-2 of the Exchange Act). Yes x No --------- ---------- The number of shares outstanding of the issuer's common stock, $.01 par value per share, was 9,472,226 at July 31, 2003. ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY CONTENTS

2 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements 3 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Income (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements 4 ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements 5 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flow (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements 6 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flow, cont. (Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements 7 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 accounting principles generally accepted in the United States of America. 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 nine and three-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the entire year ending September 30, 2003. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2002. Certain previously reported balances have been reclassified to conform with current year presentation. (3) Merger with MAF Bancorp, Inc. On May 21, 2003, St. Francis Capital Corporation and MAF Bancorp, Inc. ("MAF") announced that MAF has agreed to acquire the Company in an all-stock transaction with a fixed exchange ratio. Based on the closing price of MAF's common stock on June 30, 2003, the transaction is valued at approximately $294 million. Pursuant to a definitive agreement between the two companies, the Company will merge into MAF, with MAF to be the surviving corporation. As a result of the merger, each issued and outstanding share of St. Francis Capital Corporation common stock will be converted into the right to receive 0.79 shares of MAF common stock. The transaction is subject to regulatory approvals and approval by the holders of a majority of MAF's common stock and the holders of a majority of the Company's common stock. The proposed merger is expected to be completed in the fourth quarter of 2003. (4) 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 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:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 45 days or less or other termination clauses and may require a fee. Fixed rate loan commitments as of June 30, 2003 have interest rates ranging from 4.25% to 7.875%. Because some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent cash requirements. The Company evaluates the creditworthiness of each customer on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counterparty. The Company generally extends credit on a secured basis. Collateral obtained consists primarily of one- to four-family residences and other residential and commercial real estate and commercial business assets. Loans sold with recourse represent one- to four-family mortgage loans that are sold to secondary market agencies, primarily Federal National Mortgage Association ("FNMA"), with the servicing of these loans being retained by the Company. The Company's exposure on loans sold with recourse is the same as if the loans remained in the Company's loan portfolio. The Company receives a larger servicing spread on those loans being serviced than it would if the loans had been sold without recourse. The Company has entered into agreements whereby, for an initial and annual fee, it will guarantee payment on letters of credit backing industrial revenue bond issues ("IRB"). The IRBs are issued by municipalities to finance real estate owned by a third party. Potential loss on a guarantee is the notional amount of the guarantee less the value of the real estate collateral. At June 30, 2003, appraised values of the real estate collateral exceeded the amount of the guarantees. Standby letters of credit are conditional commitments that the Company issues to guarantee the performance of a customer to a third-party. The guarantees frequently support public and private borrowing arrangements. The Company receives an initial and annual fee for the guarantee. The guarantees generally have a term of approximately one year and may be automatically renewable within a specified period of time. Potential loss on a guarantee is the notional amount of the guarantee less the value of the collateral. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its future cash requirements to be less than the total outstanding commitments. 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, equipment or other similar commercial type financing. The credit risk involved in extending these lines of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held for these commitments may include, but may not be limited to, real estate, investment securities, equipment, accounts receivable, inventory and Company deposits. 9 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (5) Securities The Company's securities available for sale and held to maturity at June 30, 2003 were as follows:

During the nine-month periods ended June 30, 2003 and 2002, gross proceeds from the sale of securities available for sale totaled approximately $474.2 million and $97.8 million, respectively. The gross realized gains on such sales totaled approximately $2.1 million and $1.0 million for the nine-month periods ended June 30, 2003 and 2002, respectively. The gross realized losses on such sales totaled approximately $75,000 and $50,000 for the nine-month periods ended June 30, 2003 and 2002, respectively. During the three-month periods ended June 30, 2003 and 2002, gross proceeds from the sale of securities available for sale totaled approximately $221.6 million and $53.9 million, respectively. The gross realized gains on such sales totaled approximately $1.1 million and $312,000 for the three-month periods ended June 30, 2003 and 2002, respectively. The 10 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued gross realized losses on such sales totaled approximately $5,000 and $48,000 for the three-month periods ended June 30, 2003 and 2002, respectively. At June 30, 2003, $354.7 million of mortgage-related securities were pledged as collateral for Federal Home Loan Bank ("FHLB") advances. (6) Loans Loans receivable are summarized as follows:

11 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (7) Allowance For Loan Losses Activity in the allowance for loan losses is summarized as follows:

(8) Earnings Per Share Basic earnings per share of common stock for the nine-and three-month periods ended June 30, 2003 and 2002, have been determined by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock for the nine and three-month periods ended June 30, 2003 and 2002, have been determined by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period adjusted for the dilutive effect of outstanding stock options. Book value per share of common stock at June 30, 2003 and September 30, 2002, have been determined by dividing total shareholders' equity by the number of shares of common stock outstanding at period end adjusted for the dilutive effect of outstanding stock options at the respective dates. Stock options are regarded as potential common stock and are, therefore, considered in per share calculations if not considered to be antidilutive. 12 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued The computation of earnings per common share is as follows:

The computation of book value per common share is as follows:

13 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (9) Stock Option Plans The Company has adopted stock option plans for the benefit of directors and officers of the Company. The option exercise price cannot be less than the fair value of the underlying common stock as of the date of the option grant, and the maximum term cannot exceed ten years. Stock options awarded to directors may be exercised at any time or on a cumulative basis over varying time periods, provided the optionee remains a director of the Company. The stock options awarded to officers are exercisable on a cumulative basis over varying time periods, depending on the individual option grant terms, which may include provisions for acceleration of vesting periods. At June 30, 2003, 62,930 shares were reserved for future grants. Further information concerning the options is as follows:

For purposes of providing the pro forma disclosures required under SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123," ("SFAS No. 148") the fair value of stock options granted was estimated using the Black-Scholes option pricing model. There were no options granted during the nine and three-month periods ended June 30, 2003 and 2002. Had compensation cost for the Company's stock-based plans been determined in accordance with SFAS No. 148, net income and earnings per share would have been reduced to the pro forma amounts indicated below. This pro forma net income reflects only options granted in the fiscal years 1997 through June 30, 2003. Therefore, the full impact of calculating compensation cost under SFAS No. 148 is not reflected in the pro-forma net income and earnings per share amounts.

14 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued (10) Income Taxes Actual income tax expense differs from the "expected" income tax expense computed by applying the statutory Federal corporate tax rate to income before income tax expense, as follows:

(11) Derivative and Hedging Activities The Company utilizes derivative hedging instruments in the course of its asset/liability management. The hedging instruments primarily used by the Company are interest rate swap agreements which are used to convert fixed-rate payments or receipts to variable-rate payments or receipts and thus hedge the Company's fair market value of the item being hedged. The items being hedged generally expose the Company to variability in fair value in rising or declining interest rate environments. In converting the fixed payment or receipt to a variable payment or receipt, the interest rate swaps effectively reduce the variability of the fair market value of the items being hedged. The Company's mortgage banking activities include the issuance of commitments to extend residential mortgage loans. When the loan is originated or purchased, it may be recorded as a mortgage loan held for sale. The loans held for sale are hedged with forward contracts and a fair value hedge is designated. The Company is in a short position with forward contracts, whereby the Company agrees to sell mortgage loans held for sale at a pre-established price at some future date, and in a long position with the mortgage loans held for sale. The hedging relationship is highly effective and hedges changes in the fair value of the mortgage loans held for sale due to interest rate changes. The change in fair value of mortgage loans held for sale is included in the consolidated statements of income. The Company utilizes interest rate swaps to hedge the fair value of brokered certificates of deposit ("CDs"). The interest rate swaps that hedge brokered CDs are matched with the CD as to final maturity, interest payment dates and call features. The interest rate swaps are a floating pay-fixed receive instrument and as such, they convert the fixed rate payment on the brokered CDs to a floating rate and thus hedge the fair value of the brokered CDs from changes in interest rates. At June 30, 2003 and September 30, 2002, the Company did not have any interest rate swaps outstanding. The Company measures the effectiveness of it's hedges on a periodic basis. Any difference between the fair value change of the hedge versus the fair value change of the hedged item is considered to be the "ineffective" portion of the hedge. The ineffective portion of the hedge is recorded as an increase or decrease in the related income statement classification of the item being hedged. If the ineffectiveness of a hedge exceeds certain levels, the derivative would no longer be eligible for hedge treatment and future changes in fair value of the derivative would be recorded on the income statement. The Company's commitments to originate mortgage loans held-for-sale and forward loan sale commitments are considered derivatives under the accounting standards. As such, the change in fair value of such commitments, are recorded as an adjustment to the gains on the sale of loans. (12) Current Accounting Developments The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include 15 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Adoption of this Standard did not materially affect the results of operations or financial position of the Company. The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123" ("SFAS No. 148"). This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure requirements are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS No. 149 is to be applied prospectively and is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Adoption of this Standard is not expected to materially affect the results of operations or financial position of the Company. The FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this Standard is not expected to materially affect the results of operations or financial position of the Company. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" which provides new accounting guidance on when to consolidate a variable interest entity. A variable interest entity exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights, the obligation to absorb the expected loss of an entity if they occur, and the right to receive the expected residual return of the entity if they occur. Adoption of this Interpretation is not expected to materially affect the results of operations or financial position of the Company. (13) Segment Information The Company's operations include four strategic business segments: Retail Banking, Commercial Banking, Mortgage Banking and Investments. Financial performance is primarily based on the individual segment's direct contribution to Company net income. The segments do not include the operations of the Company as a holding company, nor the operations of the Bank's operating subsidiaries. Capital is not allocated to the segments and thus net interest income related to the free funding associated with capital is not included in the individual segments. The Company only charges the segments with direct expenses. Costs associated with administrative and centralized back-office support areas of the Bank are not allocated to the segments. Income taxes are allocated to the segments based on the Bank's effective tax rate prior to the consolidation with its affordable housing subsidiary. The Retail Banking segment consists of the Bank's retail deposits, branch and ATM networks, consumer lending operations, annuity and brokerage services and call center. The segment includes a much higher level of interest-bearing liabilities than interest-earning assets. The Company views this segment as a significant funding vehicle for the other lending segments. The Company's transfer pricing model has the effect of viewing this segment as a comparison to the cost of wholesale funds. The Commercial Banking segment consists of the Bank's commercial, commercial real estate and multifamily lending operations. It also includes the lending aspects of the Company's affordable housing subsidiary. 16 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued The Mortgage Banking segment consists of the Bank's single-family mortgage lending operation. Single-family lending consists of three primary operations: portfolio lending, lending for sale in the secondary market and loan servicing. The Investment segment consists of the Company's portfolio of mortgage-backed and related securities, its debt and equity securities and other short-term investments. This segment also includes the Company's wholesale sources of funding including FHLB advances, brokered certificates of deposits, reverse repurchase agreements and federal funds purchased.

17 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued

--------------------- (a) After-tax effect of $6.5 million and $7.1 million of general and administrative expenses for the nine-month periods ended June 30, 2003 and 2002, respectively. After-tax effect of $2.2 million and $2.3 million of general and administrative expenses for the three-month periods ended June 30, 2003 and 2002, respectively. (14) Goodwill and Intangible Assets Effective October 1, 2002, the Company adopted Financial Accounting Statement 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. As required under SFAS No. 142, the Company discontinued the amortization of goodwill with a net carrying value of $12.9 million at October 1, 2001 and annual amortization of approximately $1.2 million that resulted from business combinations prior to the adoption of SFAS No. 142. The Company evaluates goodwill for impairment at least annually. Impairment testing of goodwill was completed as of October 1, 2002 and resulted in no impairment, therefore, goodwill has a net carrying value of $12.9 million at June 30, 2003. In addition to goodwill, the Company's other intangible assets consist of mortgage servicing rights and other intangible assets from business combinations which are included in other assets on the consolidated balance sheet. Mortgage servicing rights are not subject to SFAS No. 142 but rather, are amortized over their expected life and subject to periodic impairment testing. The results for the nine-and three-month periods ended June 30, 2003 include charges of $3.9 million and $1.3 million, respectively, related to an impairment write-down of the Company's mortgage servicing rights. The write-down was the result of an increase in forecasted prepayment speeds, which resulted primarily from the current lower interest rate environment. At June 30, 2003 and September 30, 2002 the valuation reserve totaled $7.0 million and $3.1 million, respectively. The Company's other intangible assets resulted from the purchase of deposits. This acquisition did not meet the definition of a business combination under SFAS No. 147, "Acquisitions of Certain Financial Institutions," therefore, it is not required to be accounted for in accordance with SFAS No. 141 and SFAS No. 142. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows: 18 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements, continued

Amortization expense for the mortgage servicing rights asset are based on assumptions made during each reporting period. Such assumptions include, but are not limited to, the current level of interest rates and the forecast prepayment speeds as estimated by major mortgage dealers. Actual amortization expense is also affected by the amount of loans sold with servicing retained. At June 30, 2003, the Company services $869.3 million in mortgage loans for others, compared to $768.7 million at September 30, 2002. Intangible assets from business combinations are amortized on a straight-line method. Actual amortization expense is as follows:

The following table shows the future estimated amortization expense for originated mortgage servicing rights based on existing balances and the interest rate environment as of June 30, 2003. The Company's actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on changes in mortgage interest rates, estimated prepayment speeds, additional recognition of servicing on loans sold in the future and market conditions.

19 ST. FRANCIS CAPITAL CORPORATION & SUBSIDIARY Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operation FORWARD-LOOKING STATEMENTS This Report contains certain forward looking statements with respect to the financial condition, results of operations and business of St. Francis Capital Corporation (the "Company") and its wholly owned subsidiary, St. Francis Bank (the "Bank"). The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises 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 at June 30, 2003 were $2.25 billion, a decrease of $85 million from $2.34 billion at September 30, 2002. Loans receivable, including mortgage loans held for sale, decreased $24.1 million from September 30, 2002 as declines in one- to four-family and commercial loans were partially offset by increases in home equity loans. Total capital increased to $194.0 million at June 30, 2003 compared with $179.1 million at September 30, 2002. The Company's ratio of shareholders' equity to total assets was 8.60% at June 30, 2003, compared to 7.66% at September 30, 2002. The Company's book value per share was $19.33 at June 30, 2003, compared to $18.31 at September 30, 2002. The restructuring of the balance sheet continues to be one of the strategic initiatives of the Company. During the past three years the Company has reduced the size of its mortgage-backed securities and investment securities portfolios as repayments, scheduled maturities and sales occur. Funds received from these repayments, maturities and sales have been and are expected to be used to grow and diversify the Company's loan portfolio, to reduce the Company's wholesale debt and as an additional source of liquidity. This restructuring is part of a long-range plan to make the Company's balance sheet composition more representative of "community banks" with a greater percentage of assets in our loan portfolio as opposed to investments. Management anticipates that this restructuring should improve the Company's margins due to the generally higher interest rates on loans, and depending on the growth in the loan portfolio, this will continue to be an ongoing initiative of the Company in fiscal 2003. Loans receivable, including mortgage loans held for sale, decreased $24.1 million to $1.30 billion at June 30, 2003 from $1.32 billion at September 30, 2002. During the nine-month period ended June 30, 2003, one- to four-family loans decreased $30.2 million, commercial loans decreased $23.4 million, multi-family mortgage loans decreased $3.3 million and consumer and interim financing loans decreased $2.9 million, offset by an increase of $33.3 million in home equity loans and an increase of $2.4 million in commercial real estate loans. The Company's one- to four-family mortgage loan portfolio has a significant level of adjustable-rate loans and during periods of declining or generally low interest rates, the customers generally convert adjustable-rate loans to fixed-rate loans. However, fixed-rate loans are generally sold in the secondary market and are not maintained on the Company's balance sheet. The commercial loan portfolio has decreased due to a reduction in the Company's syndicated loan credits. For the nine-month period ended June 30, 2003, the Company originated approximately $1.06 billion in loans, as compared to $785.2 million for the same period in the prior year. Of the $1.06 billion in loans originated, $625.8 million were first mortgage loans, $182.1 million were home equity loans, $85.9 million were commercial real estate loans, $76.5 million were consumer and interim financing loans, $52.4 million were multi-family loans and $36.9 million were commercial loans. For the nine-month period ended June 30, 2003, the Company purchased $451.1 million one- to four-family loans, as compared to $232.6 million for the same period in the prior year. The increase in loans purchased during the current year is primarily due to increased activity in the Company's mortgage banking operation in Illinois. For the nine-month period ended June 30, 2003, the Company sold $1.02 billion one- to four-family loans, as compared to $542.9 million for the same period in the prior year. During periods of declining or generally low interest rates, the Company originates more fixed rate loans, which are generally sold in the secondary market. Mortgage-backed and related securities, including securities available for sale, decreased $79.6 million to $629.2 million at June 30, 2003 from $708.8 million at September 30, 2002. The decreases were due to accelerated repayments, scheduled maturities and sales during the period. The decrease in mortgage-backed securities was partially offset by purchases of $933.5 million during the nine-month period ended June 30, 2003. Debt and equity securities increased $48.2 million to $64.8 million at June 30, 2003 from $16.6 million at September 30, 2002. The increase was due to purchases of $93.6 million, partially offset by scheduled maturities of $14.9 million and sales of $30.5 million. The increase in the debt and equity securities portfolio during the nine- 20 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued month period ended June 30, 2003, was the result of the decline in the Company's loan portfolio. As noted above, depending on the growth in the loan portfolio, management anticipates balance sheet restructuring will continue to be an ongoing initiative of the Company in fiscal 2003. Deposits decreased $59.5 million to $1.36 billion at June 30, 2003 from $1.42 billion at September 30, 2002. The decrease in deposits was due primarily to decreases of $93.5 million in certificates of deposit, partially offset by increases of $20.3 million in checking accounts, $11.0 million in money market demand account deposits and $2.7 million in passbook accounts. At June 30, 2003, the Company had approximately $91.2 million in brokered certificates of deposit compared with $191.4 million at September 30, 2002. The brokered deposits are generally for terms of three months to three years. 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 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 undefined reasons. Advances and other borrowings increased by $25.7 million to $667.8 million at June 30, 2003 from $642.1 million at September 30, 2002. Short-term borrowings increased $54.2 million to $659.4 million at June 30, 2003, compared to $605.2 million at September 30, 2002. At June 30, 2003, $445.0 million of the short-term borrowings were callable Federal Home Loan Bank ("FHLB") advances with maturities from two years to eight years and are callable by the FHLB during the next fiscal year and quarterly thereafter. Long-term borrowings decreased $28.4 million to $8.4 million at June 30, 2003, compared to $36.8 million at September 30, 2002. At June 30, 2003, the Company had additional borrowing capacity of $280.8 million available from the FHLB. RESULTS OF OPERATIONS NET INCOME. Net income for the nine-month period ended June 30, 2003 was $18.9 million compared with $16.0 million for the nine-month period ended June 30, 2002. Net income for the three-month period ended June 30, 2003 was $6.5 million compared with $5.1 million for the three-month period ended June 30, 2002. Net income for the nine-and three-month periods ended June 30, 2003 increased due to an increase in other operating income, due primarily to increases in gains on sales of loans. Such increases were partially offset by charges of $3.9 million and $1.3 million, respectively, related to an impairment write-down of the Company's mortgage servicing rights. (For further information see footnote 14 in "Notes to Unaudited Consolidated Financial Statements" on page 18 and discussion of "Other Operating Income" on page 25). The following table shows the return on average assets and return on average equity ratios for each period:

NET INTEREST INCOME. Net interest income before provision for loan losses decreased $5.0 million or 12.0% to $36.7 million for the nine-month period ended June 30, 2003 compared to $41.7 million for the same period in the prior year. Net interest income before provision for loan losses decreased $2.6 million or 18.3% to $11.8 million for the three-month period ended June 30, 2003 compared to $14.4 million for the same period in the prior year. The decrease in net interest income is a result of a decrease in the Company's net interest margin, partially offset by an increase in average earning assets. The net interest margin decreased to 2.32% and 2.24% for the nine and three-month periods ended June 30, 2003, respectively, compared with 2.69% and 2.75% for the same periods in the prior year. The low interest rate environment affects the Company's net interest margin as the yield on earning assets declines to reflect new rates. The cost of liabilities is no longer decreasing as rapidly as the decrease in the yield on earning assets because deposit rates are near their lowest level and have little room for further downward adjustment. The Company's interest rate 21 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued sensitivity as measured by it's one-year interest rate gap position is also positive, which implies an increase in net interest income in a rising rate environment or a decrease in net interest income in a falling rate environment. Total interest income decreased $14.0 million or 15.1% to $79.3 million and $5.4 million or 17.8% to $25.2 million, respectively, for the nine-and three-month periods ended June 30, 2003 compared to $93.3 million and $30.6 million, respectively, for the same periods in the prior year. The decrease in interest income was primarily the result of decreases in interest on loans, mortgage-backed and related securities and debt and equity securities. The decrease in interest income on loans was the result of a decrease in the average yield on loans to 6.07% from 6.92% for the nine-month period ended June 30, 2003 and 2002, respectively, partially offset by an increase in the average balance of loans to $1.31 billion from $1.28 billion for the same period. The decrease in interest income on loans was the result of a decrease in the average yield on loans to 5.85% from 6.69% for the three-month period ended June 30, 2003 and 2002, respectively, partially offset by an increase in the average balance of loans to $1.30 billion from $1.29 billion for the same period. The decrease in interest income on mortgage-backed and related securities was due to a decrease in the average balance of such securities to $660.3 million from $680.6 million for the nine-month periods ended June 30, 2003 and 2002, respectively, and a decrease in the average yield on such securities to 2.97% from 4.53% for the same periods. The decrease in interest income on mortgage-backed and related securities for the three-month period ended June 30, 2003 compared to the three-month period ended June 30, 2002 was due to a decrease in the average balance of such securities to $627.1 million from $676.1 million, respectively, and a decrease in the average yield on such securities to 2.65% from 4.49% for the same periods. The decrease in interest on debt and equity securities was the result of a decrease in the average balance of such securities to $33.3 million from $41.1 million for the nine-month periods ended June 30, 2003 and 2002, respectively, and a decrease in the average yield on such securities to 2.76% from 4.44% for the same periods. The decrease in interest income on debt and equity securities for the three-month period ended June 30, 2003 compared to the three-month period ended June 30, 2002 was due to a decrease in the average balance of such securities to $64.3 million from $67.0 million, and a decrease in the average yield on such securities to 2.65% from 4.49% for the same periods. The amortization of original purchase premium or discount is included as part of interest income on mortgage-backed and related securities. For the nine-and three-month periods ended June 30, 2003, such amortization reduced interest income by $6.3 million and $2.2 million, respectively, compared to $1.5 million and $573,000 for the nine-and three-month periods ended June 30, 2002. The increase in the amortization is due to the higher level of prepayments within the mortgage-backed and related securities portfolio caused by the generally lower level of interest rates. See "Financial Condition" for a further discussion of the Company's balance sheet restructuring activities. Total interest expense decreased $9.1 million or 17.5% to $42.6 million for the nine-month period ended June 30, 2003, compared to $51.7 million for the nine-month period ended June 30, 2002. For the three-month period ended June 30, 2003, total interest expense decreased $2.8 million or 17.3% to $13.4 million compared to $16.2 million for the three-month period ended June 30, 2002. The decrease in interest expense was the result of decreases in the cost of deposits and advances and other borrowings, as well as decreases in the average balances of deposits. The average cost of deposits decreased to 2.09% and 1.94% for the nine-and three-month periods ended June 30, 2003, respectively, from 2.85% and 2.55% for the same periods in the prior year. The average balances of deposits decreased to $1.28 billion and $1.25 billion for the nine-and three-month periods ended June 30, 2003, respectively, as compared to $1.33 billion and $1.31 billion for the same periods in the prior year. See "Financial Condition" for a further discussion of the Company's deposit base. The average balance of advances and other borrowings increased to $655.3 million and $669.6 million for the nine-and three-month periods ended June 30, 2003, respectively, as compared to $593.2 million and $643.9 million for the same periods in the prior year. The average cost of advances and other borrowings decreased to 4.61% and 4.43% for the nine-and three-month periods ended June 30, 2003, respectively, from 5.22% and 4.95% for the same periods in the prior year. The decrease in the cost of borrowings is due to reverse repurchase agreements and Federal Funds purchased which have repriced to reflect the changes in rate levels associated with the respective borrowing rate indexes from the same period in the prior year. The following table sets forth information regarding: (1) average assets and liabilities, (2) average yield on assets and average cost on liabilities, (3) net interest margin, (4) net interest rate spread, and (5) the ratio of earning assets to interest-bearing liabilities for the nine and three-month periods ended June 30, 2003 and 2002, respectively. Tax-exempt investments are not material and the tax-equivalent method of presentation is not included in the schedule. 22 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued

23 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for loan losses for each period:

The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan loss experience and other factors, which in management's judgment, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties which collateralize loans. With respect to loans that are deemed impaired, the calculation of allowance for loan losses is based upon the discounted present value of expected cash flows received from the debtor or other measures of market prices or collateral values. In general, the level of the allowance for loan losses and changes during each fiscal year is a function of several factors, including but not limited to changes in the loan portfolio, net charge-offs and non-performing loans. Gross loans receivable were $1.36 billion for both of the periods ended June 30, 2003 and 2002, respectively. Net charge-offs for the nine and three-month periods ended June 30, 2003 were $677,000 and $177,000, respectively, compared to $514,000 and $143,000 for the nine and three-month periods ended June 30, 2002. Non-performing loans increased to $3.3 million or 0.25% of gross loans at June 30, 2003 compared to $2.2 million or 0.16% of gross loans at September 30, 2002. For the nine and three-month periods ended June 30, 2003, the provision for loan losses was $637,000 and $84,000, respectively, compared to $2.7 million and $913,000, respectively, for the same periods in the prior year. Management believes that the allowance for loan losses at June 30, 2003 is adequate to absorb probable losses inherent in the portfolio. Management believes it uses the best information available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the Company believes it has established its existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting the borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of factors discussed herein. 24 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued OTHER OPERATING INCOME. Other operating income increased by $10.9 million to $29.9 million and by $5.8 million to $11.1 million for the nine and three-month periods ended June 30, 2003, 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:

The results for the nine-and three-month periods ended June 30, 2003 include charges of $3.9 million and $1.3 million, respectively, related to an impairment write-down of the Company's mortgage servicing rights, compared with $900,000 for the nine-and three-month periods ended June 30, 2002. The impairment write-down is recorded as a valuation reserve at June 30, 2003 and 2002. The Company's mortgage servicing rights are accounted for at the lower of book or market value. As part of the calculation of the market value of mortgage servicing rights, the Company calculates the present value of the future stream of servicing fee income expected to be received from its mortgage loan servicing portfolio, relying in part on median loan prepayment speeds as forecast by the major mortgage dealers. These mortgage dealer forecasts utilize a number of assumptions, including an assumption as to the future direction of interest rates. During the nine-and three-month periods ended June 30, 2003, the forecasted prepayment speeds have increased significantly as compared to the previous period (reflecting forecasts for continued low interest rates and a correspondingly high level of mortgage repayments and refinancings) and resulted in the impairment write-downs. The Company services $869.3 million in mortgage loans for others, with those servicing rights valued, net of valuation allowances of $7.0 million, at $6.4 million as of June 30, 2003. Other than the aforementioned impairment on mortgage servicing rights, the increase for the nine-and three-month periods ended June 30, 2003 was due primarily to gains on the sale of loans, loan-related fees and depository fees and service charges. Gains on the sale of mortgage loans increased to $16.4 million and $5.9 million for the nine-and three-month periods ended June 30, 2003, respectively, compared to gains of $7.6 million and $2.3 million for the same periods in the prior year. The Company's volume of mortgage loan sales were $1.02 billion and $349.5 million for the nine and three-month periods ended June 30, 2003, respectively, compared to $542.9 million and $148.7 million for the same periods in the prior year. The level of loan sale activity is highly dependent on the interest rate environment and on the types of mortgage loans originated. In the recent low interest rate environment, customers are more likely to select or refinance into fixed-rate mortgages, which the Company then generally sells in the secondary market. Loan servicing and loan related fees increased to $4.9 million and $1.6 million for the nine-and three-month periods ended June 30, 2003, respectively, compared to $3.0 million and $849,000 for the nine-and three-month periods ended June 30, 2002, respectively. The increase in other loan-related fees included higher levels of a variety of fees including servicing revenues on loans sold, prepayment penalties, loan modification fees and other loan origination fees, which were also attributable to increased loan activity in the recent low interest rate environment. Depository fees and service charges increased to $5.5 million and $2.3 million for the nine-and three-month periods ended June 30, 2003, respectively, compared to $4.2 million and $1.4 million for the nine-and three-month periods ended June 30, 2002, respectively. The Company continues to experience increases in its retail deposit base, particularly in checking accounts, and the related fee income generated. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $3.4 million or 9.6% to $39.3 million and increased $1.4 million or 12.0% to $13.3 million for the nine and three-month periods ended June 30, 2003, 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:

25 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued The increase is primarily due to additional levels of compensation, including increased commissions and incentive pay related to the Company's increased loan origination activity, higher benefit costs and normal merit pay increases at the start of the Company's fiscal year. Including commissions and salaries, mortgage loan related compensation increased by approximately $1.7 million and $591,000 for the nine-and three-month periods ended June 30, 2003, respectively, compared to the prior year. These increases were comprised primarily of commission compensation and additional salary and benefit compensation, which were directly related to the extremely high level of mortgage activity fostered by the low interest rate environment. In addition, expenses related to the pending merger with MAF Bancorp, Inc. were $456,000 and $353,000 for the nine-and three-month periods ended June 30, 2003. INCOME TAX EXPENSE. Income tax expense increased to $7.8 million and $2.9 million for the nine and three-month periods ended June 30, 2003, compared to $6.2 million and $1.8 million for the same periods in the prior year. The effective tax rates for the nine and three-month periods ended June 30, 2003 were 29.25% and 30.62%, respectively, compared with 27.81% and 26.04% for the nine and three-month periods ended June 30, 2002. The changes in the effective tax rate is primarily due to the increased amount of income, partially offset by increases in affordable housing credits during the nine and three-month periods ended June 30, 2003. The income tax credits received on the Company's affordable housing investments were $2.3 million and $758,000 for the nine and three-month periods ended June 30, 2003, respectively, compared with $2.0 million and $652,000 for the same periods in the prior year. At June 30, 2003 the Company had investments in 14 affordable housing projects compared to investments in 12 projects at June 30, 2002. ASSET QUALITY Total non-performing assets were $4.2 million, or 0.19% of total assets at June 30, 2003, compared with $4.1 million, or 0.18% of total assets at September 30, 2002. 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 are summarized as follows:

Except as disclosed above, 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. Impaired loans totaled $3.5 million at June 30, 2003 compared to $2.0 million at September 30, 2002. These loans had associated impairment reserves of $346,000 and $696,000 at June 30, 2003 and September 30, 2002, respectively. For the nine-month period ended June 30, 2003, the average balance of impaired loans was $3.2 million compared to $9.2 million for the nine-month period ended June 30, 2002 and $6.3 million for the year ended September 30, 2002. Interest income on impaired loans for the nine-month periods ended June 30, 2003 and 2002 was $147,000 and $208,000, respectively. 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 attempts to control this risk through pricing of assets and liabilities and maintaining specific levels of maturities. Generally, the Company is subject to decreases in the net interest margin in rising rate environments and increases in the net interest margin in falling interest rate environments. 26 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued At June 30, 2003, the Company's estimated cumulative one-year gap between assets and liabilities was a positive 2.66% of total assets. The Company's three-year cumulative gap as of June 30, 2003 was a positive 0.21% of total assets. A positive gap occurs when a greater dollar amount of interest-earning assets are repricing or maturing than interest-bearing liabilities. The change in the Company's gap position is due to the decline in interest rates during fiscal 2002 and 2003. As interest rates declined, the terms of the Company's assets shortened as prepayments of the Company's mortgage-related assets increased and the terms of the liabilities lengthened as consumers invested in longer term certificates of deposit and the Company issued longer term brokered certificates of deposit. With a positive gap position, during periods of rising interest rates it is expected that the yield of the Company's interest-earning assets will rise more quickly than the cost on its interest-bearing liabilities, which will have a positive 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. The Company's interest rate risk position, as defined by gap, is dynamic as interest rates change. While static gap analysis may be a useful measure of determining short-term risk to future net income under certain circumstances, it does not measure the sensitivity of the market value of assets and liabilities to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the market interest rate environment. In the event market interest rates increase significantly from the current rates at June 30, 2003, the Company expects that its one-year positive gap would become negative due to the anticipated shortening of the terms of the Company's fixed rate callable FHLB advances becoming callable. In addition, prepayments of the Company's mortgage-related assets will slow causing a lengthening in the terms of these assets. 27 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued The following table summarizes the Company's gap position as of June 30, 2003.

------------------- (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 5% to 85%, based on the individual loan coupon rate and characteristics, 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 $58.9 million at June 30, 2003. (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 33%, 14% and 99%, 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 $103,000 or 4.6% of total assets. (4) Fixed rate callable FHLB advances are included in the period of their modified duration rather than in the period in which they are due. Borrowings includes fixed rate callable FHLB advances of $320 million maturing in one to three years and $125 million maturing in three to five years. 28 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued Assumptions regarding withdrawals and prepayments are based on historical experience, and management believes such assumptions are reasonable, although actual withdrawals and repayments of assets and liabilities may vary substantially. Certain shortcomings are inherent in the method of analysis presented in the gap table. For example, although certain assets and liabilities may have similar maturities to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on other types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans and mortgage-backed and related securities, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of an actual change in interest rates, actual prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the data in the table. CRITICAL ACCOUNTING POLICES In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. ALLOWANCE FOR LOAN LOSSES -- The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan loss experience and other factors which, in management's judgment, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties which collateralize loans. With respect to loans that are deemed impaired, the calculation of allowance for loan losses is based upon the discounted present value of expected cash flows received from the debtor or other measures of market prices or collateral values. Management believes it uses the best information available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the Company believes it has established its existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting the borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates. ACCOUNTING FOR INCOME TAXES -- As part of the process of preparing the consolidated financial statements the Company is required to estimate income taxes for federal and state purposes. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated statements of financial condition. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or increases this allowance in a period, the Company would include an expense within the tax provision in the consolidated statements of income. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. A valuation allowance is based on management's estimates of taxable income in the jurisdictions in which the Company operates and the period over which deferred tax assets will be recoverable. In the event actual results differ from these estimates, or if management adjusts these estimates in future periods the Company may need to establish an additional valuation allowance which could materially impact the financial position and results of operations. MORTGAGE SERVICING RIGHTS -- The Company recognizes as a separate asset the rights to service mortgage loans for others. The value of mortgage servicing rights is amortized in relation to the servicing revenue expected to be earned. Estimating the fair value of the mortgage servicing rights involves judgment, particularly of estimated prepayment speeds of the underlying mortgages 29 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued serviced. Net income could be affected if management's estimate of the prepayment speeds or other factors differ materially from actual prepayments. The above listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. 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 $44.2 million and $45.8 million as of June 30, 2003 and September 30, 2002, respectively. The Company's primary sources of funds are deposits, including brokered certificates of deposit, borrowings from the FHLB and proceeds from principal and interest payments on loans and mortgage-backed and related securities. Although maturities and scheduled amortization of loans are predictable sources of funds, deposit flows, prepayments on mortgage loans and mortgage-backed and related securities are influenced significantly by general interest rates, economic conditions and competition. Additionally, the Bank is limited by the FHLB to borrowing up to 35% of its assets. At June 30, 2003, the Company had additional borrowing capacity of $280.8 million available from the FHLB. The Company owns FHLB stock valued at $110.9 million and $90.8 million as of June 30, 2003 and September 30, 2002, respectively. The Bank is required to own $25.4 million of FHLB stock as of June 30 2003, therefore, the remainder of the stock is held for investment purposes and is considered to be a liquid asset. In fiscal 2002 the Company continued to reduce the size of its mortgage-backed securities and investment securities portfolios as part of a strategy to decrease the proportion of earnings from that segment of its balance sheet. The reduction was primarily accomplished through the repayment of principal, scheduled maturities and the sale of available-for-sale securities. Funds generated from the repayment of principal, maturities and sales from the mortgage-backed securities and investment securities portfolios were used to grow and diversify the Company's loan portfolio, to reduce the Company's wholesale debt and as an additional source of liquidity. Depending on the growth in the loan portfolio, management anticipates that this form of "balance sheet restructuring" will be an ongoing strategic initiative of the Company in fiscal 2003. The Company is in the midst of a share repurchase program where it may purchase up to 460,000 shares, or approximately five percent, of its common stock in the open market. As of June 30, 2003, the Company had purchased 70,300 shares under the current authorization at an average price of $20.78 per share. The Company may purchase an additional 389,700 shares under the current authorization. The Company's share repurchase program is funded through dividends received from the Bank and the Company's line of credit. Due to the Company's access to liquidity, shares repurchased have a minimal effect on the Company's liquidity. At June 30, 2003, the Company had outstanding loan commitments including lines of credit of $451.4 million compared to $451.1 million at September 30, 2002. The Company had no commitments to purchase loans outstanding at either of these dates. The Company anticipates it will have sufficient funds available to meet its current loan commitments, including loan applications received and in process prior to the issuance of firm commitments. Certificates of deposit, including brokered certificates, which are scheduled to mature in one year or less at June 30, 2003 were $431.1 million compared to $414.1 million at September 30, 2002. Management believes that a significant portion of such deposits will remain with the Company. Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations generally relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial service provider the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Company. 30 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued The following table summarizes significant contractual obligations and other commitments at June 30, 2003.

(1) Fixed-rate callable FHLB advances are included in the period of their modified duration rather than in the period in which they are due. Short- and long-term borrowings include fixed rate callable advances of $180 million maturing in 2005, $140 million maturing in 2006, $25 million maturing in 2007 and $100 million maturing in 2008. Under federal and state laws and regulations, the Company and its wholly owned subsidiary are required to meet certain tangible, core and risk-based capital requirements. Tangible capital generally consists of shareholders' equity minus certain intangible assets. Core capital generally consists of tangible capital plus qualifying intangible assets. The risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. The Bank is required to follow Office of Thrift Supervision ("OTS") capital regulations which require savings institutions to meet two capital standards: (i) "tier 1 core capital" in an amount not less than 4% of adjusted total assets and (ii) "risk-based capital" of at least 8% of risk-weighted assets. The following table summarizes the Bank's capital ratios at the dates indicated:

The capital of the Company and the Bank exceed all regulatory capital requirements. 31 ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY Item 2: Management's Discussion and Analysis, continued The following table sets forth the amounts of estimated cash flows for the various interest-earning assets and interest-bearing liabilities outstanding at June 30, 2003.

32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required herein pursuant to Item 305 of Regulation S-K is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 4. CONTROLS AND PROCEDURES The company's senior management, with the participation of the Company's chief executive officer and chief financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that, as of June 30, 2003, the disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including the Bank and the Bank's wholly owned subsidiaries, is made known to the Company's chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Neither the Company nor the Bank is involved in any pending legal proceedings involving amounts in the aggregate which management believes are material to the financial condition and results of operations of the Company and the Bank. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION On July 25, 2003, the Company announced the declaration of a dividend of $0.20 per share on the Company's common stock for the quarter ended June 30, 2003. The dividend is payable on August 20, 2003 to shareholders of record as of August 11, 2003. This will be the 32nd consecutive cash dividend payment since the Company became publicly-held in June 1993. 33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Articles of Incorporation of Registrant (1) 3.2 Amended By-laws of Registrant (2) 3.3 Stock Charter of St. Francis Bank, F.S.B. (1) 3.4 By-laws of St. Francis Bank, F.S.B. (1) 3.5 Articles of Amendment to the Articles of Incorporation of Registrant (3) 4.0 Shareholders' Rights Agreement dated as of September 25, 1997 between Registrant and Firstar Trust Company (4) 10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan (1) 10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1) 10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan (1) 10.4 Credit Agreement by and between St. Francis Bank, F.S.B. Employee Stock Ownership Trust and Registrant (1) 10.5 St. Francis Bank, F.S.B. Management Recognition and Retention Plan and Trust (1) 10.6 St. Francis Capital Corporation 1993 Incentive Stock Option Plan (1) 10.7 St. Francis Capital Corporation 1993 Stock Option Plan for Outside Directors (1) 10.8 1986 Deferred Compensation Agreement as Amended-Thomas R. Perz (4) 10.9 1987 Deferred Compensation Agreement-Thomas R. Perz (1) 10.10 1988 Deferred Compensation Agreement-Edward W. Mentzer (1) 10.11 2000 St. Francis Bank, FSB Employment Agreement-Thomas R. Perz (5) 10.12 2000 St. Francis Capital Corporation Employment Agreement-Thomas R. Perz (5) 10.13 1996 Amended Employment Agreement-James C. Hazzard (5) 10.14 1997 Amended Employment Agreement-Bradley J. Smith (5) 10.15 1998 Amended Employment Agreement-Jon D. Sorenson (5) 10.16 1998 Amended Employment Agreement-James S. Eckel (5) 10.17 St. Francis Capital Corporation 1997 Stock Option Plan (3) 10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz (3) 10.19 Merger agreement dated as of May 21, 2003 by and between St. Francis Capital Corp. and MAF Bancorp, Inc. (6) 11.1 Statement Regarding Computation of Earnings Per Share (See footnote 8 in "Notes to Unaudited Consolidated Financial Statements") (7) 31.1 Certification of Chief Executive Officer (7) 31.2 Certification of Chief Financial Officer (7) 32.1 Certification of Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) 32.2 Certification of Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) (1) Incorporated by reference to exhibits filed with the Registrant's Form S-1 Registration Statement declared effective on April 22, 1993. (Registration Number 33-58680). (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. (3) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. (5) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. (6) Incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 21, 2003. (7) Filed herewith. (b) Form 8-K: On May 21, 2003, the Company filed a Current Report on Form 8-K to announce that MAF Bancorp, Inc. has agreed to acquire St. Francis Capital Corporation in an all-stock transaction with a fixed exchange ratio. On July 25, 2003, the Company filed a Current Report on Form 8-K to announce its second quarter earnings and quarterly dividend. 34 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ST. FRANCIS CAPITAL CORPORATION Dated: August 14, 2003 By: /s/ Jon D. Sorenson ----------------- ---------------------------------------- Jon D. Sorenson Chief Financial Officer 35 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Articles of Incorporation of Registrant (1) 3.2 Amended By-laws of Registrant (2) 3.3 Stock Charter of St. Francis Bank, F.S.B. (1) 3.4 By-laws of St. Francis Bank, F.S.B. (1) 3.5 Articles of Amendment to the Articles of Incorporation of Registrant (3) 4.0 Shareholders' Rights Agreement dated as of September 25, 1997 between Registrant and Firstar Trust Company (4) 10.1 St. Francis Bank, F.S.B. Money Purchase Pension Plan (1) 10.2 St. Francis Bank, F.S.B. 401(k) Savings Plan (1) 10.3 St. Francis Bank, F.S.B. Employee Stock Ownership Plan (1) 10.4 Credit Agreement by and between St. Francis Bank, F.S.B. Employee Stock Ownership Trust and Registrant (1) 10.5 St. Francis Bank, F.S.B. Management Recognition and Retention Plan and Trust (1) 10.6 St. Francis Capital Corporation 1993 Incentive Stock Option Plan (1) 10.7 St. Francis Capital Corporation 1993 Stock Option Plan for Outside Directors (1) 10.8 1986 Deferred Compensation Agreement as Amended-Thomas R. Perz (4) 10.9 1987 Deferred Compensation Agreement-Thomas R. Perz (1) 10.10 1988 Deferred Compensation Agreement-Edward W. Mentzer (1) 10.11 2000 St. Francis Bank, FSB Employment Agreement-Thomas R. Perz (5) 10.12 2000 St. Francis Capital Corporation Employment Agreement-Thomas R. Perz (5) 10.13 1996 Amended Employment Agreement-James C. Hazzard (5) 10.14 1997 Amended Employment Agreement-Bradley J. Smith (5) 10.15 1998 Amended Employment Agreement-Jon D. Sorenson (5) 10.16 1998 Amended Employment Agreement-James S. Eckel (5) 10.17 St. Francis Capital Corporation 1997 Stock Option Plan (3) 10.18 Split Dollar Life Insurance Agreement-Thomas R. Perz (3) 10.19 Merger agreement dated as of May 21, 2003 by and between St. Francis Capital Corp. and MAF Bancorp, Inc. (6) 11.1 Statement Regarding Computation of Earnings Per Share (See footnote 8 in "Notes to Unaudited Consolidated Financial Statements") (7) 31.1 Certification of Chief Executive Officer (7) 31.2 Certification of Chief Financial Officer (7) 32.1 Certification of Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) 32.2 Certification of Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) (1) Incorporated by reference to exhibits filed with the Registrant's Form S-1 Registration Statement declared effective on April 22, 1993. (Registration Number 33-58680). (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. (3) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. (5) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. (6) Incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 21, 2003. (7) Filed herewith. 36

ST FRANCIS CAPITAL CORP 10-Q