<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- -----------
Commission File Number 0-15580
St. Paul Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3504665
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6700 W. North Avenue
Chicago, Illinois 60707
- --------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(773) 622-5000
---------------------------------------------------
(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 twelve months (or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value -- 34,167,683 shares, as of Nov. 3, 1997
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<PAGE> 2
ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of Sept. 30, 1997 and Dec. 31, 1996........................ 3
Consolidated Statements of Income for the Three and Nine
Months Ended Sept. 30, 1997 and 1996.......................... 4
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended Sept. 30, 1997 and 1996..................... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended Sept. 30, 1997 and 1996..................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.............................. 44
Signature Page................................................ 45
Exhibits...................................................... 46
</TABLE>
2
<PAGE> 3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
Dollars in thousands 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 78,307 $ 98,137
Federal funds sold and interest bearing
bank balances 139,785 75,572
Short-term cash equivalent securities 38,644 16,499
----------- -----------
Total cash and cash equivalents 256,736 190,208
Investment securities
(Market: Sept. 30, 1997-$70,583;
Dec. 31, 1996-$49,103) 70,583 49,103
Mortgage-backed securities
(Market: Sept. 30, 1997-$995,814;
Dec. 31, 1996-$1,158,171) 993,007 1,162,982
Loans receivable, (Net of accumulated provision
for loan losses:
Sept. 30, 1997-$34,069; Dec. 31, 1996-$35,965) 3,043,046 2,782,116
Loans held for sale, at lower of cost or market
(Market: Sept. 30, 1997-$13,942;
Dec. 31, 1996-$12,021) 13,909 11,992
Accrued interest receivable 26,778 25,745
Foreclosed real estate (Net of accumulated
provision for losses:
Sept. 30, 1997-$242; Dec. 31, 1996-$284) 1,987 2,634
Real estate held for development or investment 18,842 15,783
Investment in Federal Home Loan Bank stock 38,188 35,211
Office properties and equipment 52,001 47,286
Prepaid expenses and other assets 33,359 34,110
----------- -----------
Total Assets $ 4,548,436 $ 4,357,170
=========== ===========
LIABILITIES:
Deposits $ 3,288,157 $ 3,337,055
Short-term borrowings 530,187 366,854
Long-term borrowings 268,843 194,390
Advance payments by borrowers for taxes
and insurance 10,823 21,561
Other liabilities 41,372 49,200
----------- -----------
Total Liabilities 4,139,382 3,969,060
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01 per share:
authorized-10,000,000 shares; none issued) - -
Common stock (par value $.01 per share:
authorized-40,000,000 shares;
Issued: Sept. 30, 1997-35,443,866 shares;
Dec. 31, 1996-38,392,810 shares;
Outstanding: Sept. 30, 1997-34,133,382 shares;
Dec. 31, 1996-34,163,988 shares) 354 384
Paid-in capital 114,524 148,265
Retained income, substantially restricted 315,864 288,065
Accumulated other comprehensive income:
Unrealized gain on securities (net of taxes of
$1,920 at Sept. 30, 1997 and $1,387 of taxes
at Dec. 31, 1996) 3,154 2,278
Borrowings by employee stock ownership plan (256) (396)
Unearned employee stock ownership plan shares
(368,157 shares) (2,883) (2,883)
Treasury stock (1,310,484 shares at Sept. 30, 1997;
4,228,822 shares at Dec. 31, 1996) (21,703) (47,603)
----------- -----------
Total stockholders' equity 409,054 388,110
----------- -----------
Total liabilities and stockholders' equity $ 4,548,436 $ 4,357,170
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30,
------------------ ------------------
Dollars in thousands except per share amounts 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 59,604 $ 58,833 $169,825 $169,479
Mortgage-backed securities 17,815 13,354 56,376 42,063
Investment securities 1,144 1,157 3,201 3,423
Federal funds and interest-bearing bank balances 1,153 485 3,876 1,983
Other investment income 1,071 1,035 3,075 3,225
------------------ ------------------
Total interest income 80,787 74,864 236,353 220,173
INTEREST EXPENSE:
Deposits 35,512 34,767 107,025 103,763
Short-term borrowings 7,505 4,134 16,751 10,210
Long-term borrowings 4,576 4,566 13,718 13,354
------------------ ------------------
Total interest expense 47,593 43,467 137,494 127,327
------------------ ------------------
Net interest income 33,194 31,397 98,859 92,846
Provision for loan losses --- 500 --- 1,500
------------------ ------------------
Net interest income after provision
for loan losses 33,194 30,897 98,859 91,346
OTHER INCOME:
Loan servicing fees 481 279 1,326 1,082
Other fee income 4,227 4,217 12,110 11,803
ATM operations 2,906 1,695 9,463 4,474
Net gain on loan sales 142 132 324 568
Net gain on securities sales -- -- -- 855
Discount brokerage commissions 1,836 1,178 4,982 3,837
Income from real estate development 705 643 1,872 1,842
Insurance and annuity commissions 793 773 2,490 2,199
------------------ ------------------
Total other income 11,090 8,917 32,567 26,660
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 14,080 13,033 42,185 38,676
Occupancy, equipment and other office expense 7,586 6,596 21,755 18,917
Advertising 1,398 1,475 4,240 3,937
Federal deposit insurance 699 2,042 2,081 6,014
SAIF recapitalization --- 21,000 --- 21,000
Other 1,822 1,622 5,061 4,956
------------------ ------------------
General and administrative expense 25,585 45,768 75,322 93,500
Loss on foreclosed real estate 59 89 142 1,245
------------------ ------------------
Income (loss) before income taxes and
extraordinary item 18,640 (6,043) 55,962 23,261
Income taxes 6,266 (2,501) 18,954 7,860
------------------ ------------------
Income (loss) before extraordinary item 12,374 (3,542) 37,008 15,401
Extraordinary item:
Loss on early extinguishment of debt, net of tax --- --- 403 ---
------------------ ------------------
NET INCOME (LOSS) AFTER EXTRAORDINARY ITEM $ 12,374 $ (3,542) $ 36,605 $ 15,401
================== ==================
EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM:
Primary $ 0.35 $ (0.11) $ 1.06 $ 0.43
Fully diluted 0.35 (0.11) 1.05 0.43
================== ==================
EARNINGS (LOSS) PER SHARE AFTER EXTRAORDINARY ITEM:
Primary $ 0.35 $ (0.11) $ 1.05 $ 0.43
Fully diluted 0.35 (0.11) 1.04 0.43
================== ==================
DIVIDENDS PER SHARE $ 0.100 $ 0.064 $ 0.260 $ 0.171
================== ==================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Borrowings Unearned
Accumulated by Employee Employee
Common Stock Other Stock Stock Total
----------------- Paid-In Retained Comprehensive Ownership Ownership Treasury Stockholders'
Shares Amount Capital Income Income Plan Plan Shares Stock Equity
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
Dec. 31, 1995 35,155,752 $375 $140,991 $269,791 ($895) ($485) ($2,883) ($22,697) $384,197
Comprehensive income:
Net income - - - 15,401 - - - - 15,401
Change in unrealized
loss on securities,
(net of tax of
$2,130) - - - - (3,498) - - - (3,498)
--------------------------------------------------------------------------------------------
Comprehensive income - - 15,401 (3,498) - - - 11,903
Stock option
exercises 482,085 5 3,733 - - - - - 3,738
Cash dividends paid
to stockholders
($0.171 per share) - - - (5,830) - - - - (5,830)
ESOP loan repayment - - - - - 44 - - 44
Treasury stock
purchases (1,734,375) - - - - - - (22,421) (22,421)
---------------------------------------------------------------------------------------------------------
Balance at
Sept. 30, 1996 33,903,462 $380 $144,724 $279,362 ($4,393) ($441) ($2,883) ($45,118) $371,631
=========================================================================================================
Balance at
Dec. 31, 1996 34,163,988 $384 $148,265 $288,065 $2,278 ($396) ($2,883) ($47,603) $388,110
Comprehensive income:
Net Income - - - 36,605 - - - - 36,605
Change in unrealized
gain on securities,
(net of tax of
$533) - - - - 876 - - - 876
--------------------------------------------------------------------------------------------
Comprehensive income - - 36,605 876 - - - 37,481
Stock option
exercises 952,300 8 7,470 - - - - 1,901 9,379
Retirement of
fractional shares (1,881) - (34) - - - - - (34)
Retirement of
Treasury stock - (38) (41,177) - - - - 41,215 -
Cash dividends paid
to stockholders
($0.260 per share) - - - (8,806) - - - - (8,806)
Repayment of
ESOP principal - - - - - 140 - - 140
Treasury stock
purchases (981,025) - - - - - - (17,216) (17,216)
---------------------------------------------------------------------------------------------------------
Balance at
Sept. 30, 1997 34,133,382 $354 $114,524 $315,864 $3,154 ($256) ($2,883) ($21,703) $409,054
=========================================================================================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Sept. 30
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 36,605 $ 15,401
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 1,500
Provision for losses on foreclosed real estate - 943
Provision for depreciation 5,784 5,273
Assets originated and acquired for sale (27,509) (33,552)
Sale of assets held for sale 26,573 36,843
Increase in accrued interest receivable (1,033) (212)
(Increase) decrease in prepaid expenses and
other assets 751 (8,783)
Increase (decrease) in other liabilities (7,828) 26,039
Net amortization of yield adjustments (2,079) 6,988
Other items, net (10,972) (20,923)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 20,292 29,517
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal repayments on loans receivable 646,825 465,488
Loans originated and purchased for investment (901,178) (796,194)
Loans receivable sold 3,579 13,014
Principal repayments on available for sale mortgage-
backed securities 90,915 52,258
Principal repayments on held to maturity mortgage-
backed securities 79,243 124,007
Purchase of held to maturity mortgage-backed securities - (38,041)
Sale of available for sale mortgage-backed securities - 27,542
Maturities of available for sale investment securities 29,200 30,250
Purchase of available for sale investment securities (50,140) (20,191)
Additions to real estate (8,369) (14,167)
Real estate sold 8,544 37,696
(Purchase) sale of Federal Home Loan Bank stock (2,977) 1,093
Purchase of office properties and equipment (10,499) (8,336)
- -------------------------------------------------------------------------------
Net cash used in investing activities (114,857) (125,581)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of certificates of deposit 330,009 353,502
Payments for maturing certificates of deposit (367,779) (269,050)
Net decrease in other deposit products (11,128) (28,166)
New long-term borrowings 148,538 50,000
Repayment of long-term borrowings (75,852) -
Increase in short-term borrowings, net 164,686 49,715
Dividends paid to stockholders (8,806) (5,830)
Net proceeds from exercise of stock options 9,379 3,738
Purchase of treasury stock (17,216) (22,421)
Decrease in advance payments by borrowers
for taxes and insurance (10,738) (10,056)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 161,093 121,432
- -------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 66,528 25,368
Cash and cash equivalents at beginning of period 190,208 186,621
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 256,736 $ 211,989
===============================================================================
See notes to consolidated financial statements
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest credited on deposits $ 110,629 $ 93,797
Interest paid on deposits 9,379 8,507
----------------------
Total interest paid on deposits 120,008 102,304
Interest paid on borrowings 28,071 22,702
Income taxes paid, net 13,445 12,649
Real estate acquired through foreclosure 2,678 21,555
Loans originated in connection with real estate
acquired through foreclosure 910 19,806
</TABLE>
6
<PAGE> 7
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared
according to generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Management, all necessary adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation have been
included. The results of operations for the three- and nine-month periods
ended Sept. 30, 1997 are not necessarily indicative of the results expected for
the entire fiscal year.
2. The accompanying consolidated financial statements include the accounts of
St. Paul Bancorp, Inc. (the "Company" or "St. Paul Bancorp") and its
wholly-owned subsidiaries, St. Paul Federal Bank For Savings (the "Bank"),
Annuity Network, Inc. and St. Paul Financial Development Corporation. The
financial statements of the Bank include the accounts of its subsidiaries.
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
3. At Sept. 30, 1997, the Company had the following outstanding commitments to
originate loans (dollars in thousands):
<TABLE>
<S> <C>
1-4 Family Adjustable-Rate $ 10,056
1-4 Family Fixed-Rate 8,920
Income Property Loans Adjustable-Rate 11,455
Income Property Loans Fixed-Rate 16,831
Commercial Adjustable-Rate Construction 2,220
Consumer Loans 9,604
Unused Lines of Credit 97,058
</TABLE>
The Company held commitments, at Sept. 30, 1997, to purchase $189.5 million of
adjustable-rate, 1-4 family real estate loans and $2.7 million of
adjustable-rate income property loans.
The Company anticipates funding these origination and purchase commitments with
cash flow from operations and incremental borrowings as necessary.
The Bank held commitments, at Sept. 30, 1997, to sell $7.6 million of
fixed-rate, 1-4 family real estate loans. The consolidated financial
statements contain market value losses, if any, related to these commitments.
At Sept. 30, 1997, the Company has outstanding $9.2 million of standby letters
of credit on behalf of St. Paul Financial Development Corporation and other
borrowers or customers to various counties and villages as a performance
guarantee for land development and improvements.
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<PAGE> 8
4. The Company, from time to time, uses certain derivative financial
instruments. These financial instruments include interest rate exchange
agreements and forward loan sales commitments, and are used as risk management
tools to hedge certain assets and liabilities. Interest rate exchange
agreements are accounted for on an accrual basis. The recognition of any gain
or loss on termination of these agreements will be dependent on the disposition
of the related hedged asset or liability. The fair values of these agreements
are not recognized in the primary financial statements. Forward loan sale
commitments are accounted for at the lower of cost or market. The fair values
of all derivative financial instruments are disclosed annually in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 119, Disclosures
About Derivative Financial Instruments and Fair Value of Financial
Instruments."
5. During the first quarter of 1997, the Company adopted SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement provides accounting and reporting standards for
the sale, securitization, and servicing of receivables and other financial
assets and the extinguishment of liabilities. The adoption of this Statement
did not affect operations in a material way. The implementation of some of the
provisions of this Statement have been delayed until 1998 as required by SFAS
No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125.
6. In February 1997, the Financial Accounting Standards Board ("FASB")issued
SFAS No. 128, Earnings per Share, which is required to be adopted on December
31, 1997. Earlier adoption of this Statement is not allowed. Upon adoption,
the Company will be required to change the method used to compute earnings per
share and to restate all prior periods. Under the new requirements, the
Company will report basic and diluted earnings per share, in the place of the
currently reported primary and fully diluted earnings per share. Under SFAS
No. 128, the computation of basic earnings per share will exclude the dilutive
effect of common stock equivalents. Currently, the Company's only common stock
equivalents are stock options issued to employees and directors. Diluted
earnings per share will reflect the potential dilutive effect of stock options,
computed using the treasury stock method and the average market price of the
Company's common stock over the period. The following table presents earnings
per share after extraordinary item computed under SFAS No. 128:
<TABLE>
3rd Qtr 3rd Qtr YTD YTD
1997 1996 1997 1996
------- ------- ----- -----
<S> <C> <C> <C> <C>
Basic $0.37 $(0.11) $1.08 $0.45
Diluted $0.35 $(0.11) $1.05 $0.43
</TABLE>
The impact of this Statement on future earnings per share is largely dependent
on future share prices and the amount of stock options outstanding.
7. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This Statement consolidates existing guidance on
disclosures about the Company's capital structure into one Statement. SFAS No.
129 is effective for financial statements for periods ending after December 15,
1997. Because the Company already makes the disclosures required by this
Statement, the adoption will have no impact on the financial statements.
8
<PAGE> 9
8. During the third quarter of 1997, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. The provisions of this Statement become
effective in 1998, however, earlier adoption is allowed. This Statement
establishes standards for the reporting and display of comprehensive income and
its components in the full set of financial statements. This Statement affects
the display of comprehensive income in the financial statements and does not
address recognition or measurement of comprehensive income and its components.
The adoption of this Statement required the reclassification of prior
comparable periods.
9. Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting of financial information from operating segments in
annual and interim financial statements. This Statement requires that
financial information be reported on the basis that it is reported internally
for evaluating segment performance and deciding how to allocate resources to
segments. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will have
no material impact on the financial statements. SFAS No. 131 will become
effective in 1998.
10. All share and per share amounts have been restated for a five-for-four
stock split distributed to stockholders on Jan. 14, 1997 and a three-for-two
stock split distributed to stockholders on July 14, 1997.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
St. Paul Bancorp, Inc. (the "Company") is the holding company for St. Paul
Federal Bank For Savings (the "Bank"), the largest independent savings
institution in the State of Illinois. At Sept. 30, 1997, the Company reported
total assets of $4.5 billion. The Bank operates 52 branches in the Chicago
metropolitan area, comprised of 35 free-standing offices and 17 banking offices
located in Dominick's(R) and Cub(R) supermarkets. The Bank operates one of the
largest networks of ATMs in the metropolitan Chicago area with 448 ATMs. The
Bank also services approximately 180,000 checking accounts and 26,000 loans as
of Sept. 30, 1997.
The Bank will be increasing the size of its branch network during the
fourth quarter of 1997, with the opening of its first "Money Connection Center"
located in a storefront within the City of Chicago. The Bank is considering
two additional Chicago locations for store-front branches, and will seek
opportunities for additional locations in the future. Storefront branches
require a significantly lower initial capital investment as compared to
traditional free-standing offices. The Bank is also negotiating with a retail
store chain to install ATMs in approximately 40 stores beginning in 1998.
Both the Company and the Bank continued to operate other wholly owned
financial services companies, including Investment Network, Inc., Annuity
Network, Inc., SPF Insurance Agency, Inc., and St. Paul Financial Development
Corporation ("SPFD"). As of Sept. 30, 1997, customers maintained $638 million
of investments through Investment Network, Inc. and $336 million of annuity
contracts through Annuity Network, Inc. SPFD is primarily a residential land
development company focused in the greater Chicagoland area and, from time to
time, participates in commercial real estate development projects. At Sept.
30, 1997, SPFD had $32.0 million in real estate equity and financing
investments.
In general, the business of the Bank is to reinvest funds obtained from
its retail banking facilities into interest-yielding assets, such as loans
secured by mortgages on real estate, securities, and to a lesser extent,
consumer and commercial real estate loans. The Bank's 1-4 family residential
mortgage products are originated through its retail banking offices and
telephone banking
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<PAGE> 11
facility, as well as a correspondent loan program in the Chicago
metropolitan area and other Midwestern states (including Wisconsin, Indiana,
Michigan and Ohio). The Bank also originates a variety of consumer loan
products, including home equity loans, secured lines of credit, education,
automobile and credit card loans through the retail banking offices. The Bank
has also entered into agreements to sell lesser quality home equity and
automobile loans to third parties rather than retaining them for its portfolio.
During the first nine months of 1997, the Bank originated $153.0 million of 1-4
family loans, $54.0 million of home equity/line of credit loans, and $8.6
million of other consumer loans.
The Bank offers mortgage loans to qualifying borrowers to finance
apartment buildings and to a much lesser extent, commercial real estate. In
recent years, the Bank made these income property loans in several Midwestern
states, such as Illinois, Indiana, Wisconsin, Minnesota, and Ohio. In 1997,
the Bank's Board of Directors provided for a limited expansion of the Bank's
nationwide income property lending program. The Board has authorized the
origination of new loans in those markets where Management believes the
economies are strong and where the Bank currently has an income property
servicing portfolio or to borrowers with whom the Bank has a long standing
relationship. During the third quarter of 1997, the Board of Directors also
approved a program to originate loans secured by industrial, office, and, to a
lesser extent, shopping center properties located in the Midwest. See "CREDIT
RISK MANAGEMENT" for further details. During the first nine months, the Bank
originated $172.1 million of income property loans.
To supplement its loan origination efforts, the Bank has actively
purchased 1-4 family adjustable rate whole loans for its portfolio. During the
first three quarters of 1997, the Bank purchased $507.0 million of 1-4 family
adjustable rate loans located nationally.(1) The Bank also invests in
mortgage-backed securities ("MBS"), government and other investment-grade,
liquid investment securities. The Bank classified investment securities as
either available for sale ("AFS") or held to maturity ("HTM") under Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity
- ---------------------
(1) Also, during October 1997, the Bank purchased an additional $189.5
million of adjustable rate 1-4 family whole loans.
11
<PAGE> 12
Securities. Under SFAS No. 115, unrealized gains and losses on AFS
securities are recorded as an adjustment to stockholders' equity, net of
related taxes.
As a consumer-oriented retail financial institution, the Bank gathers
deposits from the neighborhoods and surrounding suburbs of the metropolitan
Chicago area, which have favorable savings patterns and high levels of home
ownership. The Bank offers a variety of deposit products including checking,
savings, money market accounts, and certificates of deposit ("CDs"). The Bank
also borrows to help fund operations and interest earning asset growth.
Earnings of the Bank are susceptible to interest rate risk to the extent
that the Bank's deposits and borrowings reprice on a different basis and in
different periods than its securities and loans. Prepayment options embedded
in loans and MBS and varying demand for loan products, due to changes in
interest rates, create additional operating risk for the Bank in matching the
repricing of its assets and liabilities. The Bank tries to structure its
balance sheet to reduce exposure to interest rate risk and to maximize its
return on equity, commensurate with risk levels that do not jeopardize the
financial safety and soundness of the institution.
Changes in real estate market values also affect the Bank's earnings. As
changes occur in interest rates, the forces of supply and demand for real
estate, and the economic conditions of real estate markets, the risk of actual
losses in the Bank's loan portfolio will also change. See "CREDIT RISK
MANAGEMENT" for further details.
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing itself of the protection of the safe harbor
with respect to all of such forward-looking statements. These forward-looking
statements describe future plans or strategies and include the Company's
expectations of future financial results. The Company's ability to predict
results or the effect of future plans or strategies is inherently uncertain.
Factors that could affect actual results 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 the Federal Reserve, v) changes in the quality or composition of
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<PAGE> 13
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. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
The Company does not undertake and specifically disclaims any obligation
to update any forward-looking statements to reflect occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.5 billion at Sept. 30, 1997,
a $191.3 million or 4.4% increase over total assets reported at Dec. 31, 1996.
Higher loans receivable, cash and cash equivalents and investment securities
generally produced the increase in total assets. These increases were partly
offset by lower MBS balances.
Cash and cash equivalents totaled $256.7 million at Sept. 30, 1997, $66.5
million higher than Dec. 31, 1996. See "CASH FLOW ACTIVITY" for further
details. The Bank increased cash and cash equivalent balances at Sept. 30,
1997 to help fund additional 1-4 family loan acquisitions during October 1997.
Investment securities, comprised of U.S. Treasury and agency debt
securities and other marketable equity securities, totaled $70.6 million at
Sept. 30, 1997, as compared to $49.1 million at Dec. 31, 1996. Additional
purchases of debt and equity securities produced the increase. At both Sept.
30, 1997 and Dec. 31, 1996, all of the Company's investment securities were
classified as AFS. The Company recorded an unrealized gain of $442,000 on AFS
investment securities at Sept. 30, 1997, compared to an unrealized loss of
$137,000 at Dec. 31, 1996.
MBS totaled $993.0 million at Sept. 30, 1997, $170.0 million or 14.6% less
than the $1.16 billion of MBS at Dec. 31, 1996. Principal repayments produced
the lower balance. The weighted average yield on the MBS portfolio
was 7.04% at Sept. 30, 1997, or 12 basis points higher than the weighted
average yield at Dec. 31, 1996. Lower scheduled amortization of net premiums
and a modest amount of repricing in the adjustable rate portfolio produced the
increase in the weighted
13
<PAGE> 14
average rate since Dec. 31, 1996. The Bank's MBS portfolio at Sept. 30,
1997, included $340.1 million of loans originated and serviced by the Bank.
Approximately 54% of the MBS portfolio is classified as AFS, and at Sept.
30, 1997, the Company reported an unrealized gain on its AFS MBS of $4.6
million compared to an unrealized gain of $3.8 million at Dec. 31, 1996. At
Sept. 30, 1997, 75% of the MBS portfolio had adjustable rate characteristics
(although some may be performing at initial fixed interest rates), compared to
77% of the portfolio at Dec. 31, 1996.
Net loans receivable totaled $3.0 billion at Sept. 30, 1997, $260.9
million or 9.4% higher than the $2.8 billion of loans receivable at Dec. 31,
1996. The purchase of $514.6 million of loans and the origination of another
$386.6 million of loans, partly offset by $646.8 million of principal
repayments, primarily produced the increase in loans receivable since year end
1996. See "CASH FLOW ACTIVITY" for further discussion.
The weighted average rate on loans receivable decreased to 7.55% at Sept.
30, 1997 from 7.66% at Dec. 31, 1996. The repayment of higher yielding loans
and the purchase and origination of loans at rates lower than the portfolio
average produced a decline in the weighted average rate. At Sept. 30, 1997,
85% of the mortgage loan portfolio had adjustable rate characteristics compared
to 82% at Dec. 31, 1996.
Office properties and equipment increased $4.7 million, or 10.0% to $52.0
million at Sept. 30, 1997, from $47.3 million at Dec. 31, 1996. The purchase
of a 70,000 square foot office facility, located in a Northwest suburb of
Chicago, to replace a leased property used as an operations center, produced
the increase. See "RESULTS OF OPERATIONS" for further details.
Deposits totaled $3.3 billion at Sept. 30, 1997, $48.9 million or 1.5%
lower than deposit balances at Dec. 31, 1996. Most of the decrease in deposit
balances since year-end 1996 occurred in the second and third quarters as a
portion of the certificates of deposit ("CDs") portfolio matured. The weighted
average cost of deposits increased to 4.32% at Sept. 30, 1997 from 4.31% at
Dec. 31, 1996. The increase was primarily related to higher rates paid on CD
balances since Dec. 31, 1996.
14
<PAGE> 15
Total borrowings, which include FHLB advances, totaled $799.0 million at
Sept. 30, 1997, $237.8 million or 42.4% higher than the $561.2 million of
borrowings at Dec. 31, 1996. The increase was largely due to the use of
borrowings by the Bank to fund whole loan purchases. In addition, during the
first quarter of 1997, the Company issued $100 million of unsecured 7.125%
senior notes due in 2004. A portion of the proceeds was used in March 1997 to
redeem, at par, the Company's $34.5 million of 8.25% subordinated notes due in
2000. See "RESULTS OF OPERATIONS" for further details on the extraordinary
loss on the early extinguishment of this debt.
The combined weighted average cost of borrowings declined to 6.15% at
Sept. 30, 1997 from 6.22% at Dec. 31, 1996, due primarily to the increased use
of the lower-costing short-term borrowings, and the repayment of the
subordinated notes. See "CASH FLOW ACTIVITY" for further discussion.
Stockholders' equity of the Company was $409.1 million at Sept. 30, 1997
or $11.98 per share. In comparison, stockholders' equity at Dec. 31, 1996 was
$388.1 million or $11.36 per share. The $20.9 million increase in
stockholders' equity during the nine months ended Sept. 30, 1997 resulted from
$36.6 million of net income and $9.4 million of capital provided by the
exercise of stock options granted to employees and directors. These increases
were partly offset by the repurchase of $17.2 million of the Company's common
stock and dividends paid to shareholders of $8.8 million. See "CAPITAL" and
"CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further analysis.
During the second quarter of 1997, the Company declared a three-for-two
stock split, distributed on July 14, 1997 to stockholders of record as of June
30, 1997. The purpose of the stock split was to enhance liquidity of the
Company's common stock and to make the Company's stock more affordable for
retail investors. Prior to the distribution of the three-for-two stock split,
the Company retired 3.75 million shares (split adjusted) of treasury stock. In
addition, the Board of Directors raised the quarterly dividend rate by 25% over
the previous quarterly dividend rate, on a split adjusted basis. The new
quarterly dividend rate of $0.10 per share began with the dividend paid in the
third quarter of 1997.
15
<PAGE> 16
During the first nine months of 1997, the Company continued with its stock
repurchase program by acquiring 981,025 shares of Company common stock, at a
weighted average price of $17.55. As of Sept. 30, 1997, under the current
program, the Company has purchased 1,149,775 shares (at a weighted average
price of $17.13) of the 1,687,500 share goal. Under all purchase programs, the
Company spent $64.7 million to reacquire 5.2 million shares at a weighted
average price of $12.43 per share. See "CASH FLOW ACTIVITY -- HOLDING COMPANY
LIQUIDITY" for further details.
See "CREDIT RISK MANAGEMENT" for discussion of foreclosed real estate
balances.
CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additionally
discretionary) actions by the regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements and therefore the
Company's financial statements. Under capital adequacy guidelines and
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. The Bank's capital amounts and classification also are
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets. As
of Sept. 30, 1997, Management believes that the Bank meets all capital adequacy
requirements to which it is subject.
As of Sept. 30, 1997, the Bank meets the requirements of the Office of
Thrift Supervision ("OTS") to be categorized as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based capital ratios,
16
<PAGE> 17
Tier I risk-based ratios, and Tier I leverage ratios(2) as set forth in the
table below. The Bank's actual amounts and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
-------------- ------------------ ------------------
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
As of Sept. 30, 1997 -------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 413,946 16.65% >$ 198,941 >8.00% >$ 248,676 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 382,848 15.39% >$ 99,516 >4.00% >$ 149,274 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 382,848 8.60% >$ 178,039 >4.00% >$ 222,548 > 5.00%
- - - -
As of Dec. 31, 1996
Total Capital
(to Risk Weighted Assets) $ 409,266 17.27% >$ 189,562 >8.00% >$236,953 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 379,645 16.02% >$ 94,787 >4.00% >$ 142,181 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 379,645 8.80% >$ 172,647 >4.00% >$ 215,809 > 5.00%
- - - -
</TABLE>
The following schedule reconciles stockholders' equity of the Company to
the components of regulatory capital of the Bank at Sept. 30, 1997:
<TABLE>
<CAPTION>
Sept. 30,
Dollars in thousands 1997
- -------------------------------------------------------------------------------
<S> <C>
Stockholders' equity of the Company $ 409,054
Less: capitalization of the Company
and non-Bank subsidiaries (17,528)
- -------------------------------------------------------------------------------
Stockholder's equity of the Bank 391,526
Less: unrealized gain on
available for sale securities (2,925)
Less: investments in non-includable
subsidiaries (1,587)
Less: intangible assets (4,166)
- -------------------------------------------------------------------------------
Tangible and core capital 382,848
Plus: allowable GVAs 31,098
- -------------------------------------------------------------------------------
Risk-based capital $ 413,946
===============================================================================
</TABLE>
In an attempt to address the interest rate risk inherent in the balance
sheets of insured institutions, the OTS proposed a regulation that adds an
- --------------------
(2) In addition to the Tier I leverage ratio, the Bank must maintain a
ratio of tangible capital to regulatory assets of 1.50%. As of Sept. 30, 1997,
the Bank's tangible capital ratio of 8.60% exceeded the minimum required ratio.
17
<PAGE> 18
interest rate risk component to the risk-based capital requirement for excess
interest rate risk. Under this proposed regulation, which has not yet been
implemented, an institution is considered to have excess interest rate risk if,
based upon a 200 basis point change in market interest rates, the market value
of an institution's capital changes by more than 2%. If a change greater than
2% occurs, one-half of the percent change in the market value of capital in
excess of 2% is added to the institution's risk-based capital requirement. At
Sept. 30, 1997, the Bank had $215.0 million of excess risk-based capital
available to meet any additional capital requirement.
The OTS has issued notice of a proposed regulation that would require all
but the most highly rated savings institutions to maintain a ratio of core
capital to total assets of between 4% and 5% to conform to the prompt
corrective action requirement and allow the Bank to be deemed at least
"adequately capitalized." Even at a 4% core capital ratio requirement as of
Sept. 30, 1997, the Bank would have excess core capital of $204.8 million. The
Bank presently intends to maintain a ratio of core capital to total assets of
at least 7%.
Under the Federal Deposit Insurance Corporation Improvement Act, the OTS
recently published regulations to ensure that its risk-based capital standards
take adequate account of concentration of credit risk, risk from nontraditional
activities, and actual performance and expected risk of loss on multifamily
mortgages. These rules allow the regulators to impose, on a case-by-case
basis, an additional capital requirement above the current requirements where
an institution has significant concentration of credit risk or risks from
nontraditional activities. The Bank is currently not subject to any additional
capital requirements under these regulations.
The OTS may establish capital requirements higher than the generally
applicable minimum for a particular savings institution if the OTS determines
the institution's capital was or may become inadequate in view of its
particular circumstances. Individual minimum capital requirements may be
appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses safety
or soundness concerns. The Bank has no such requirements.
18
<PAGE> 19
CASH FLOW ACTIVITY
Sources of Funds The major sources of funds during the first nine months of
1997 included $817.0 million of principal repayments on loans receivable and
MBS, $330.0 million from the issuance of CDs, a $237.4 million net increase in
borrowings, and $29.2 million from maturing AFS investment securities.
During the first nine months of 1997, repayments of loans receivable and
MBS totaled $817.0 million, compared to $641.8 million during the first nine
months of 1996. Most of the increase resulted from higher repayments on income
property loans. Repayments on these loans totaled $285.4 million in the first
nine months of 1997, compared to $130.2 million for the first nine months of
1996. Higher repayments resulted from the scheduled maturity of a significant
portion of this portfolio in 1997. Repayments in the 1-4 family loan and MBS
portfolios increased slightly to $522.3 million during the first nine months of
1997 from $500.3 million during the same period in 1996. The Bank has
experienced a high level of repayments in these portfolios on the
adjustable-rate loans that have low initial interest rate of 1 to 5 years as
borrowers refinance before the introductory interest rate resets. In addition,
higher average balances also contributed to the increase in the level of
payoffs.
The issuance of CDs during the first nine months of 1997 totaled $330.0
million, slightly less than the issuance of $353.5 million of CDs during the
same period in 1996. The Bank continues to rely on CDs as a source of funds.
The Bank uses special promotions and features to attract depositors to CDs.
The Bank emphasizes the sale of short-term products and the entire CD portfolio
has a weighted average maturity of eleven months.
During the first nine months of 1997, net borrowings increased by $237.4
million, as compared to a $99.7 million net increase during the first nine
months of 1996. During the first quarter of 1997, the Company issued $100
million of 7.125% senior notes. A portion of the proceeds was used to repay
the $34.5 million of 8.25% subordinated notes. In addition, the Bank used
borrowing balances to fund a significant portion of the whole loan
acquisitions. See "STATEMENT OF FINANCIAL CONDITION" for further details.
19
<PAGE> 20
The maturity of $29.2 million of investment securities also provided
additional liquidity during 1997. In comparison, during the same nine month
period in 1996, $30.3 million of funds were provided by the maturity of
investment securities.
Uses of Funds. The major uses of funds during the nine months ended Sept. 30,
1997 included $901.2 million of loans originated and purchased for investment,
$367.8 million of payments for maturing CDs, $50.1 million for the purchase of
AFS investment securities, $17.2 million for the purchase of treasury stock,
and $10.5 million for additions to office properties and equipment.
Loans originated and purchased for investment totaled $901.2 million
during the first nine months of 1997, compared to $796.2 million during the
same period of 1996. The Bank purchased $514.6 million of mortgage loans during
the first nine months of 1997 as part of Management's strategy to replace loan
repayments and build interest earning asset levels. Loans originated for
investment during the first nine months of 1997 from retail operations and
correspondent operations were $341.9 million and $45.8 million, respectively.
In comparison, loans originated for investment from retail and correspondent
operations in the first nine months of 1996 were $246.2 million and $138.8
million, respectively. Higher income property loan originations and special
1-4 family fixed-rate loan origination programs produced the increase in loan
originations from the retail operations. While greater emphasis on the retail
network produced the decline in originations from the correspondent network.
Payments for maturing CDs increased from $269.1 million during the nine
months ended Sept. 30, 1996 to $367.8 million during the first nine months of
1997. The scheduled maturity of some of the Bank's higher rate CD products
produced the increase in payments for maturing CDs. CD balances declined in
the second and third quarters of 1997 when CDs issued during 1996 promotions
matured. Also, checking, savings and money market account balances decreased
$11.1 million during the first nine months of 1997, compared to a decrease of
$25.2 million during the first nine months of 1996.
In addition, during the first nine months of 1997, $50.1 million of funds
were used to purchase AFS investment securities. In comparison, during the same
20
<PAGE> 21
period in 1996, $20.2 million of funds were used to purchase AFS investment
securities.
During the first nine months of 1997, the Company used $17.2 million of
funds to acquire 981,025 shares of its own common stock. See "HOLDING COMPANY
LIQUIDITY" following for further details. In comparison, the Company used
$22.4 million to acquire 1,734,375 of its own common stock during the first
nine months of 1996.
The Company increased office property and equipment expenditures to $10.5
million in the first nine months of 1997 from $8.3 million in the same period
in 1996. Additions in 1997 included the purchase of a $5.4 million, 70,000
square foot office facility to be used as an operations center. For further
details on the new operations center and planned additions to the Bank's branch
network, see "RESULTS OF OPERATIONS -- GENERAL AND ADMINISTRATIVE EXPENSE".
Holding Company Liquidity. At Sept. 30, 1997, St. Paul Bancorp, the "holding
company," had $36.6 million of cash and cash equivalents, which included
amounts due from depository institutions and investment securities with
original maturities of less than 90 days. In addition, the Company has $20.5
million of investment securities classified as AFS. The Company also maintains
a $20.0 million revolving line of credit agreement from another financial
institution. At Sept. 30, 1997, no funds have been borrowed under this
agreement.
Sources of liquidity for St. Paul Bancorp during the first nine months of
1997 included $98.6 million from the issuance of senior debt, $35.9 million of
dividends from the Bank and $1.8 million of dividends from SPFD and Annuity
Network, Inc. Uses of St. Paul Bancorp's liquidity during the first nine
months of 1997 included advances to the Bank of $28.7 million(3), the repayment
of $34.5 million of subordinated debt, the $20.2 million purchase of investment
securities, the acquisition of $17.2 million of Company common stock under the
stock repurchase program, $13.8 million of advances to SPFD, and $8.8 million
of dividends paid to stockholders.
- --------------------
(3) During 1997, the Company used its excess liquidity to advance funds to
the Bank for use in the Bank's operation. The advance is due upon demand and
earns a rate of interest comparable to what the Company could earn on its
investment portfolio.
21
<PAGE> 22
Under the current stock repurchase program, which was announced during
1996, the Company has acquired 1,149,775 (at a weighted average price of
$17.13) of the stated 1,687,500 share goal. The program will run through
December 1997.
Regulatory Liquidity Requirements. Savings institutions must maintain average
daily balances of liquid assets equal to a specified percentage of the
institution's average net withdrawable deposits plus short-term borrowings.
Liquid assets include cash, certain time deposits, federal funds sold, certain
corporate debt securities, and securities of specified United States
government, state, or federal agency obligations. The Director of the OTS can
change this liquidity requirement from time to time to any amount within the
range of 4% to 10% of average deposits and short-term borrowings depending upon
the economic conditions and the deposit flows of savings institutions. The
current liquidity requirement is 5% of average deposits and short-term
borrowings. The Bank's regulators have recently issued a proposal to reduce
the current liquidity requirement. At Sept. 30, 1997, the Bank had $265.0
million invested in liquid assets, which exceeded the current requirement by
$72.4 million. Up to certain limits, the Bank can use FHLB advances,
securities sold under agreements to repurchase, and the issuance of
mortgage-backed notes as additional sources of liquidity.
22
<PAGE> 23
RATE/VOLUME ANALYSIS
The following tables present the components of the changes in net interest
income by volume and rate(4) for the three and nine months ended Sept. 30, 1997
and 1996:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, 1997 and 1996 Sept. 30, 1997 and 1996
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
--------------------------------- ---------------------------------
TOTAL TOTAL
Dollars in thousands VOLUME RATE CHANGE VOLUME RATE CHANGE
- -------------------------------------------------------------------- ---------------------------------
CHANGE IN INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 931 $ (160) $ 771 $ 2,097 $ (1,751) $ 346
Mortgage-backed securities 3,349 1,112 4,461 9,574 4,739 14,313
Investment securities (152) 139 (13) (652) 430 (222)
Federal funds and interest-bearing
bank balances 630 38 668 1,855 38 1,893
Other short-term investments (5) 41 36 (375) 225 (150)
-------- -------- -------- -------- -------- --------
Total interest income 4,753 1,170 5,923 12,499 3,681 16,180
CHANGE IN INTEREST EXPENSE:
Deposits 256 489 745 2,380 882 3,262
Short-term borrowings 3,263 108 3,371 6,319 222 6,541
Long-term borrowings 139 (129) 10 715 (351) 364
-------- -------- -------- -------- -------- --------
Total interest expense 3,658 468 4,126 9,414 753 10,167
-------- -------- -------- -------- -------- --------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $ 1,095 $ 702 $ 1,797 $ 3,085 $ 2,928 $ 6,013
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(4) This analysis allocates the change in interest income and expense
related to volume based upon the change in average balance and prior period's
applicable yield or rate paid. The change in interest income and expense
related to rate is based upon the change in yield or rate paid and the prior
period's average balances. Changes due to both rate and volume have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each. The effect of nonperforming
assets has been included in the rate variance. Average balances exclude the
effect of unrealized gains and losses.
23
<PAGE> 24
RESULTS OF OPERATIONS
General. Net income for the third quarter of 1997 was $12.4 million or $0.35
per share compared to a net loss of $3.5 million or $0.11 per share during the
same quarter in 1996. Operating results in the year ago quarter included a
$21.0 million one-time charge for the Bank's share of a special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"). See "GENERAL AND
ADMINISTRATIVE EXPENSE" following for further details. Third quarter 1997
operating results represents a 19.4% increase over third quarter 1996 earnings
excluding the SAIF charge, which would have been $10.4 million or $0.29 per
share. Net income for the first nine months of 1997 totaled $36.6 million or
$1.05 per share compared to $15.4 million or $0.43 per share during the first
nine months of 1996 including the SAIF charge. Without considering the
one-time charge, year-to-date 1997 earnings rose 24.9% from proforma
year-to-date 1996 earnings of $29.3 million or $0.82 per share. For both the
quarter and year-to-date periods, the higher level of net income resulted from
higher net interest income and other operating income, as well as a lower
provision for loan losses. Operating results during 1997 also included a
$403,000 extraordinary loss, net of tax, on the early extinguishment of the
Company's $34.5 million of subordinated notes.
Net Interest Income. Net interest income totaled $33.2 million during the
third quarter of 1997, a 5.7% increase from the $31.4 million of net interest
income recorded during the same quarter in 1996. For the nine month period
ending Sept. 30, 1997, net interest income was $98.9 million, $6.0 million or
6.5% higher than during the same period in 1996. In both the quarter and
year-to-date periods, net interest income benefited from expanded interest
earning asset levels. Management continued to focus its attention on
increasing interest earning assets through the purchase of adjustable rate 1-4
family whole loans. Average interest earnings assets levels increased $251
million to $4.3 billion in the nine month period ended Sept. 30, 1997 from same
nine month period in 1996. This growth in interest earning assets was mainly
funded with additional borrowings.
24
<PAGE> 25
The net interest margin ("NIM") was 3.04% during the third quarter of
1997, compared to 3.07% during the same quarter in 1996. The NIM for the first
nine months of 1997 was 3.07%, level with the NIM during the year-to-date
period in 1996. In both the quarter and year-to-date periods, the NIM
benefited from the expanded interest earning asset levels and an increase in
the overall asset yield. The higher asset yields were mainly associated with
an increase in the MBS portfolio yield as amortization of net premiums
decreased. However, heavier reliance on borrowings, the highest costing
interest-bearing liability, and rising deposit costs put downward pressure on
the NIM. A larger increase in the effective cost of deposit costs and in
average borrowing balances for the quarterly comparison caused the NIM to
contract by 3 basis points, while the year-to-date comparison was flat.
Interest Income. Interest income on loans receivable increased slightly in
both the quarter and year-to-date periods. For the third quarter, loan
interest income rose $771,000 to $59.6 million, while during the year-to-date
period, loan interest income increased by $346,000 to $169.8 million. In both
periods, average loan balances increased, but the effective yield earned on
loans decreased. Average loan balances increased $48.8 million to $3.1 billion
during the third quarter, as compared to the same quarter a year ago, while
year-to-date average balances rose by $36.6 million. The Bank increased
average loan balances through the acquisition of whole loans, including the
purchase of $514.6 million of loans during the first nine months of 1997.
However, the growth in average loan balances has been limited because of the
securitization of $381 million of loans into MBS at the end of December 1996
and an increase in the amount of loan repayments. A decline in the effective
loan yield partly offset the increase to loan interest income from higher
average balances. The loan yield was 7.64% during the third quarter of 1997,
or 2 basis points lower than during the third quarter in 1996, while the
year-to-date loan yield declined 8 basis points to 7.61% over the same nine
month period in 1996. For both periods, the repayment of higher rate loans and
the purchase and origination of loans at weighted average rates less than the
portfolio average contributed to the lower yields. In addition, the loan
securitization transferred higher yielding loan balances into MBS, further
reducing the loan yield, but causing the MBS yield to increase.
25
<PAGE> 26
MBS interest income increased significantly during the quarter and
year-to-date periods due to higher average balances and effective yields. MBS
interest income rose 33.4% during the third quarter of 1997 to $17.8 million
and year-to-date interest income increased by 34.0% to $56.4 million. Average
MBS balances increased by $197.1 million and $190.3 million during the quarter
and year-to-date periods, respectively. The increase resulted from the $381
million loan securitization at the end of 1996, partly offset by principal
repayments. The effective MBS yield rose by 50 basis points during the third
quarter of 1997 to 6.92%, while the year-to-date yield rose by 66 basis points
to 6.93%. The higher yields were associated with lower amortization of net
premiums and the addition of the new securities that had a weighted average
rate higher than the rate on the entire MBS portfolio.
Interest income from investments increased $691,000 during the current
quarter and $1.5 million during the first nine months of 1997, when compared to
the same periods in 1996, due to higher average balances and effective yields.
Average investment balances increased $36.3 million and $24.1 million during
the third quarter and first nine months of 1997, respectively. Most of the
increase in average balances was associated with higher fed fund and
interest-bearing bank balances, as the Company increased liquidity. Higher
yields earned on new investment securities and the maturities of lower rate
securities, produced the increase in yield.
Interest Expense. Both higher average balances and effective deposit costs
produced the increase in deposit expense. Deposit interest expense rose
$745,000 to $35.5 million during the third quarter of 1997 compared to the same
period a year ago, while year-to-date expense rose by $3.3 million to $107.0
million. Average deposit balances rose by $24.0 million to $3.3 billion during
the third quarter of 1997 and $74.4 million during the nine month period ending
Sept. 30, 1997. Deposit balances increased during 1996 and into the first
quarter of 1997, as the Bank focused on CD sales as a source of funds.
However, deposit balances have decreased in both second and third quarters of
1997, and Sept. 30, 1997 period-end deposit balances were relatively level with
Sept. 30, 1996. As a result, average balances in the year-to-date comparison
increased more than in the third quarter comparison. The greater reliance on
CDs, the highest costing
26
<PAGE> 27
deposit product, and an increase in the weighted average CD rate also
contributed to an increase in the effective cost of deposits. The effective
cost of deposits increased 6 basis points during the third quarter of 1997
and 4 basis points during the first nine months of 1997.
Higher average borrowing balances produced the increase in borrowing
interest expense in both the quarter and year-to-date periods. During the
third quarter of 1997, borrowing expense rose by $3.4 million to $12.1 million
and year-to-date expense increased $6.9 million to $30.5 million as compared to
the same periods a year ago. Average balances rose by $229.3 million during
the current quarter to $777.2 million, while year-to-date average balances
increased $159.2 million to $653.1 million. Management relied on borrowings,
particularly short-term borrowings, to fund a significant portion of the whole
loan acquisitions. The increase in short-term borrowings, which are generally
lower costing than the long-term borrowings, also produced a decline in the
effective cost of borrowings. The effective cost declined 13 basis points
during the third of 1997 compared to the year ago quarter, and 14 basis points
in the year-to-date periods. In addition, lower long-term borrowing costs also
contributed to the overall decline in borrowing costs. (5)
Interest Rate Spread. The Bank's ability to sustain current net interest
income levels during future periods is largely dependent on maintaining the
interest rate spread, which is the difference between weighted average rates on
interest earning assets and interest bearing liabilities. The interest rate
spread was 2.63% at Sept. 30, 1997, compared to 2.78% at Dec. 31, 1996 and
2.75% at Sept. 30, 1996. The decline in the interest rate spread was produced
by a combination of higher interest bearing liability costs and a decline in
the weighted average loan rate. The heavier reliance on borrowings as a source
of funds and rising deposit cost produced the higher liability costs. The
repayment of higher rate loans and the purchase and origination of loans at
rates below the portfolio average produced the lower weighted average loan rate.
- ---------------------
(5) In February of 1997, the Company issued $100 million of 7.125% senior
notes. A portion of the proceeds from the senior notes were used on Mar. 31,
1997 to redeem, at par, the Company's $34.5 million of 8.25% subordinated
notes. The benefit from this repayment of the higher costing borrowings did
not begin to impact borrowing expense until the second quarter of 1997.
27
<PAGE> 28
External forces, such as the performance of the economy, actions of the
Board of Governors of the Federal Reserve System, and market interest rates,
can significantly influence the size of the interest rate spread and are beyond
the control of Management. In response to these forces, Management evaluates
market conditions and deploys strategies that it believes will produce a
sustainable and profitable interest rate spread.
Management also believes that several product-related factors will
continue to impact the interest rate spread. First, the Bank has $1.1 billion
of "adjustable" rate loans and MBS that have initial fixed interest rate
periods ranging from three to seven years. At Sept. 30, 1997, only $85.1
million of these loans and MBS were scheduled to reprice during the ensuing
twelve months. If interest rates remain at current levels at the time of
repricing, the Bank may experience an increase in the yields, but could also
experience higher prepayments.
Second, approximately $272.9 million of adjustable rate 1-4 family and
multifamily loans are at their interest rate floors. These loans will not
reprice until their fully indexed interest rate exceeds the floor rate. (6)
Third, $1.0 billion of the Company's assets are tied to movements that lag
behind the movements in market interest rates. In general, this condition
benefits the Bank's asset yields as market rates decrease, but constrains
repricing as interest rates increase.
Lastly, nearly all adjustable rate loans and MBS contain periodic and
lifetime interest rate caps that limit the amount of upward repricing on loans
- -----------------------------
(6) At Sept. 30, 1997, the weighted average fully indexed rate on these
loans was 7.45% and the weighted average floor was 8.04%. These interest rate
floors benefited net income by $435,000 during the third quarter of 1997 and
$1.8 million for the first nine months of 1997. The floors also increased the
NIM and interest rate spread during 1997 by 6 basis points. In comparison, at
Sept. 30, 1996, the Bank had $415.4 million of loans at their floors, which
benefited interest income by $835,000 during the third quarter of 1996 and $2.3
million during the first nine months of 1996. In addition, the floors
increased the NIM and interest rate spread during the first nine months of 1996
by 8 basis points.
28
<PAGE> 29
and MBS. Most of the annual interest caps in the Bank's loan and MBS portfolio
are 2%. At Sept. 30, 1997, only $19.5 million of loans and MBS are at their
periodic or lifetime interest rate caps.
On the liability side, the Company has $633.1 million of borrowings that
are scheduled to reprice during the next six months and a CD portfolio of $2.0
billion that has a weighted average remaining maturity of 11 months. The
Company also has $1.3 billion of deposits in checking, savings, and money
market accounts that are expected to help mitigate the effect of a rapid change
in interest rates.
Traditionally, financial institutions have used "GAP" analysis as a
measure of interest rate sensitivity. GAP is the ratio of interest rate
sensitive assets to interest rate sensitive liabilities over a specified time
horizon, expressed as a percentage of total assets. At Sept. 30, 1997, the
Company maintained a one-year negative GAP of 7.66%, suggesting that net
interest income would decrease if market rates were to increase. See
"ASSET/LIABILITY REPRICING SCHEDULE" following for further details.
Provision for Loan Losses. Due to continued positive trends in credit quality,
the Company recorded no provision for loan losses during the third quarter or
the year-to-date 1997 periods. See "CREDIT RISK MANAGEMENT" for further
discussion of loss provisions and adequacy of the accumulated provisions for
losses. In comparison, the Company recorded a $500,000 provision for loan loss
during the third quarter of 1996 and a $1.5 million provision during the first
nine months of 1996.
Other Income. An increase in other income contributed to the higher level of
net income for both the third quarter and year-to-date 1997 periods. Other
income for the current quarter of 1997 was $11.1 million, $2.2 million or 24.4
percent higher than during the same quarter a year ago. Year-to-date 1997
other income was $32.6 million, $5.9 million or 22.2% higher than during the
same period during 1996.
29
<PAGE> 30
In both the three month and year-to-date periods, higher income from ATM
operations generated most of the increase in other income. Income from ATM
operations increased $1.2 million and $5.0 million during the third quarter and
year-to-date 1997 periods, respectively. The higher ATM revenues resulted from
the January 1997 introduction of an ATM access fee to non-customers who use the
Bank's ATM network and the expansion of the Bank's ATM network during 1996,
with the installation of over 250 ATMs in White Hen Pantry convenience stores
located in the eight county Chicagoland area.
Higher revenues from discount brokerage operations also contributed to the
increase. An increase in transaction volumes at Investment Network, Inc., the
Bank's discount brokerage subsidiary, produced a $658,000 increase in revenues
from brokerage operations during the third quarter of 1997 and a $1.1 million
increase in the year-to-date period.
These increases in other income were partly offset by lower gains from
security sales. An $855,000 gain on the sale of MBS in the first quarter of
1996 produced the lower gain on security sales in 1997.
While most of the growth in other income during 1997 has been generated
from ATM operations, several events could impact ATM revenues in the future.
First, the Bank may lose the operation of up to 55 ATM machines located in a
grocery store chain in the Chicagoland area, as the grocery store chain
installed in-store branches of another financial institution. The Bank
continues to seek partners in other ATM ventures, and during 1997 entered into
an agreement with another grocery store chain to install 12 ATMs and is
currently negotiating with a third grocery store chain to install approximately
40 ATMs machines during early 1998. Second, proposals have been discussed,
from time to time, both at the federal and state level to introduce legislation
that could increase disclosures and/or limit the Bank's ability to charge an
access fee to non-customers who use a St. Paul ATM. Management can give no
assurances that such legislation will be enacted (and in what form), nor can
Management estimate the impact of such legislation on ATM revenues.
30
<PAGE> 31
General and Administrative Expense. General and administrative expenses
("G&A")totaled $25.6 million during the third quarter of 1997, or 3.3% higher
than during the same period of 1996, excluding the one-time $21.0 million SAIF
charge. G&A expenses for the nine month period ended Sept. 30, 1997 were $75.3
million, or 3.9% higher than during the same period in 1996 without the SAIF
charge. The higher level of expense in both the quarter and year-to-date
period was mainly generated by increases in compensation and benefits and
occupancy, equipment and office expense. These increases in expense were
partly offset by lower deposit insurance premiums.
Compensation and benefits rose $1.0 million during the third quarter of
1997 over the same quarter in 1996, while year-to-date expense rose by $3.5
million over the same period in 1996. The increase in compensation and
benefits was associated with annual merit increases, higher sales incentives,
an increase in employment taxes, and higher pension costs. Occupancy,
equipment and office expense rose $990,000 during the current quarter and $2.8
million for the first three quarters of 1997 compared to the same periods in
1996. The expansion of the ATM network, establishment of the Bank's new
operation center, system projects, and higher depreciation on capital
investments produced the increase in occupancy, equipment and office expense.
System projects include a review of information systems to ensure compliance
with transaction processing in the next century (as discussed further below),
evaluation of current information systems and future needs, and projects
related to the general ledger system.
During the third quarter of 1996, President Clinton signed into law
legislation that mandated the recapitalization of SAIF. This legislation
required members of the SAIF, such as St. Paul Federal Bank for Savings, to pay
a one-time assessment to bring the SAIF up to desired capitalization levels.
St. Paul's share of the special assessment was $21.0 million, which was
included in G&A expense during the third quarter of 1996. After this special
assessment, St. Paul's annual SAIF insurance premiums dropped to a level more
comparable to the rates paid by commercial banks. Because of the lower
premiums, federal deposit insurance premiums decreased by $1.3 million during
the third quarter of 1997 and $3.9 million during the year-to-date period, as
compared to the same periods in 1996.
31
<PAGE> 32
Management remains committed to ongoing expense control, and have reviewed
back-office operations in order to improve work flows, communications,
coordination, and service as a means to improve efficiency and control expense.
As part of this review, Management has outsourced the Bank's internal mail
handling operations and has used increased automation to reduce staffing levels
in the corporate purchasing department. Even with the above measures, 1997 G&A
levels have exceeded and are expected to continue to exceed 1996 levels due to
anticipated additions to the branch network, expansion of the ATM network, an
increase in planned advertising and promotions, more services offered to
customers, systems projects, higher compensation for retail personnel, and
general inflation.
The Company is conducting a review of its information systems department
and studying ways to reorganize this function to improve its information
systems. Management anticipates that this review may result in the outsourcing
of certain functions, including the loan servicing and deposit central
processing systems. By the end of 1997, the outsourcing vendors for these
functions should be selected and processing agreements completed.
As part of the review of back-office operations, during 1997, the Bank
purchased a 70,000 square foot office facility to serve as an operations
center. The Bank plans to consolidate at least two of its leased premises into
this operations center. The Bank expects to gain operating and cost
efficiencies by housing some back-office operations in one facility. While
additional expenses are expected to be incurred as the facility is prepared for
occupancy and the leased facilities are vacated in early 1998, the Bank expects
to obtain cost savings over the long term from operating this facility at lower
costs than the leased premises. Funds for the purchase of this facility were
provided by operations.
Management will also add to the branch network in 1997 and 1998. In
December of 1997, the first "Money Connection Center" is scheduled to open, and
the Bank is studying locations for up to two more of such centers, all located
in the City of Chicago. These offices will be located in storefronts or
32
<PAGE> 33
neighborhood shopping centers, which have similar cost requirements as the
Bank's current in-store branch locations. These centers will be located in
areas with significant pedestrian traffic and will utilize technology to
deliver a full range of banking services while keeping operating and staffing
costs lower than free-standing branches. The Bank plans to look for other
opportunities to open these storefront branches in the future. The Bank
intends to fund all branch expansion with existing liquidity.
Management also expects increased G&A expenditures in 1997 and 1998
related to the systems requirements to ensure that the Bank can process
transactions in the next century. The Bank has assembled a task force charged
with addressing the "Year 2000" compliance issue and has been coordinating
efforts with an outside consultant. The Bank expects to have critical
development work completed by December of 1998 with final testing to occur in
1999. The Bank intends to fund this cost from operations and excess liquidity.
Operations of Foreclosed Real Estate. The net loss generated from foreclosed
real estate operation was $59,000 during the third quarter of 1997, or $30,000
less than the net loss recorded during the same period a year ago. However,
the net loss for the first nine months of 1997 of $142,000 was substantially
less than the $1.2 million loss incurred during the same period in 1996. The
lower net cost was produced by a lower provision for real estate owned ("REO")
losses. The provision during 1996 was considered necessary to reflect an
additional loss on a multifamily property sold during the second quarter of
1996.(7) See "CREDIT RISK MANAGEMENT" for further discussion of REO.
Income Taxes. A higher level of pretax income primarily produced the increase
in the provision for income taxes for both the quarter and year-to-date
periods.
- ----------------------
(7) The additional loss in 1996 occurred when the Bank entered into a sales
contract with a buyer to purchase the multifamily property at a value lower
than the current book value. While the book value was supported by a current
appraisal, Management elected to accept a liquidation value, principally due to
the high vacancy levels, rather than holding this asset in an effort to achieve
stabilization of occupancy.
33
<PAGE> 34
The annual effective income tax rate for year-to-date 1997 periods was 33.9%,
compared to 33.8% during 1996.
Extraordinary Item. During the first quarter of 1997, the Company recorded a
$403,000 extraordinary loss, net of tax, on the early extinguishment, at par,
of its $34.5 million of 8.25% subordinated debt due in 2000. The write-off of
unamortized issuance costs and discounts created the loss at extinguishment.
The subordinated debt was repaid with a portion of the proceeds from the
Company's issuance of $100 million of 7.125% senior notes due in 2004. The
future savings of replacing the higher costing subordinated notes with the
senior notes is expected to more than offset the extraordinary loss incurred.
34
<PAGE> 35
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
Three months ended Sept. 30,
Dollars in thousands At Sept. 30, 1997 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Investment securities (b) $ 70,583 6.50% $ 70,693 $ 1,144 6.42% $ 80,654 $ 1,157 5.69%
Federal funds and
interest-bearing bank balances 139,785 5.11 85,049 1,153 5.38 38,411 485 5.01
Other investments (c) 76,832 5.96 67,004 1,071 6.34 67,360 1,035 6.10
- ---------------------------------------------------------------------------------------------------------------------------------
Total investments 287,200 5.68 222,746 3,368 6.00 186,425 2,677 5.70
Mortgage-backed securities (b) 993,007 7.04 1,029,606 17,815 6.92 832,458 13,354 6.42
Loans receivable (d) 3,091,024 7.55 3,121,693 59,604 7.64 3,072,933 58,833 7.66
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $4,371,231 7.31% $4,374,045 $80,787 7.39% $4,091,816 $74,864 7.32%
=================================================================================================================================
Deposits:
Interest-bearing checking $ 217,138 1.65% $ 227,752 $ 948 1.65% $ 230,749 $ 1,033 1.78%
Non-interest-bearing checking 147,566 -- 150,135 -- -- 135,211 -- --
Other non-interest-bearing accounts 45,664 -- 42,587 -- -- 30,863 -- --
Money market accounts 214,863 3.73 220,493 2,062 3.71 211,860 1,849 3.46
Savings accounts 670,706 2.45 683,957 4,215 2.44 692,517 4,216 2.42
Certificates of deposit 1,992,220 5.73 1,972,347 28,287 5.69 1,972,063 27,669 5.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,288,157 4.32 3,297,271 35,512 4.27 3,273,263 34,767 4.21
Borrowings:(e)
Short-term borrowings 530,187 5.83 508,394 7,505 5.86 287,168 4,134 5.71
Long-term borrowings 268,843 6.76 268,854 4,576 6.75 260,779 4,566 6.95
- ---------------------------------------------------------------------------------------------------------------------------------
Total borrowings 799,030 6.15 777,248 12,081 6.17 547,947 8,700 6.30
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $4,087,187 4.68% $4,074,519 $47,593 4.63% $3,821,210 $43,467 4.51%
=================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 284,044 $ 299,526 $ 270,606
=================================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.07x 1.07x
=================================================================================================================================
Net interest income $33,194 $31,397
=================================================================================================================================
Interest rate spread 2.63%
=================================================================================================================================
"Average" interest rate spread 2.76% 2.81%
=================================================================================================================================
Net yield on average earning assets 3.04% 3.07%
=================================================================================================================================
</TABLE>
(a) All average balances based on daily balances.
(b) Average balances exclude the effect of unrealized gains or losses on
available for sale investment securities.
(c) Includes investment in FHLB stock, deposits at the FHLB, and other
short-term investments.
(d) Includes loans held for sale and loans placed on nonaccrual status.
(e) Includes FHLB advances, securities sold under agreements to repurchase, and
other borrowings.
35
<PAGE> 36
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
Dollars in thousands At Sept. 30, 1997 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Investment securities (b) $ 70,583 6.50% $ 67,615 $ 3,201 6.33% $ 82,141 $ 3,423 5.57%
Federal funds and
interest-bearing bank balances 139,785 5.11 97,577 3,876 5.31 50,847 1,983 5.21
Other investments (c) 76,832 5.96 64,721 3,075 6.35 72,839 3,225 5.92
- ---------------------------------------------------------------------------------------------------------------------------------
Total investments 287,200 5.68 229,913 10,152 5.90 205,827 8,631 5.61
Mortgage-backed securities (b) 993,007 7.04 1,084,916 56,376 6.93 894,663 42,063 6.27
Loans receivable (d) 3,091,024 7.55 2,974,964 169,825 7.61 2,938,392 169,479 7.69
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $4,371,231 7.31% $4,289,793 $ 236,353 7.35% $4,038,882 $ 220,173 7.27%
=================================================================================================================================
Deposits:
Interest-bearing checking $ 217,138 1.65% $ 231,720 $ 2,933 1.69% $ 234,786 $ 3,077 1.75%
Non-interest-bearing checking 147,566 -- 145,653 -- -- 129,619 -- --
Other non-interest-bearing accounts 45,664 -- 40,773 -- -- 31,237 -- --
Money market accounts 214,863 3.73 219,196 6,002 3.66 203,942 5,018 3.29
Savings accounts 670,706 2.45 684,350 12,561 2.45 696,212 12,632 2.43
Certificates of deposit 1,992,220 5.73 2,017,587 85,529 5.67 1,969,081 83,036 5.64
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,288,157 4.32 3,339,279 107,025 4.29 3,264,877 103,763 4.25
Borrowings:(e)
Short-term borrowings 530,187 5.83 385,087 16,751 5.82 239,722 10,210 5.69
Long-term borrowings 268,843 6.76 268,028 13,718 6.84 254,166 13,354 7.02
- ---------------------------------------------------------------------------------------------------------------------------------
Total borrowings 799,030 6.15 653,115 30,469 6.24 493,888 23,564 6.38
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $4,087,187 4.68% $3,992,394 $ 137,494 4.60% $3,758,765 $ 127,327 4.53%
=================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 284,044 $ 297,399 $ 280,117
=================================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.07x 1.07x
=================================================================================================================================
Net interest income $ 98,859 $ 92,846
=================================================================================================================================
Interest rate spread 2.63%
=================================================================================================================================
"Average" interest rate spread 2.75% 2.74%
=================================================================================================================================
Net yield on average earning assets 3.07% 3.07%
=================================================================================================================================
</TABLE>
(a) All average balances based on daily balances.
(b) Average balances exclude the effect of unrealized gains or losses on
available for sale investment securities.
(c) Includes investment in FHLB stock, deposits at the FHLB, and other
short-term investments.
(d) Includes loans held for sale and loans placed on nonaccrual status.
(e) Includes FHLB advances, securities sold under agreements to repurchase, and
other borrowings.
36
<PAGE> 37
KEY CREDIT STATISTICS
<TABLE>
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996 Dec. 31, 1995
Dollars in thousands Dollar % Dollar % Dollar %
- ----------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
1-4 family units $2,100,251 69% $1,753,907 63% $1,663,228 62%
Multifamily units 899,099 29 988,506 35 979,017 36
Commercial 63,152 2 54,985 2 54,981 2
Land and land development --- - 1,633 * 1,940 *
- ----------------------------------------------------------------------------------------------
Total mortgage loans $3,062,502 100% $2,799,031 100% $2,699,166 100%
==============================================================================================
CONSUMER LOANS:
Secured by deposits $ 853 6% $ 1,169 6% $ 2,307 10%
Education (guaranteed) 17 * 210 1 261 1
Home improvement 197 1 281 1 576 2
Auto 12,152 83 16,197 85 20,034 86
Personal 1,394 10 1,193 7 165 1
- ----------------------------------------------------------------------------------------------
Total consumer loans $ 14,613 100% $ 19,050 100% $ 23,343 100%
- ----------------------------------------------------------------------------------------------
Total loans held for investment $3,077,115 $2,818,081 $2,722,509
==============================================================================================
Weighted average rate 7.55% 7.66% 7.69%
==============================================================================================
*Less than 1%
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996 Dec. 31, 1995
Dollars in thousands Dollar % Dollar % Dollar %
- ----------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family units $ 10,352 68% $ 9,102 73% $ 7,722 26%
Multifamily units 2,670 17 --- -- 8,665 30
Commercial --- -- 387 3 1,360 5
- ----------------------------------------------------------------------------------------------
Total mortgage loans 13,022 85 9,489 76 17,747 61
CONSUMER LOANS 61 * 46 * 81 *
REAL ESTATE OWNED:
1-4 family units 308 2 1,566 13 2,174 8
Multifamily units --- -- --- -- 8,206 28
Commercial 1,920 13 1,351 11 997 3
- ----------------------------------------------------------------------------------------------
Total real estate owned 2,228 15 2,917 24 11,377 39
- ----------------------------------------------------------------------------------------------
Total nonperforming assets $ 15,311 100% $ 12,452 100% 29,205 100%
==============================================================================================
*Less than 1%
</TABLE>
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Dec. 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEY CREDIT RATIOS
- ----------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.08% 0.15% 0.21%
Net California loan charge-offs to average California
loans receivable 0.37 0.56 0.48
Loan loss reserve to total loans 1.11 1.28 1.42
Loan loss reserve to nonperforming loans 260.41 377.19 216.62
Loan loss reserve to impaired loans 159.25 64.04 120.37
Nonperforming assets to total assets 0.34 0.29 0.71
General valuation allowance to non-
performing assets 212.12 248.88 123.94
- ----------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
CREDIT RISK MANAGEMENT
LENDING
At Sept. 30, 1997, the loans receivable portfolio was mainly comprised of
residential mortgages, secured by both 1-4 family and multifamily dwellings.
The loan portfolio also included, but to a much lesser extent, commercial real
estate loans, land loans, and consumer loans. See "KEY CREDIT STATISTICS" for
further details.
Non-performing loans totaled $13.1 million at Sept. 30, 1997, up $3.5
million from Dec. 31, 1996. The increase was largely due to the addition of
one $2.7 million income property loan to non-performing status during the
third quarter of 1997 and $1.2 million increase in non-performing 1-4 family
loans. Despite the slight increase since year-end, non-performing loans
continue to be among the lowest levels in recent history.
At Sept. 30, 1997, the Bank had a net investment in impaired loans of
$21.4 million, compared to $56.2 million at Dec. 31, 1996.(8) At both Sept. 30,
1997 and Dec. 31, 1996, all of the impaired loans were performing but
considered impaired because it is probable, based upon current information and
events, that the Bank will be unable to collect all amounts due in accordance
with the original contractual agreement. As anticipated by Management, the
level of impaired loans has been significantly reduced since Dec. 31, 1996,
primarily because of the resolution of several income property loans that had
been classified as impaired because of pending maturities.
The accumulated provision for loan losses at Sept. 30, 1997 was $34.1
million compared to $36.0 million at Dec. 31, 1996, a decrease of $1.9 million.
The following table provides a rollforward of the accumulated provision for
loan losses from Jan. 1, 1996 through Sept. 30, 1997:
- ----------------------
(8) Impaired as defined in SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure."
38
<PAGE> 39
<TABLE>
<CAPTION>
1997 1996
-------------- --------------------------
Nine Months Nine Months Year Ended
Dollars in thousands Ended Sept. 30 Ended Sept. 30 Dec. 31
- --------------------------------------------- --------------------------
<S> <C> <C> <C>
Beginning of Period $35,965 $38,619 $38,619
Provision for losses --- 1,500 1,750
Charge-offs (2,632) (4,255) (5,113)
Recoveries 736 416 709
-------------- --------------------------
End of Period $34,069 $36,280 $35,965
============== ==========================
</TABLE>
The general valuation allowance is evaluated based on a careful review of
the various risk components that are inherent in each of the loan portfolios,
including off-balance sheet items. The risk components that are evaluated
include the level of non-performing and classified assets, geographic
concentrations of credit, economic conditions, trends in real estate values,
the impact of changing interest rates on borrower debt service, as well as
historical loss experience, peer group comparisons, and regulatory guidance.
Net loan charge-offs in the first nine months of 1997 totaled $1.9
million, compared to $3.8 million of net charge-offs in the first nine months
of 1996.(9) Of the $2.6 million of gross charge-offs, $1.9 million had already
been identified as "loss" for which a specific reserve had been established at
year-end 1996. Annualized net loan charge-offs to average loans receivable
totaled 0.08% during the first nine months of 1997. In comparison, the
Company's net loan charge-offs in 1996 and 1995 were equivalent to 0.15% and
0.21% of average loans receivable, respectively. See "KEY CREDIT STATISTICS"
for further details.
No loan loss provision was recorded during the nine months ended Sept. 30,
1997 compared to a $1.5 million loan loss provision during the same period in
1996. The decline in recent years in the level of classified loans,
non-performing assets, and charge-offs, as well as a decrease in the size of
the Bank's income property lending portfolio, and the stabilization of certain
real
- --------------------
(9) Gross loan charge-offs in the first nine months of 1997 totaled $2.6
million and included $2.1 million of charge-offs on income property loans that
were considered impaired under SFAS No. 114 and $535,000 of charge-offs on 1-4
family and consumer loans. Recoveries during the first nine months of 1997
were primarily related to income property loans.
39
<PAGE> 40
estate markets have allowed the Bank to reduce the level of the accumulated
provision for loan losses by recording loss provisions below net charge-offs.
In the future, if the trends noted above continue, the level of charge-offs may
be higher than loan loss provisions, thereby further reducing the level of the
accumulated provision for loan losses. See "KEY CREDIT STATISTICS" for further
details.
The adequacy of the accumulated provision for loan losses is approved on a
quarterly basis by the Loan Loss Reserve Committee ("Reserve Committee") of the
Bank's Board of Directors. The accumulated provision for loan losses reflects
Management's best estimate of the reserves needed to provide for credit risks
for income property loans as well as all other perceived credit risks of the
Bank. However, actual results could differ from this estimate and future
additions to the reserves may be necessary based on unforeseen changes in
economic conditions. In addition, federal regulators periodically review the
Bank's accumulated provision for losses on loans. Such regulators have the
authority to require the Bank to recognize additions to the reserves at the
time of their examinations.
In addition to refinancing existing maturing income property loans, the
Bank's Board of Directors has provided for a limited expansion of income
property lending outside of the Midwest. Under this program, the Bank has been
authorized to originate new multifamily loans in strong markets where the Bank
already has an income property servicing portfolio or to borrowers with whom it
has a long-standing relationship. Originations under this program are not
expected to exceed $100 million during 1997, and will help offset the repayment
of maturing loans. During the third quarter of 1997, the Board of Directors
approved a program to provide loans on real estate secured by industrial,
office, and shopping center properties. The initial focus of the program will
be on industrial centers and secondarily on office complexes. Loans on
shopping centers will be considered only on a very select basis. The
geographic focus of the program will be in the Midwestern states. Management
anticipates originations under this program to be between $20 million and $25
million during the next 12 months.
During the first nine months of 1997, the Bank purchased $507.0 million of
whole loans, secured by 1-4 family residences located nationally. Prior to
purchasing these loans, the Bank performs due diligence procedures, and because
40
<PAGE> 41
of that process, Management believes that the portfolios acquired present no
greater risk than the Bank's own originated 1-4 family portfolio. The Bank
also purchased $7.6 million of loans secured by income property real estate
located in Wisconsin. The Bank applied its own loan origination underwriting
standards to the purchase of these loans. All purchased loans are subject to
the Bank's quarterly review of the adequacy of the general valuation allowance.
Management continues to monitor events in the submarkets in which the Bank
has substantial loan concentrations, particularly California. While some
softness persists in certain areas, Management is not aware of any unfavorable
changes in those economies that would have a significant adverse effect on the
Bank's loan portfolio.
As of Sept. 30, 1997, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 21%, compared to 34% at Dec. 31,
1996. Lower classified asset levels primarily generated the decrease in the
ratio.
OTHER REAL ESTATE OWNED
REO totaled $2.2 million at Sept. 30, 1997 compared to $2.9 million at the
end of 1996. Of total REO at Sept. 30, 1997, $300,000 were 1-4 family assets
and $1.9 million was income property real estate.
The accumulated provision for real estate losses totaled $242,000 at Sept.
30, 1997 compared to $284,000 at Dec. 31, 1996. During the first nine months of
1997, the Bank recorded net charge-offs of $42,000 generating the decrease in
the accumulated provision. In comparison, $2.5 million of net charge-offs were
recorded during the same period in 1996. There was no provision for REO losses
during the first nine months of 1997 compared to $943,000 in the first nine
months of 1996. See "RESULTS OF OPERATIONS" for further details on REO
provision.
In accordance with the Company's accounting policy, REO assets are
initially recorded at the lower of their net book value or fair value, less
estimated selling costs. The accumulated provision for loan losses is charged
41
<PAGE> 42
for any excess of net book value over fair value at the foreclosure, or
in-substance foreclosure, date. After foreclosure, the accumulated provision
for foreclosed real estate losses is used to establish specific valuation
allowances on individual REO properties as declines in market value occur and
to provide general valuation allowances for possible losses associated with
risks inherent in the REO portfolio.
42
<PAGE> 43
ASSET/LIABILITY REPRICING SCHEDULE (a)
<TABLE>
<CAPTION>
at Sept. 30, 1997
-------------------------------------------------------------------------------------
Weighted More than 6
Average % of 6 Months months to Over
Rate Balance Total or less 1 year 1-3 years 3-5 years 5 years
- ----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:(b)
Adjustable rate 5.11% $ 139,785 3% $ 139,785 $ - $ - $ - $ -
Fixed rate 6.18 147,415 3 48,792 9,981 10,013 - 78,629
Mortgage-backed securities:(c)
Adjustable rate 7.03 744,709 17 288,692 241,995 214,022 - -
Fixed rate 7.05 248,298 6 16,440 15,718 52,854 47,872 115,414
Mortgage loans:(c)
Adjustable and renegotiable rate 7.45 2,608,745 61 1,220,732 414,133 810,509 163,371 -
Fixed rate 8.15 453,757 10 45,410 46,478 145,647 100,578 115,644
Consumer loans (c) 7.64 14,613 * 2,177 1,384 4,457 3,303 3,292
Assets held for sale 7.80 13,909 * 13,909 - - - -
-------------------------------------------------------------------------------------
Total rate sensitive assets 7.31% $4,371,231 100% $1,775,937 $ 729,689 $1,237,502 $315,124 $ 312,979
=====================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 0.87% $ 409,904 10% $ 111,118 $ 23,319 $ 76,442 $ 55,229 $ 143,796
Savings accounts 2.45 670,755 16 221,283 42,458 133,338 89,656 184,020
Money market deposit accounts 3.72 215,278 5 215,278 - - - -
Fixed-maturity certificates 5.73 1,992,220 49 865,548 741,948 259,740 72,402 52,582
-------------------------------------------------------------------------------------
4.32 3,288,157 80 1,413,227 807,725 469,520 217,287 380,398
Borrowings:
FHLB advances 5.99 391,085 10 340,000 - 50,000 248 837
Other borrowings 6.20 391,545 10 293,139 - - - 98,406
Mortgage-backed note 8.54 16,400 * - - 16,400 - -
-------------------------------------------------------------------------------------
6.15 799,030 20 633,139 - 66,400 248 99,243
-------------------------------------------------------------------------------------
Total rate sensitive liabilities 4.68% $4,087,187 100% $2,046,366 $ 807,725 $ 535,920 $217,535 $ 479,641
=====================================================================================
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 2.63% $ 284,044 $ (270,429) $ (78,036) $ 701,582 $ 97,589 $(166,662)
=====================================================================================
Cumulative GAP $ (270,429) $(348,465) $ 353,117 $450,706 $ 284,044
Cumulative GAP to total assets without
regard to hedging transactions (5.95)% (7.66)% 7.76% 9.91% 6.24%
Cumulative GAP to total assets with
impact of hedging transactions (3.88)% (5.77)% 8.31% 9.91% 6.24%
</TABLE>
* Less than 1%.
(a) Mortgage loan repricing/maturity projections were based upon principal
repayment percentages in excess of the contractual amortization schedule of the
underlying mortgages. Multifamily mortgages were estimated to be prepaid at a
rate of approximately 18% per year; adjustable rate mortgage loans on 1-4
family residences and loan securities were estimated to prepay at a rate of 22%
per year; fixed rate loans and loan securities were estimated to prepay at a
rate of 10% per year. Loans with an adjustable rate characteristic, including
loans with initial fixed interest rate periods, are considered by Management to
have an adjustable rate.
Checking accounts were estimated to be withdrawn at rates between 15% and 21%
per year. Most of the regular savings accounts were estimated to be withdrawn
at rates between 18% and 26% per year, although for some of the accounts,
Management assumed an even faster rate.
Except for multifamily loans, the prepayment assumptions included in this
schedule are based upon the Bank's actual prepayment experience over the past
year, as well as Management's future expectations of prepayments. The Bank
assumed a prepayment percentage of 18% because of current market conditions and
the nature of the Bank's multifamily portfolio. The new decay assumption on
passbook and checking accounts is based on a historical regression analysis of
the Bank's growth in these accounts.
(b) Includes investment in FHLB stock.
(c) Excludes accrued interest and accumulated provisions for loan losses.
43
<PAGE> 44
PART II. -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) The Company filed a current report on Form 8-K on July 15, 1997,
announcing the extension of its current stock repurchase program until
December 1997.
44
<PAGE> 45
SIGNATURES
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. PAUL BANCORP, INC.
-----------------------------------------
(Registrant)
Date: November 14, 1997 By: /s/ Joseph C. Scully
----------------- ------------------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 1997 By: /s/ Robert N. Parke
----------------- ------------------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
45
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATIONS OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, 1997 Sept. 30, 1997
------------------ -----------------
<S> <C> <C>
1. Net income $ 12,373,510 $ 36,604,927
2. Weighted average common
shares outstanding 33,729,563 33,791,879
------------- -------------
3. Earnings per
common share $ 0.37 $ 1.08
============= =============
4. Weighted average common
shares outstanding 33,729,563 33,791,879
5. Common stock equivalents
due to dilutive
effect of stock options 1,162,540 1,120,727
------------- -------------
6. Total weighted average
common shares and
equivalents outstanding 34,892,103 34,912,606
============= =============
7. Primary earnings per share $ 0.35 $ 1.05
============= =============
8. Total weighted average
common shares and
equivalents outstanding
(Line 6) 34,892,103 34,912,606
9. Additional dilutive shares
using end of period market
value versus average market
value for the computation of
stock options under the
treasury stock method 69,139 188,335
------------- -------------
10. Total shares for fully
diluted earnings per share 34,961,242 35,100,941
============= =============
11. Fully diluted earnings
per share $ 0.35 $ 1.04
============= =============
</TABLE>
46
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 78,307
<INT-BEARING-DEPOSITS> 84,155
<FED-FUNDS-SOLD> 55,630
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 602,136
<INVESTMENTS-CARRYING> 461,454
<INVESTMENTS-MARKET> 464,261
<LOANS> 3,091,024
<ALLOWANCE> 34,069
<TOTAL-ASSETS> 4,548,436
<DEPOSITS> 3,288,157
<SHORT-TERM> 530,187
<LIABILITIES-OTHER> 52,195
<LONG-TERM> 268,843
0
0
<COMMON> 354
<OTHER-SE> 408,700
<TOTAL-LIABILITIES-AND-EQUITY> 4,548,436
<INTEREST-LOAN> 169,825
<INTEREST-INVEST> 10,152
<INTEREST-OTHER> 56,376
<INTEREST-TOTAL> 236,353
<INTEREST-DEPOSIT> 107,025
<INTEREST-EXPENSE> 137,494
<INTEREST-INCOME-NET> 98,859
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 75,322
<INCOME-PRETAX> 55,962
<INCOME-PRE-EXTRAORDINARY> 37,008
<EXTRAORDINARY> (403)
<CHANGES> 0
<NET-INCOME> 36,605
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.07
<LOANS-NON> 7,175
<LOANS-PAST> 5,908
<LOANS-TROUBLED> 857
<LOANS-PROBLEM> 23,226
<ALLOWANCE-OPEN> 35,965
<CHARGE-OFFS> 2,632
<RECOVERIES> 736
<ALLOWANCE-CLOSE> 34,069
<ALLOWANCE-DOMESTIC> 34,069
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
