<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 June 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
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(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 -- 34,095,546 shares, as of Aug. 1, 1997
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<PAGE> 2
ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of June 30, 1997 and Dec. 31, 1996.............................. 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1997 and 1996................................ 4
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1997 and 1996............................ 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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................................ 9
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders................ 41
Item 6 Exhibits and Reports on Form 8-K................................... 41
Signature Page..................................................... 42
Exhibits........................................................... 43
2
<PAGE> 3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
June 30, Dec. 31,
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 79,561 $ 98,137
Federal funds sold and interest bearing bank balances 84,640 75,572
Short-term cash equivalent securities 28,519 16,499
------------------------------------
Total cash and cash equivalents 192,720 190,208
Investment securities
(Market: June 30, 1997-$73,078; Dec. 31, 1996-$49,103) 73,078 49,103
Mortgage-backed securities
(Market: June 30, 1997-$1,050,732; Dec. 31, 1996-$1,158,171) 1,053,752 1,162,982
Loans receivable, (Net of accumulated provision for loan losses:
June 30, 1997-$34,514; Dec. 31, 1996-$35,965) 3,110,041 2,782,116
Loans held for sale, at lower of cost or market
(Market: June 30, 1997-$10,287; Dec. 31, 1996-$12,021) 10,287 11,992
Accrued interest receivable 28,107 25,745
Foreclosed real estate
(Net of accumulated provision for losses: June 30,1997-$350;
Dec. 31, 1996-$284) 1,887 2,634
Real estate held for development or investment 18,056 15,783
Investment in Federal Home Loan Bank stock 38,188 35,211
Office properties and equipment 52,707 47,286
Prepaid expenses and other assets 32,571 34,110
------------------------------------
Total Assets $4,611,394 $4,357,170
====================================
LIABILITIES:
Deposits $3,295,211 $3,337,055
Short-term borrowings 580,187 366,854
Long-term borrowings 268,839 194,390
Advance payments by borrowers for taxes and insurance 22,385 21,561
Other liabilities 48,009 49,200
------------------------------------
Total Liabilities 4,214,631 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: June 30,1997-35,444,517 shares;
Dec. 31, 1996-38,392,810 shares;
Outstanding: June 30, 1997-33,988,070 shares;
Dec. 31, 1996-34,163,988 shares) 354 384
Paid-in capital 114,457 148,265
Retained income, substantially restricted 306,866 288,065
Unrealized gain on securities, net of taxes 1,795 2,278
Borrowings by employee stock ownership plan (304) (396)
Unearned employee stock ownership plan shares (368,157 shares) (2,883) (2,883)
Treasury stock (1,456,447 at June 30, 1997;
4,228,822 shares at Dec. 31, 1996) (23,522) (47,603)
------------------------------------
Total stockholders' equity 396,763 388,110
------------------------------------
Total liabilities and stockholders' equity $4,611,394 $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 Six months ended
June 30, June 30,
------------------------------------------------------
Dollars in thousands except per share amounts 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $56,668 $57,788 $110,221 $110,646
Mortgage-backed securities 18,949 13,728 38,561 28,709
Investment securities 1,056 1,125 2,057 2,266
Federal funds and interest-bearing bank balances 1,070 518 2,723 1,498
Other investment income 981 893 2,004 2,190
--------------------- ---------------------
Total interest income 78,724 74,052 155,566 145,309
INTEREST EXPENSE:
Deposits 35,696 34,309 71,513 68,996
Short-term borrowings 5,039 3,853 9,246 6,076
Long-term borrowings 4,595 4,121 9,142 8,788
--------------------- ---------------------
Total interest expense 45,330 42,283 89,901 83,860
--------------------- ---------------------
Net interest income 33,394 31,769 65,665 61,449
Provision for loan losses --- 500 --- 1,000
--------------------- ---------------------
Net interest income after provision for loan losses 33,394 31,269 65,665 60,449
OTHER INCOME:
Loan servicing fees 391 318 845 803
Other fee income 4,027 3,982 7,883 7,586
ATM operations 3,279 1,481 6,557 2,779
Net gain on loan sales 65 116 182 436
Net gain on securities sales --- --- --- 855
Discount brokerage commissions 1,629 1,333 3,146 2,659
Income from real estate development 681 521 1,167 1,199
Insurance and annuity commissions 921 767 1,697 1,426
--------------------- ---------------------
Total other income 10,993 8,518 21,477 17,743
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 14,226 12,809 28,105 25,643
Occupancy, equipment and other office expense 7,451 6,323 14,170 12,321
Advertising 1,413 1,292 2,841 2,462
Federal deposit insurance 697 2,004 1,382 3,972
Other 1,781 1,852 3,239 3,334
--------------------- ---------------------
General and administrative expense 25,568 24,280 49,737 47,732
Loss on foreclosed real estate 39 20 83 1,156
--------------------- ---------------------
Income before income taxes and extraordinary item 18,780 15,487 37,322 29,304
Income taxes 6,383 5,298 12,688 10,361
--------------------- ---------------------
Income before extraordinary item 12,397 10,189 24,634 18,943
Extraordinary item:
Loss on early extinguishment of debt, net of tax --- --- 403 ---
--------------------- ---------------------
NET INCOME AFTER EXTRAORDINARY ITEM $12,397 $10,189 $ 24,231 $ 18,943
===================== =====================
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM:
Primary $ 0.36 $ 0.29 0.71 $ 0.53
Fully diluted 0.36 0.29 0.70 0.53
===================== =====================
EARNINGS PER SHARE AFTER EXTRAORDINARY ITEM:
Primary $ 0.36 $ 0.29 $ 0.69 $ 0.53
Fully diluted 0.36 0.29 0.69 0.53
===================== =====================
DIVIDENDS PER SHARE $ 0.080 $ 0.053 $ 0.160 $ 0.107
===================== =====================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized Borrowings Unearned
Gain/(Loss) by Employee Employee
Common Stock on Stock Stock Total
------------------ Paid-In Retained Securities, Ownership Ownership Treasury Stockholders'
Shares Amount Capital Income Net of Tax 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
Stock option
exercises 306,725 3 2,407 - - - - - 2,410
Net Income - - - 18,943 - - - - 18,943
Cash dividends paid
to stockholders
($0.107 per share) - - - (3,693) - - - - (3,693)
Change in unrealized
loss on securities,
net of tax - - - - (3,894) - - - (3,894)
Treasury stock
purchases (1,734,375) - - - - - - (22,421) (22,421)
--------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1996 33,728,102 $378 $143,398 $285,041 $(4,789) $(485) $(2,883) $(45,118) $375,542
==============================================================================================================
Balance at
Dec. 31, 1996 34,163,988 $384 $148,265 $288,065 $2,278 $(396) $(2,883) $(47,603) $388,110
Retirement of
Treasury stock - (38) (41,177) - - - - 41,215 -
Retirement of
fractional shares (1,230) - (19) - - - - - (19)
Stock option
exercises 802,937 8 7,388 - - - - - 7,396
Net Income - - - 24,231 - - - - 24,231
Cash dividends paid
to stockholders
($0.16 per share) - - - (5,430) - - - - (5,430)
Change in unrealized
gain on securities,
net of tax - - - - (483) - - - (483)
Repayment of
ESOP principal - - - - - 92 - - 92
Treasury stock
purchases (977,625) - - - - - - (17,134) (17,134)
--------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1997 33,988,070 $354 $114,457 $306,866 $1,795 $(304) $(2,883) $(23,522) $396,763
==============================================================================================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 24,231 $18,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 1,000
Provision for losses on foreclosed real estate - 943
Provision for depreciation 3,834 3,399
Assets originated and acquired for sale (15,508) (25,889)
Sale of assets held for sale 16,189 27,573
Increase in accrued interest receivable (2,362) (1,575)
(Increase) decrease in prepaid expenses and other assets 1,539 (1,953)
Increase (decrease) in other liabilities (1,191) 118
Net amortization of yield adjustments (2,178) 7,252
Other items, net (2,743) (18,616)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,811 11,195
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal repayments on loans receivable 425,030 302,142
Loans originated and purchased for investment (749,919) (678,023)
Loans receivable sold 3,579 12,320
Principal repayments on available for sale mortgage-backed securities 58,121 38,483
Principal repayments on held to maturity mortgage-backed securities 49,854 94,013
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 16,200 20,250
Purchase of available for sale investment securities (40,157) (10,190)
Additions to real estate (6,206) (11,195)
Real estate sold 5,248 31,308
(Purchase) sale of Federal Home Loan Bank stock (2,977) 1,093
Purchase of office properties and equipment (9,255) (6,192)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (250,482) (216,490)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of certificates of deposit 193,310 169,337
Payments for maturing certificates of deposit (268,375) (177,756)
Net increase in other deposit products 33,221 35,978
New long-term borrowings 148,538 50,000
Repayment of long-term borrowings (75,852) -
Increase in short-term borrowings, net 214,685 149,715
Dividends paid to stockholders (5,430) (3,693)
Net proceeds from exercise of stock options 7,396 2,410
Purchase of treasury stock (17,134) (22,421)
Decrease in advance payments by borrowers
for taxes and insurance 824 2,028
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 231,183 205,598
- -------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,512 303
Cash and cash equivalents at beginning of period 190,208 186,621
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 192,720 $186,924
=============================================================================================================
See notes to consolidated financial statements
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest credited on deposits $ 69,593 $ 58,307
Interest paid on deposits 6,411 5,457
--------------------------
Total interest paid on deposits 76,004 63,764
Interest paid on borrowings 14,378 13,983
Income taxes paid, net 6,804 10,052
Real estate acquired through foreclosure 751 17,055
Loans originated in connection with real estate
acquired through foreclosure - 17,066
</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 six-month periods ended
June 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 June 30, 1997, the Company had the following outstanding commitments to
originate loans (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1-4 Family Adjustable-Rate $ 9,212
1-4 Family Fixed-Rate 3,163
1-4 Family Adjustable-Rate Construction 160
Multifamily Adjustable-Rate 19,392
Commercial Adjustable-Rate Construction 3,522
Consumer Loans 7,351
Unused Lines of Credit 95,802
</TABLE>
The Company anticipates funding these commitments with cash flow from
operations and incremental borrowings as necessary.
The Bank held commitments, at June 30, 1997, to sell $1.7 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 June 30, 1997, the Company has outstanding $7.9 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.
4. During the first quarter of 1997, the Company adopted Statement of
Financial Accounting Standards("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 has been delayed until 1998 as required by SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125.
5. In February 1997, the Financial Accounting Standards Board ("FASB")issued
SFAS
7
<PAGE> 8
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 this
Statement, 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 common
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>
<CAPTION>
2nd Qtr 2nd Qtr YTD YTD
1997 1996 1997 1996
------- ------- ---- ----
<S> <C> <C> <C> <C>
Basic $0.37 $0.30 $0.72 $0.55
Diluted $0.36 $0.29 $0.69 $0.53
</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.
6. 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.
7. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for the reporting and display of
comprehensive income and its components in the full set of financial
statements. Because this Statement does not address recognition or measurement
of comprehensive income and its components, the adoption of this Statement will
not have a material effect on the financial statements. SFAS No. 130 will
become effective in 1998, however, earlier adoption is allowed.
8. 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.
9. All share and per share amounts have been restated for a three-for-two
stock split distributed on July 14, 1997 to stockholders of record on June 30,
1997.
8
<PAGE> 9
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 June 30, 1997, the Company reported
total assets of $4.6 billion. The Bank operates 52 branches in the Chicago
metropolitan area, comprised of 35 free-standing offices and 17 banking offices
located in Omni(R) and Cub(R) supermarkets. During the second half of 1997,
the Bank will open one additional branch in a store-front location within the
City of Chicago, and is considering locations for up to two additional Chicago
store-front branches. These store-front locations have lower initial cost
requirements than the Bank's free-standing locations. The Bank also operates
one of the largest networks of ATMs in the metropolitan Chicago area with 454
ATMs. The Bank also services approximately 181,000 checking accounts and
nearly 29,000 loans as of June 30, 1997.
Both the Company and the Bank continued to operate other wholly owned
financial services companies, including St. Paul Financial Development
Corporation ("SPFD"), Annuity Network, Inc., SPF Insurance Agency, Inc., and
Investment Network, Inc. As of June 30, 1997, customers maintained $597
million of investments through Investment Network, Inc. and $329 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 June 30, 1997, SPFD had $26.2 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 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 six months of 1997, the Bank originated $85.1 million
9
<PAGE> 10
of 1-4 family loans, $36.9 million of home equity/line of credit loans, and
$5.8 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. See "CREDIT RISK MANAGEMENT" for further details. During the
first six months, the Bank originated $106.5 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 half of 1997, the Bank purchased $506.6 million of 1-4 family adjustable
rate loans located nationally. The Bank had planned at least $400 million of
such acquisitions in 1997. 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
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
10
<PAGE> 11
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 which 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.
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.6 billion at June 30, 1997, a
$254.2 million or 5.8% increase from total assets reported at Dec. 31, 1996.
Higher loans receivable and investment securities generally produced the
increase in total assets. These increases were partly offset by lower MBS
balances.
Cash and cash equivalents totaled $192.7 million at June 30, 1997, $2.5
million higher than Dec. 31, 1996. See "CASH FLOW ACTIVITY" for further
details.
Investment securities, comprised of U.S. Treasury and agency debt
securities and other equity securities, totaled $73.1 million at June 30, 1997,
as compared to $49.1 million at Dec. 31, 1996. Additional purchases of debt
and equity securities produced the increase. At both June 30, 1997 and Dec.
31, 1996, all of the Company's investment securities were classified as AFS.
The Company recorded an unrealized loss of $82,000 on AFS investment securities
at June 30, 1997, compared to an unrealized loss of $137,000 at Dec. 31, 1996.
MBS totaled $1.05 billion at June 30, 1997, $109.2 million or 9.4% 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 7.06%
at June 30, 1997, or 14 basis points higher than the weighted average yield at
Dec. 31, 1996. Lower scheduled amortization of net premiums produced the
increase in the weighted average rate since Dec. 31, 1996. The Bank's MBS
portfolio at June 30, 1997, included $361.6 million of loans originated and
serviced by the Bank.
11
<PAGE> 12
Approximately 53% of the MBS portfolio is classified as AFS, and at
June 30, 1997, the Company reported an unrealized gain on its AFS MBS of $3.0
million compared to an unrealized gain of $3.8 million at Dec. 31, 1996. The
decrease in the unrealized gain was partly due to higher interest rates since
Dec. 31, 1996 and principal repayments in the MBS portfolio. At June 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 $3.1 billion at June 30, 1997, $327.9 million
or 11.8% higher than the $2.8 billion of loans receivable at Dec. 31, 1996.
The purchase of $514.2 million of loans and the origination of another $235.7
million of loans, partly offset by $425.0 million of principal repayments,
primarily produced the increase in loans receivable during the first six months
of 1997. See "CASH FLOW ACTIVITY" for further discussion.
The weighted average rate on loans receivable decreased to 7.49% at June
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 June 30, 1997, 85%
of the mortgage loan portfolio had adjustable rate characteristics compared to
82% at Dec. 31, 1996.
Office properties and equipment increased $5.4 million, or 11.5% to $52.7
million at June 30, 1997, from $47.3 million at Dec. 31, 1996. The purchase of
a $5.4 million, 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 June 30, 1997, $41.8 million or 1.3%
lower than deposit balances at Dec. 31, 1996. Most of the decrease in deposit
balances since year-end 1996 occurred in the second quarter as a large portion
of the certificates of deposit ("CDs") portfolio matured. The weighted average
cost of deposits decreased to 4.26% at June 30, 1997 from 4.31% at Dec. 31,
1996. The decrease was primarily related to a decrease in total CD balances
since Dec. 31, 1996, which are the Bank's highest costing deposit products.
Total borrowings, which include FHLB advances, totaled $849.0 million at
June 30, 1997, $287.8 million or 51.3% 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
12
<PAGE> 13
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 June
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 $396.8 million at June 30, 1997 or
$11.67 per share. In comparison, stockholders' equity at Dec. 31, 1996 was
$388.1 million or $11.36 per share. The $8.7 million increase in stockholders'
equity during the six months ended June 30, 1997 resulted from $24.2 million of
net income and $7.4 million of capital provided by the exercise of stock
options granted to employees and directors. These increases were partly offset
by the repurchase of $17.1 million of the Company's common stock and dividends
paid to shareholders of $5.4 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.
During the first six months of 1997, the Company continued with its
stock repurchase program by acquiring 977,625 shares of Company common stock,
at a weighted average price of $17.53. As of June 30, 1997, under the current
program, the Company has purchased 1,146,375 shares (at a weighted average
price of $17.12) of the 1,687,500 share goal. This program was extended for
another six months and will run through December 1997. 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. After the retirement of 3.75
million treasury shares (split adjusted)
13
<PAGE> 14
during the second quarter, at June 30, 1997, the Company had 1.5
million treasury shares remaining. 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 the Company's).
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 June 30, 1997, Management believes that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 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,
Tier I risk-based ratios, and Tier I leverage ratios (1) as set forth in the
table below. The Bank's actual amounts and ratios are also presented in the
following table:
__________________________
(1) 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 June 30, 1997,
the Bank's tangible capital ratio of 8.49% exceeded the minimum required ratio.
14
<PAGE> 15
<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 June 30, 1997 ----------------------- --------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 412,743 16.89% >=$ 195,552 >=8.00% >=$ 244,440 >=10.00%
Tier I Capital
(to Risk Weighted Assets) $ 382,167 15.62% >=$ 97,844 >=4.00% >=$ 146,765 >= 6.00%
Tier I Capital (core)
(to Regulatory Assets) $ 382,167 8.44% >=$ 181,143 >=4.00% >=$ 226,429 >= 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 June 30, 1997:
<TABLE>
<CAPTION>
June 30,
Dollars in thousands 1997
- -------------------------------------------------------------------------
<S> <C>
Stockholders' equity of the Company $396,763
Less: capitalization of the Company
and non-Bank subsidiaries (7,123)
- -------------------------------------------------------------------------
Stockholder's equity of the Bank 389,640
Less: unrealized gain on
available for sale securities (1,725)
Less: investments in non-includable
subsidiaries (1,579)
Less: intangible assets (4,169)
- -------------------------------------------------------------------------
Tangible and core capital 382,167
Plus: allowable GVAs 30,576
- -------------------------------------------------------------------------
Risk-based capital $412,743
=========================================================================
</TABLE>
15
<PAGE> 16
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
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
June 30, 1997, the Bank had $217.2 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
June 30, 1997, the Bank would have excess core capital of $201.0 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.
16
<PAGE> 17
CASH FLOW ACTIVITY
Sources of Funds The major sources of funds during the first six months of
1997 included $533.0 million of principal repayments on loans receivable and
MBS, a $287.4 million net increase in borrowings, $193.3 million from the
issuance of CDs, and $16.2 million from maturing AFS investment securities.
During the first six months of 1997, repayments of loans receivable and
MBS totaled $533.0 million, compared to $434.6 million during the first six
months of 1996. Most of the increase resulted from higher repayments on income
property loans. Repayments on income property loans were $209.7 million in the
first six months of 1997, compared to $68.7 million for the first six months of
1996. An increase in the number of loans maturing produced the higher level of
repayments. A significant portion of the Bank's income lending portfolio is
scheduled to mature over the next three and one-half years, which may impact
the level of future loan repayments. See "CREDIT RISK MANAGEMENT" for further
details.
During the first half of 1997, net borrowings increased by $287.4 million,
as compared to a $199.7 million net increase during the first six months of
1996. The Bank continued to rely on borrowings to fund whole loan purchases
during the first six months of 1997. In addition, during the first quarter,
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. See
"STATEMENT OF FINANCIAL CONDITION" for further details.
The issuance of CDs during the first six months of 1997 totaled $193.3
million, compared to $169.3 million during the same period in 1996. The Bank
continued to rely on CDs as a source of funds in 1997, although the Bank did
not retain a portion of the higher rate CDs that matured in the second quarter
of 1997. Checking, savings and money market account balances increased $33.2
million during the first six months of 1997, compared to $36.0 million during
the first six months of 1996.
The maturity of $16.2 million of investment securities also provided
additional liquidity during 1997. In comparison, during the same six month
period in 1996, $20.3 million of funds were provided by the maturity of
investment securities.
17
<PAGE> 18
Uses of Funds. The major uses of funds during the six months ended June 30,
1997 included $749.9 million of loans originated and purchased for investment,
$268.4 million of payments for maturing CDs, $40.2 million for the purchase of
AFS investment securities, and $17.1 million for the purchase of treasury
stock.
Loans originated and purchased for investment totaled $749.9 million
during the first six months of 1997, compared to $678.0 million during the same
period of 1996. In the continued effort to expand interest earning asset
levels, during the first six months of 1997, the Bank purchased $514.2 million
of mortgage loans, primarily 1-4 family adjustable rate whole loans. Loans
originated for investment during the first half of 1997 from retail operations
and correspondent operations were $198.6 million and $35.6 million,
respectively. In comparison, loans originated for investment from retail and
correspondent operations in the first six months of 1996 were $149.2 million
and $106.8 million, respectively.(2)
Payments for maturing CDs increased from $177.8 million during the six
months ended June 30, 1996 to $268.4 million during the first six months of
1997. The scheduled maturity of some of the Bank's higher rate CD products
resulted in the increase in payments for maturing CDs. Most of the run-off in
the CD balances occurred in the second quarter, when balances from 1996
promotions matured.
In addition, during the first half of 1997, $40.2 million of funds were
used to purchase AFS investment securities. In comparison, during the same
period in 1996, $10.2 million of funds were used to purchase AFS investment
securities.
During the first half of 1997, the Company used $17.1 million of funds to
acquire 977,625 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 six
months of 1996.
Holding Company Liquidity. At June 30, 1997, St. Paul Bancorp, the "holding
company", had $28.7 million of cash and cash equivalents, which included
amounts due from depository institutions and investment securities with
original maturities of
___________________________
(2) In an effort to increase 1-4 family loan originations during the
second half of 1997, the Bank began a summer loan program, by offering a fixed
rate loan product at an attractive rate. In order to reduce the interest rate
risk exposure on the fixed product, the Bank entered into a interest rate
exchange agreement in the third quarter. Under this agreement, which has a
$25 million notional amount, the Bank receives a variable interest rate in
exchange for a fixed payment.
18
<PAGE> 19
less than 90 days. In addition, the Company has $20.2 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 June
30, 1997, no funds have been borrowed under this agreement.
Sources of liquidity for St. Paul Bancorp during the first six months
of 1997 included $98.6 million from the issuance of senior debt, $23.5 million
of dividends from the Bank and $1.3 million of dividends from SPFD and Annuity
Network, Inc. Uses of St. Paul Bancorp's liquidity during the first six months
of 1997 included advances to the Bank of $31.7 million(3), the repayment of
$34.5 million of subordinated debt, the $20.2 million purchase of investment
securities, the acquisition of $17.1 million of Company common stock under the
stock repurchase program, $8.3 million of advances to St. Paul Financial
Development, and $5.5 million of dividends paid to stockholders. See
"STATEMENT OF FINANCIAL CONDITION" for further discussion.
Under the current stock repurchase program, which was announced during
1996, the Company has acquired 1,146,375 of the stated 1,687,500 share goal at
a weighted average price of $17.12. The program has been extended for an
additional six months and will run through December 1997. In addition, the
Board of Directors has increased the quarterly dividend rate by 25% to $0.10
per share, after considering the three-for-two stock split, beginning with the
dividend paid in the third quarter of 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 June 30, 1997, the Bank had $211.3
million invested in liquid assets, which exceeded the current requirement by
$27.1 million. Up to certain limits, the Bank can use FHLB advances,
securities
________________________
(3) During the first half of 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.
19
<PAGE> 20
sold under agreements to repurchase, and the issuance of mortgage-backed notes
as additional sources of liquidity.
20
<PAGE> 21
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 six months ended June 30, 1997
and 1996:
<TABLE>
<CAPTION>
Three months ended June 30, 1997 and 1996 Six months ended June 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 $ (428) $ (692) $(1,120) $1,149 $(1,574) $ (425)
Mortgage-backed securities 3,333 1,888 5,221 6,225 3,627 9,852
Investment securities (201) 132 (69) (498) 289 (209)
Federal funds and interest-bearing
bank balances 520 32 552 1,226 (1) 1,225
Other short-term investments (2) 90 88 (369) 183 (186)
------ ------ ------- ------ ------- -------
Total interest income 3,222 1,450 4,672 7,733 2,524 10,257
CHANGE IN INTEREST EXPENSE:
Deposits 805 582 1,387 2,100 417 2,517
Short-term borrowings 1,035 151 1,186 3,057 113 3,170
Long-term borrowings 636 (162) 474 577 (223) 354
------ ------ ------- ------ ------- -------
Total interest expense 2,476 571 3,047 5,734 307 6,041
------ ------ ------- ------ ------- -------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $ 746 $ 879 $ 1,625 $1,999 $ 2,217 $ 4,216
====== ===== ======= ====== ======= =======
</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.
21
<PAGE> 22
RESULTS OF OPERATIONS
General. Net income for the second quarter of 1997 was $12.4 million or 21.7%
higher than during the same quarter in 1996. Earnings per share of $0.36 for
the second quarter represented a 24.1% increase over the $0.29 reported during
the same quarter a year ago. Net income for the six month period ending June
30, 1997 rose 27.9% to $24.2 million compared to $18.9 million during the same
six month period in 1996, while earnings per share rose 30.2% to $0.69.(5) 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 the first six
months of 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 $33.4 million during the
second quarter of 1997, $1.6 million or 5.1% higher than during the same period
a year ago. For the six month period ending June 30, 1997, net interest income
was $65.7 million, $4.2 million or 6.9% higher than during the same period in
1996. In both the three and six month periods, net interest income benefited
from expanded interest earning asset levels. Management continues to focus its
attention on increasing interest earning assets, primarily through the purchase
of adjustable rate 1-4 family whole loans. Period-end interest earnings assets
increased $308 million to $4.4 billion at June 30, 1997 from June 30, 1996.
This growth in interest earning assets was funded with both additional
borrowings and higher deposit balances. While deposit balances have increase
from June 30, 1996, deposit balances have decreased since the beginning of
1997.
The net interest margin ("NIM") of 3.13% during the second quarter of 1997
was relatively level with the NIM during the same quarter in 1996. The NIM for
the first six months of 1997 was 3.09%, or 3 basis points higher than during
the same period in 1996. In both periods, the NIM benefited from expanded
interest earning asset levels and an increase in the overall asset yield. The
higher asset yields
________________________
(5) The earnings per share comparisons benefited from 1.9 million of
Company shares repurchased during 1996 and 977,625 shares repurchased during
the first six months of 1997.
22
<PAGE> 23
were mainly associated with an increase in the MBS portfolio yield as
amortization of net premiums decreased. However, higher deposit costs, mainly
due to higher average CD balances and rates, and a heavier reliance on
borrowings, the highest costing interest-bearing liability, offset these
increases in the NIM. A slower increase in deposit costs in the six month
period compared to the three month period allowed the NIM for the first six
months to increase by 3 basis points while the NIM for the second quarter
remained flat.
Interest Income. Interest income on loans receivable decreased $1.1 million to
$56.7 million during the second quarter of 1997. A 10 basis point decline in
the effective loan yield and a $22.3 million reduction in average balances
produced the lower income. For the six month period ended June 30, 1997,
income from loans receivable was $110.2 million, down $425,000 from the same
period in 1996. An 11 basis point decline in the effective loan yield was
partly offset by a $30.0 million increase in average balances. For both the
three and six month comparisons, the lower effective loan yield was produced by
the repayment of higher rate loans and the purchase and origination of loans at
weighted average rates less than the portfolio average. In addition, the
securitization of $381 million of loans into MBS at end of December 1996 also
contributed to the decline in rate as higher yielding loan balances were
transferred into MBS. While average loan balances have benefited from the
acquisition of whole loans between periods, including $711.3 million of
acquisitions since June 30, 1996, the securitization of loans into MBS and loan
repayments offset these purchases. The timing of the purchases caused average
loan balances to decrease $22.3 million during the second quarter, but increase
by $30.0 million during the year-to-date period.
MBS interest income rose $5.2 million or 38.0% to $18.9 million during the
second quarter of 1997, while year-to-date MBS income increased $9.9 million or
34.3% over the same period in 1996. Higher average balances and an increase in
the effective MBS yield generated the increase in interest income. Average MBS
balances increased by $199.6 million and $186.9 million during the three and
six month periods ended June 30, 1997, respectively, as compared to the same
periods in 1996. The increase primarily resulted from the $381 million loan
securitization at the end of 1996. Principal repayments partly offset this
increase. The effective MBS yield rose by 78 basis points during the second
quarter of 1997 and 73 basis points in the
23
<PAGE> 24
year-to-date period. 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 rose by $571,000 during the second
quarter and $830,000 during the six months ended June 30, 1997 when compared to
the same period in 1996. Both higher average balances and effective yields
produced the increase in investment income. In both the three and six month
periods, most of the increase in income was associated with higher fed fund and
interest-bearing bank balances, as the Company increased liquidity. Modest
increases in the effective yield earned on investments also contributed to the
increase in income. Higher yields earned on new investment securities and the
maturities of lower rate securities, produced the increase in yield.
Interest Expense. Deposit interest expense rose $1.4 million to $35.7 million
during the second quarter of 1997 compared to the same period a year ago. In
addition, deposit expense during the first half of 1997 rose $2.5 million to
$71.5 million as compared to the same period in 1996. Most of the increase in
expense was associated with higher average deposit balances, which increased
during the latter half of 1996 and the first quarter of 1997, but declined
somewhat during the second quarter. Average deposit balances rose by $75.9
million and $98.7 million in the three and six month periods ended June 30,
1997, respectively. Heavier reliance on CDs as a source of funds primarily
produced the increase in expense. Most of the increase in CD balances occurred
during the second half of 1996 and the first quarter of 1997. Higher money
market and checking account balances accounted for the remainder of the
increase in average balances. The greater reliance on CDs, the highest costing
deposit product, also contributed to an increase in the effective cost of
deposits. The effective cost of deposits increased 7 basis points during the
second quarter of 1997 and 2 basis points during the first six months of 1997.
Borrowing interest expense increased by $1.7 million during the current
quarter and $3.5 million for the first six months of the year. Higher average
balances produced the increase. Average balances rose by $108.9 million during
the current quarter and $123.4 million during the year-to-date period.
Management relied on borrowings, particularly short-term borrowings, to fund a
significant
24
<PAGE> 25
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 2
basis points during the second quarter 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.(6)
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 2.66% at June 30, 1997, compared to 2.78% at Dec. 31, 1996 and 2.80%
at June 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 a 6 basis point increase in the weighted average deposit rate since
June 30, 1996 produced the higher liability costs. The repayment of higher
rate loans and the purchase and origination loans at rates below the portfolio
average produced the lower weighted average loan rates.
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 $1.2 billion
of "adjustable" rate loans and MBS that have initial fixed interest rate
periods ranging from three to five years. At June 30, 1997, only $61.0 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.
__________________________
(6) 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 the Company's $34.5 million of 8.25% subordinated notes. The
benefit from this repayment of the higher costing borrowings began to impact
borrowing expense during the second quarter of 1997.
25
<PAGE> 26
Second, approximately $298.6 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.(7)
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
and MBS. Most of the annual interest caps in the Bank's loan and MBS portfolio
are 2%. At June 30, 1997, only $23.6 million of loans and MBS are at their
periodic or lifetime interest rate caps.
On the liability side, the Company has $683.2 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 June 30, 1997, the
Company maintained a one-year negative GAP of 4.58%, suggesting that net
interest income would decrease if market
________________________
(7) At June 30, 1997, the weighted average fully indexed rate on these
loans was 7.39% and the weighted average floor was 8.04%. These interest rate
floors benefited net income by $554,000 during the second quarter of 1997 and
$1.4 million for the first six months of 1997. The floors also increased the
NIM and interest rate spread during 1997 by 6 basis points. In comparison, at
June 30, 1996, the Bank had $440.7 million of loans at their floors, which
benefited interest income by $709,000 during the second quarter of 1996 and
$1.4 million during the first six months of 1996. In addition, the floors
increased the NIM and interest rate spread during the first six months of 1996
by 7 basis points.
26
<PAGE> 27
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 second 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 second quarter of 1996 and a $1.0 million provision during the first
six months of 1996.
Other Income. Higher other income contributed to the higher level of net
income for both the second quarter and year-to-date 1997 periods. Other income
for the second quarter of 1997 was $11.0 million, $2.5 million or 29.1 percent
higher than during the same quarter a year ago. Year-to-date other income was
$21.5 million during 1997, $3.7 million or 21.0% higher than during the same
six month period during 1996.
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 $1.8 million and $3.8 million during the second quarter
and year-to-date 1997 periods, respectively. The higher ATM revenues resulted
from the January 1997 introduction of an ATM access fees to non-customers who
use the Bank's ATM network and the expansion of the Bank's ATM network during
1996. During 1996, the Bank more than doubled the size of its network with the
installation of 261 ATMs in White Hen Pantry convenience stores located in the
eight county Chicagoland area.
Higher revenues from discount brokerage operations and higher insurance
and annuity sales also contributed to the increase. Higher revenues from the
sale of mutual funds at Investment Network, Inc., the Bank's discount brokerage
subsidiary, mainly produced a $296,000 increase in revenues from brokerage
operations during the second quarter of 1997 and a $487,000 increase in the
year-to-date period. Also, higher annuity sales volumes mainly generated the
increase in revenues from insurance and annuity sales, which increased $154,000
in the second quarter of 1997 compared to the same period in 1996, and $271,000
during the first six months of 1997.
27
<PAGE> 28
These increases in other income were partly offset by lower gains from
security and loan 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. Lower loan
sales volumes during both the second quarter and the first six months of 1997
resulted in lower gains from loan sales of $51,000 during the second quarter
and $254,000 for the first six months of 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, during the second quarter, the Bank took out of operation 22 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 expects to take up to an additional 61 ATMs located in
these stores out of operation over the next few years. 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. 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.
General and Administrative Expense. General and administrative expenses
("G&A")totaled $25.6 million during the second quarter of 1997, or 5.3% higher
than during the same period of 1996. G&A expenses for the first six months of
1997 were $49.7 million of 4.2% higher than during the same six month period in
1996. The higher level of expense in both the quarter and six month period was
mainly generated by increases in compensation and benefits and occupancy,
equipment and office expense. Slightly higher advertising costs also
contributed to the increase in G&A.
Compensation and benefits rose $1.4 million during the second quarter of
1997 over the same quarter in 1996, while year-to-date expense rose by $2.5
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
28
<PAGE> 29
taxes, and higher pension cots. Occupancy, equipment and office
expense rose $1.1 million during the second quarter and $1.8 million for the
first six months of 1997 compared to the same periods in 1996. The expansion
of the ATM network, system projects, and higher depreciation on capital
investments produced the increase in occupancy, equipment and office expense.
Product promotions produced the increase in advertising costs.
A $1.3 million decrease in federal deposit insurance premiums during the
second quarter of 1997 and $2.6 million during the year-to-date period partly
offset these increase in G&A. The lower deposit insurance premiums resulted
from the decrease in deposit insurance premiums that became effective in
January 1997.
Management remains committed to on-going expense control, and is
continuing to review back-office operations in order to improve work flows,
communications, coordination, and service as a means to improve efficiency and
control expense. In addition, Management is conducting a review of its
information systems department and studying ways to reorganize this function to
gain additional cost savings and improve the Company's information systems.
Even with the above measures, 1997 G&A levels are expected 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.
As part of the review of back-office operations, during the second quarter
of 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 when operations begin to
move into this facility during late 1997, the Bank expects to obtain future
cost savings from operating this facility at lower costs than the leased
premises. Funds for the purchase of this facility were provided by operations.
Management also expects to add to the branch network in 1997 by opening
branch offices located in storefronts or neighborhood shopping centers. These
locations
29
<PAGE> 30
have similar cost requirements as the Bank's current in-store branch
locations, which is significantly less than the initial cost for a
free-standing branch. The Bank has selected the site for one branch and
expects to open a location in a store-front in Chicago during the second half
of the year. In addition, Management is considering sites for up to two more
store-front locations within the City of Chicago. Also, the Bank is
negotiating to open two additional in-store branches in 1998, including one
located in Northwest Indiana. 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 of $39,000 during the second quarter of 1997 was up
slightly from the $20,000 loss reported during the second quarter of 1996.
However, the net loss for the first six months of 1997 of $83,000 was
substantially less than the $1.2 million loss incurred during the first two
quarters of 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.(8) 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. The level of pretax income increased $3.3 million during the second
quarter of 1997
________________________
(8) 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.
30
<PAGE> 31
compared to the same quarter a year ago, and year-to-date pretax income
rose $8.0 million from 1996 to 1997. The effective income tax rate for both
the second quarter and year-to-date 1997 periods was 34.0%, which is the
expected annual effective income tax rate for 1997.
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.
31
<PAGE> 32
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
Three months ended June 30,
Dollars in thousands At June 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) $ 73,078 6.38% $ 66,235 $ 1,056 6.39% $ 79,488 $ 1,125 5.68%
Federal funds and
interest-bearing bank balances 84,640 5.32 78,849 1,070 5.44 40,349 518 5.15
Other investments (c) 66,707 6.02 61,099 981 6.44 61,258 893 5.85
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments 224,425 5.87 206,183 3,107 6.04 181,095 2,536 5.62
Mortgage-backed securities (b) 1,053,752 7.06 1,088,326 18,949 6.96 888,740 13,728 6.18
Loans receivable (d) 3,154,842 7.49 2,972,994 56,668 7.62 2,995,272 57,788 7.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $4,433,019 7.30% $4,267,503 $78,724 7.38% $4,065,107 $74,052 7.29%
====================================================================================================================================
Deposits:
Interest-bearing checking $ 226,600 1.66% $ 233,836 $ 992 1.70% $ 233,252 $ 1,029 1.77%
Non-interest-bearing checking 156,514 -- 147,532 -- -- 134,156 -- --
Other non-interest-bearing accounts 43,408 -- 40,605 -- -- 33,629 -- --
Money market accounts 220,247 3.69 218,011 1,993 3.67 203,538 1,636 3.22
Savings accounts 693,517 2.45 689,899 4,329 2.52 703,678 4,247 2.42
Certificates of deposit 1,954,925 5.70 2,016,038 28,382 5.65 1,961,733 27,397 5.60
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,295,211 4.26 3,345,921 35,696 4.28 3,269,986 34,309 4.21
Borrowings:(e)
Short-term borrowings 580,187 5.88 345,620 5,039 5.85 274,267 3,853 5.63
Long-term borrowings 268,839 6.75 273,064 4,595 6.75 235,543 4,121 7.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings 849,026 6.15 618,684 9,634 6.25 509,810 7,974 6.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $4,144,237 4.64% $3,964,605 $45,330 4.59% $3,779,796 $42,283 4.49%
====================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 288,782 $ 302,898 $ 285,311
====================================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.08x 1.08x
====================================================================================================================================
Net interest income $33,394 $31,769
====================================================================================================================================
Interest rate spread 2.66%
====================================================================================================================================
"Average" interest rate spread 2.79% 2.80%
====================================================================================================================================
Net yield on average earning assets 3.13% 3.13%
====================================================================================================================================
</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.
32
<PAGE> 33
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
Six months ended June 30,
Dollars in thousands At June 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) $ 73,078 6.38% $ 66,053 $2,057 6.28% $ 82,893 $ 2,266 5.51%
Federal funds and
interest-bearing bank balances 84,640 5.32 103,944 2,723 5.28 57,133 1,498 5.29
Other investments (c) 66,707 6.02 63,561 2,004 6.36 75,609 2,190 5.84
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 224,425 5.87 233,558 6,784 5.86 215,635 5,954 5.57
Mortgage-backed securities (b) 1,053,752 7.06 1,113,029 38,561 6.93 926,107 28,709 6.20
Loans receivable (d) 3,154,842 7.49 2,900,383 110,221 7.60 2,870,383 110,646 7.71
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $4,433,019 7.30% $4,246,970 $155,566 7.33% $4,012,125 $145,309 7.25%
===================================================================================================================================
Deposits:
Interest-bearing checking $ 226,600 1.66% $ 233,165 $ 1,985 1.72% $ 235,250 $ 2,044 1.75%
Non-interest-bearing checking 156,514 -- 143,645 -- -- 128,239 -- --
Other non-interest-bearing accounts 43,408 -- 38,590 -- -- 31,421 -- --
Money market accounts 220,247 3.69 218,839 3,940 3.63 200,072 3,169 3.19
Savings accounts 693,517 2.45 684,550 8,346 2.46 698,081 8,416 2.43
Certificates of deposit 1,954,925 5.70 2,040,583 57,242 5.66 1,967,575 55,367 5.67
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,295,211 4.26 3,359,372 71,513 4.29 3,260,638 68,996 4.27
Borrowings:(e)
Short-term borrowings 580,187 5.88 322,412 9,246 5.78 215,738 6,076 5.68
Long-term borrowings 268,839 6.75 267,608 9,142 6.89 250,824 8,788 7.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total borrowings 849,026 6.15 590,020 18,388 6.28 466,562 14,864 6.42
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $4,144,237 4.64% $3,949,392 $ 89,901 4.59% $3,727,200 $ 83,860 4.54%
===================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 288,782 $ 297,578 $ 284,925
===================================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.08x 1.08x
===================================================================================================================================
Net interest income $ 65,665 $ 61,449
===================================================================================================================================
Interest rate spread 2.66%
===================================================================================================================================
"Average" interest rate spread 2.74% 2.71%
===================================================================================================================================
Net yield on average earning assets 3.09% 3.06%
===================================================================================================================================
</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.
33
<PAGE> 34
KEY CREDIT STATISTICS
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996 Dec. 31, 1995
Dollars in thousands Dollar % Dollar % Dollar %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family units $2,165,379 69% $1,753,907 63% $1,663,228 62%
Multifamily units 905,305 29 988,506 35 979,017 36
Commercial 57,729 2 54,985 2 54,981 2
Land and land development 101 * 1,633 * 1,940 *
- --------------------------------------------------------------------------------------------------------
Total mortgage loans $3,128,514 100% $2,799,031 100% $2,699,166 100%
========================================================================================================
CONSUMER LOANS:
Secured by deposits $ 958 6% $ 1,169 6% $ 2,307 10%
Education (guaranteed) 60 * 210 1 261 1
Home improvement 202 1 281 1 576 2
Auto 13,297 83 16,197 85 20,034 86
Personal 1,524 10 1,193 7 165 1
- --------------------------------------------------------------------------------------------------------
Total consumer loans $ 16,041 100% $ 19,050 100% $ 23,343 100%
- --------------------------------------------------------------------------------------------------------
Total loans held for investment $3,144,555 $2,818,081 $2,722,509
========================================================================================================
Weighted average rate 7.49% 7.66% 7.69%
========================================================================================================
*Less than 1%
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996 Dec. 31, 1995
Dollars in thousands Dollar % Dollar % Dollar %
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family units $ 9,724 69% $ 9,102 73% $ 7,722 26%
Multifamily units 1,920 14 -- -- 8,665 30
Commercial -- -- 387 3 1,360 5
- -------------------------------------------------------------------------------------------------------
Total mortgage loans 11,644 83 9,489 76 17,747 61
CONSUMER LOANS 92 1 46 * 81 *
REAL ESTATE OWNED:
1-4 family units 885 6 1,566 13 2,174 8
Multifamily units --- -- --- -- 8,206 28
Commercial 1,351 10 1,351 11 997 3
- -------------------------------------------------------------------------------------------------------
Total real estate owned 2,236 16 2,917 24 11,377 39
- -------------------------------------------------------------------------------------------------------
Total nonperforming assets $13,972 100% $12,452 100% $29,205 100%
=======================================================================================================
</TABLE>
*Less than 1%
<TABLE>
<CAPTION>
June 30, Dec. 31, Dec. 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs to average loans receivable 0.10% 0.15% 0.21%
Net California loan charge-offs to average California
loans receivable 0.55 0.56 0.48
Loan loss reserve to total loans 1.10 1.28 1.42
Loan loss reserve to nonperforming loans 294.09 377.19 216.62
Loan loss reserve to impaired loans 91.67 64.04 120.37
Nonperforming assets to total assets 0.30 0.29 0.71
General valuation allowance to non-
performing assets 233.51 248.88 123.94
- --------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
CREDIT RISK MANAGEMENT
LENDING
At June 30, 1997, the loans receivable portfolio was primarily 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 $11.7 million at June 30, 1997, up $2.2
million from Dec. 31, 1996.(9) The increase was largely due to the addition of
one multifamily loan to a non-performing status during the second quarter of
1997. Despite the slight increase since year-end, non-performing loans continue
to be among the lowest levels in recent history.
At June 30, 1997, the Bank had a net investment in impaired loans of
$37.6 million, compared to $56.2 million at Dec. 31, 1996.(10) At June 30,
1997, $35.7 million of the $37.6 million of 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. At December 31, 1996, all of the
$56.2 million of impaired loans were considered performing. The decline in
impaired loans since Dec. 31, 1996, primarily resulted from resolution of
several income property loans that had been classified as impaired because of
pending maturities.
The accumulated provision for loan losses at June 30, 1997 was $34.5
million compared to $36.0 million at Dec. 31, 1996, a decrease of $1.5 million.
The following table provides a rollforward of the accumulated provision for
loan losses from Jan. 1, 1996 through June 30, 1997:
- ---------------------
(9) While non-performing loans increased from year-end, the level
decreased $6.0 million from March 31, 1997, largely due to the return to a
current status of one multi-family loan.
(10) 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."
35
<PAGE> 36
<TABLE>
<CAPTION>
1997 1996
------------ -------------------------
Six Months Six Months Year Ended
Dollars in thousands Ended June 30 Ended June 30 Dec. 31
- -------------------------------------------- -------------------------
<S> <C> <C> <C>
Beginning of Period $35,965 $38,619 $38,619
Provision for losses --- 1,000 1,750
Charge-offs (2,097) (2,659) (5,113)
Recoveries 646 358 709
------- ------- -------
End of Period $34,514 $37,318 $35,965
======= ======= =======
</TABLE>
The general valuation allowance is evaluated based on a careful evaluation
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 six months of 1997 totaled $1.5 million,
$823,000 lower than the $2.3 million of net charge-offs in the first six months
of 1996.(11) Of total charge-offs, $1.6 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 0.10%
during the first six 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 six months ended June 30,
1997 compared to a $1.0 million loan loss provision during the same period in
1996. A continued decline over the past few years in the level of classified
loans and non-performing assets, as well as a decrease in the size of the
Bank's income property
- ------------------------
(11) Gross loan charge-offs in the first six months of 1997 totaled $2.1
million and included $1.7 million of charge-offs on income property loans that
were considered impaired under SFAS No. 114 and $362,000 of charge-offs on 1-4
family and consumer loans. Recoveries during the first half of 1997 were
primarily related to income property loans.
36
<PAGE> 37
lending portfolio, and the stabilization of certain real 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 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 recent years, income property loans originated by the Company have been
secured by collateral located in the Midwest. Prior to 1991, the Bank
originated these loans on a nationwide basis. Approximately 43% of the
portfolio originated before 1991 is scheduled to mature by the end of 2000.
The Bank intends to refinance a large portion of these loans that meet
underwriting standards, and Management is actively working with borrowers whose
loans are scheduled to mature during the remainder of 1997 to refinance certain
loans and obtain payoff of lower quality loans. Management is also pursuing
strategies for 1998 maturities. In connection with these maturities,
Management is prepared to make loans to facilitate the sale of REO and
repurchase distressed loans that have been sold with recourse. Depending on
the strategies deployed, the amount of the Bank's charge-offs, REO, impaired
loans, and nonperforming assets could be affected. Management believes that,
based on economic conditions known today, loan loss reserves of the Bank are
adequate to absorb the inherent losses in the portfolio as it relates to
current plans to refinance or liquidate the income property real estate
portfolio as it matures.
In addition to its program to refinance 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
37
<PAGE> 38
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 first six months of 1997, the Bank purchased $506.6 million of
whole loans, secured by 1-4 family residences located nationally. Prior to
purchasing these loans, the Bank performs due diligence procedures. Because 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 multifamily 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 June 30, 1997, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 27%, compared to 34% at Dec. 31,
1996.
OTHER REAL ESTATE OWNED
REO totaled $2.2 million at June 30, 1997 compared to $2.9 million at the
end of 1996. Lower 1-4 family REO assets produced the decline. Of total REO at
June 30, 1997, $900,000 were 1-4 family assets and $1.3 million was commercial
real estate.
The accumulated provision for real estate losses totaled $350,000 at
June 30, 1997 compared to $284,000 at Dec. 31, 1996. During the first six
months of 1997, the Bank recorded net recoveries of $66,000 resulting in the
increase 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 six months of 1997 compared to
$943,000 in the first half of 1996. See "RESULTS OF OPERATIONS" for further
details on REO provision.
38
<PAGE> 39
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
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.
39
<PAGE> 40
<TABLE>
<CAPTION>
ASSET/LIABILITY REPRICING SCHEDULE (a)
AT JUNE 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 5.32% $ 84,640 2% $ 84,640 $ - $ - $ - $ -
Fixed rate 6.20 139,785 3 61,405 20,072 - - 58,308
Mortgage-backed securities:(c)
Adjustable rate 7.15 793,991 18 325,518 243,624 224,849 - -
Fixed rate 6.78 259,761 6 17,566 16,805 56,869 51,447 117,074
Mortgage loans:(c)
Adjustable and renegotiable rate 7.38 2,678,898 61 1,314,207 366,916 836,622 161,153 -
Fixed rate 8.18 449,616 10 53,707 37,390 146,210 103,955 108,354
Consumer loans (c) 7.89 16,041 * 2,426 1,516 4,876 3,618 3,605
Assets held for sale 8.12 10,287 * 10,287 - - - -
-------------------------------------------------------------------------------------
Total rate sensitive assets 7.30% $4,433,019 100% $1,869,756 $ 686,323 $1,269,426 $320,173 $ 287,341
=====================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 0.88% $ 426,077 10% $ 112,209 $ 24,496 $ 80,301 $ 58,017 $ 151,054
Savings accounts 2.45 693,580 17 228,813 43,903 137,875 92,707 190,282
Money market deposit accounts 3.69 220,629 6 220,629 - - - -
Fixed-maturity certificates 5.70 1,954,925 47 933,962 520,027 374,402 69,951 56,583
-------------------------------------------------------------------------------------
4.26 3,295,211 80 1,495,613 588,426 592,578 220,675 397,919
Borrowings:
FHLB advances 5.99 441,085 11 390,000 - 50,000 248 837
Other borrowings 6.24 391,541 9 293,187 - - - 98,354
Mortgage-backed note 8.54 16,400 * - - 16,400 - -
-------------------------------------------------------------------------------------
6.15 849,026 20 683,187 - 66,400 248 99,191
-------------------------------------------------------------------------------------
Total rate sensitive liabilities 4.64% $4,144,237 100% $2,178,800 $ 588,426 $ 658,978 $220,923 $ 497,110
=====================================================================================
Excess (deficit) of rate sensitive
assets over rate sensitive
liabilities (GAP) 2.66% $ 288,782 $ (309,044) $ 97,897 $ 610,448 $ 99,250 $(209,769)
=====================================================================================
Cumulative GAP $ (309,044) $(211,147) $ 399,301 $498,551 $ 288,782
Cumulative GAP to total assets without
regard to hedging transactions (6.70)% (4.58)% 8.66% 10.81% 6.26%
Cumulative GAP to total assets with
impact of hedging transactions (5.03)% (3.09)% 8.66% 10.81% 6.26%
</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.
40
<PAGE> 41
PART II. -- OTHER INFORMATION
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 7, 1997, the Company held an Annual Meeting of Shareholders (the
"Annual Meeting") to elect three directors for a term of three years and
to ratify the appointment of the Company's independent auditors for the
fiscal year ending December 31, 1997.
(b) Set forth below is a description of each matter voted upon at the Annual
Meeting and the number of votes cast for and the number of votes withheld
as to each such matter.
1. Three directors were elected for a term of three years, or
until their successors have been elected and qualified. A list of
such directors, including the votes for and withheld is set forth
below:
<TABLE>
<CAPTION>
Withhold
Authority
Nominee For To Vote
---------------- ----------------- -------
<S> <C> <C>
Paul C. Gearen 19,395,001 353,030
Joseph C. Scully 19,441,490 306,541
John J. Viera 19,442,283 305,748
</TABLE>
2. The appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 1997 was ratified.
There were 19,520,064 votes cast for the proposal, 123,260 votes
against the proposal and 104,707 votes abstained.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) The Company filed a current report on Form 8-K on June 20, 1997,
announcing a three-for-two stock split distributed on July 14, 1997 to
stockholders of record as of June 30, 1997.
41
<PAGE> 42
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: August 14, 1997 By: /s/ Joseph C. Scully
------------------------
Joseph C. Scully
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 1997 By: /s/ Robert N. Parke
-------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
42
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<Captions>
Three months ended Six months ended
June 30, 1997 June 30, 1997
-------------- -------------
<S> <C> <C>
1. Net income $12,397,383 $24,231,417
2. Weighted average common
shares outstanding 33,615,380 33,823,553
----------- -----------
3. Earnings per
common share $ 0.37 $ 0.72
=========== ===========
4. Weighted average common
shares outstanding 33,615,380 33,823,553
5. Common stock equivalents
due to dilutive
effect of stock options 1,068,654 1,075,331
----------- -----------
6. Total weighted average
common shares and
equivalents outstanding 34,684,034 34,898,884
=========== ===========
7. Primary earnings per share $ 0.36 $ 0.69
=========== ===========
8. Total weighted average
common shares and
equivalents outstanding
(Line 6) 34,684,034 34,898,884
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 98,022 169,555
----------- -----------
10. Total shares for fully
diluted earnings per share 34,782,056 35,068,439
=========== ===========
11. Fully diluted earnings
per share $ 0.36 $ 0.69
=========== ===========
</TABLE>
43
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 79,561
<INT-BEARING-DEPOSITS> 12,910
<FED-FUNDS-SOLD> 71,730
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 635,565
<INVESTMENTS-CARRYING> 491,265
<INVESTMENTS-MARKET> 488,245
<LOANS> 3,154,842
<ALLOWANCE> 34,514
<TOTAL-ASSETS> 4,611,394
<DEPOSITS> 3,295,211
<SHORT-TERM> 580,187
<LIABILITIES-OTHER> 70,394
<LONG-TERM> 268,839
349
0
<COMMON> 0
<OTHER-SE> 396,414
<TOTAL-LIABILITIES-AND-EQUITY> 4,611,394
<INTEREST-LOAN> 110,221
<INTEREST-INVEST> 6,784
<INTEREST-OTHER> 38,561
<INTEREST-TOTAL> 155,566
<INTEREST-DEPOSIT> 71,513
<INTEREST-EXPENSE> 89,901
<INTEREST-INCOME-NET> 65,665
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 49,737
<INCOME-PRETAX> 37,322
<INCOME-PRE-EXTRAORDINARY> 24,634
<EXTRAORDINARY> (403)
<CHANGES> 0
<NET-INCOME> 24,231
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 3.09
<LOANS-NON> 6,660
<LOANS-PAST> 5,076
<LOANS-TROUBLED> 857
<LOANS-PROBLEM> 39,891
<ALLOWANCE-OPEN> 35,965
<CHARGE-OFFS> 2,097
<RECOVERIES> 646
<ALLOWANCE-CLOSE> 34,514
<ALLOWANCE-DOMESTIC> 34,514
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
