<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3504665
- ----------------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6700 W. North Avenue
Chicago, Illinois 60707
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(773) 622-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value -- 41,595,986 shares, as of October 30, 1998
-------------------------------------------------------------------------
<PAGE> 2
ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of Sept. 30, 1998 and Dec. 31, 1997........................................3
Consolidated Statements of Income for the Three and Nine
Months Ended Sept. 30, 1998 and 1997..........................................4
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended Sept. 30, 1998 and 1997.....................................5
Consolidated Statements of Cash Flows for the
Nine Months Ended Sept. 30, 1998 and 1997.....................................6
Notes to Consolidated Financial Statements....................................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................11
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K.............................................44
Signature Page...............................................................45
Exhibits.....................................................................46
</TABLE>
2
<PAGE> 3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
Dollars in thousands 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 102,625 $ 113,293
Federal funds sold and interest-bearing bank balances 21,897 66,845
Short-term cash equivalent securities 117,085 57,995
----------- -----------
Total cash and cash equivalents 241,607 238,133
Investment securities
(Market: Sept. 30, 1998-$236,151; Dec. 31, 1997-$187,765) 235,796 187,575
Mortgage-backed securities
(Market: Sept. 30, 1998-$588,911; Dec. 31, 1997-$958,664) 584,759 955,291
Securities due from brokers
(Market: Sept. 30, 1998-$104,097) 104,097 --
Loans receivable (Net of allowance for loan losses:
Sept. 30, 1998-$40,470; Dec. 31, 1997-$38,569) 4,506,451 3,626,533
Loans held for sale, at lower of cost or market
(Market: Sept. 30, 1998-$44,678; Dec. 31, 1997-$19,567) 44,056 19,504
Accrued interest receivable 35,336 30,730
Foreclosed real estate (Net of allowance for losses:
Sept. 30, 1998-$155; Dec. 31, 1997-$157) 1,926 1,480
Real estate held for development or investment 13,834 15,287
Investment in Federal Home Loan Bank stock 68,539 41,114
Office properties and equipment 73,158 69,127
Prepaid expenses and other assets 38,668 41,070
----------- -----------
Total Assets $ 5,948,227 $ 5,225,844
=========== ===========
LIABILITIES:
Deposits $ 3,843,623 $ 3,871,400
Short-term borrowings 676,490 373,537
Long-term borrowings 816,693 419,457
Advance payments by borrowers for taxes and insurance 28,112 23,790
Other liabilities 81,881 51,329
----------- -----------
Total Liabilities 5,446,799 4,739,513
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:
Sept. 30,1998-80,000,000 shares; Dec. 31 1997-40,000,000 shares;
Issued: Sept. 30, 1998-41,589,408 shares;
Dec. 31, 1997-41,576,631 shares;
Outstanding: Sept. 30, 1998-40,597,914 shares;
Dec. 31, 1997-40,337,423 shares) 415 415
Paid-in capital 157,968 152,353
Retained income, substantially restricted 356,976 354,797
Accumulated other comprehensive income:
Unrealized gain on securities (net of taxes of $2,139 at
Sept. 30, 1998 and $1,651 at Dec. 31, 1997) 3,477 2,680
Borrowings by employee stock ownership plan -- (221)
Unearned employee stock ownership plan shares
(364,963 shares at Dec. 31, 1997) -- (2,858)
Treasury stock (Sept. 30, 1998-991,494 shares;
Dec. 31, 1997-1,239,208 shares) (17,408) (20,835)
----------- -----------
Total stockholders' equity 501,428 486,331
----------- -----------
Total liabilities and stockholders' equity $ 5,948,227 $ 5,225,844
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30,
----------------------------------------------
Dollars in thousands except per share amounts 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 74,311 $ 68,032 $ 211,800 $ 193,888
Mortgage-backed securities/securities due from brokers 11,922 18,498 40,112 58,509
Taxable investment securities 5,194 4,193 16,851 13,487
Nontaxable investment securities 547 541 1,458 1,523
Equity investment securities 1,044 857 2,884 2,193
--------- --------- --------- ---------
Total interest income 93,018 92,121 273,105 269,600
INTEREST EXPENSE:
Deposits 38,538 40,442 115,125 121,655
Short-term borrowings 4,811 7,541 11,831 16,863
Long-term borrowings 9,901 4,657 27,832 13,918
--------- --------- --------- ---------
Total interest expense 53,250 52,640 154,788 152,436
--------- --------- --------- ---------
Net interest income 39,768 39,481 118,317 117,164
Provision for loan losses 2,500 180 1,860 180
--------- --------- --------- ---------
Net interest income after provision for loan losses 37,268 39,301 116,457 116,984
OTHER INCOME:
Loan servicing fees 49 513 254 1,446
Other fee income 5,821 5,687 17,152 16,448
ATM operations 3,226 3,017 9,374 9,689
Net gain on loan sales 1,234 466 3,976 1,103
Net gain on securities sales -- 193 149 570
Discount brokerage commissions 1,601 1,906 5,415 5,203
Income from real estate operations 573 705 2,496 1,872
Insurance and annuity commissions 906 836 2,282 2,620
Trust revenues 612 571 1,811 1,657
--------- --------- --------- ---------
Total other income 14,022 13,894 42,909 40,608
GENERAL AND ADMINISTRATIVE EXPENSE:
Merger-related charge 9,025 -- 9,025 --
Cost-reduction charge 25,000 -- 25,000 --
Salaries and employee benefits 16,312 17,205 53,103 52,004
Occupancy, equipment and other office expense 10,797 9,882 31,745 28,441
Advertising 1,876 1,600 5,539 4,819
Federal deposit insurance 743 751 2,195 2,233
Other 2,640 2,429 8,174 6,802
--------- --------- --------- ---------
General and administrative expense 66,393 31,867 134,781 94,299
Loss on foreclosed real estate 14 69 93 53
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item (15,117) 21,259 24,492 63,240
Income tax expense (benefit) (3,423) 7,075 8,970 21,154
--------- --------- --------- ---------
Income (loss) before extraordinary item (11,694) 14,184 15,522 42,086
Extraordinary item:
Loss on early extinguishment of debt, net of tax of $207 -- -- -- (403)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (11,694) $ 14,184 $ 15,522 $ 41,683
========= ========= ========= =========
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER SHARE:
Basic $ (0.29) $ 0.36 $ 0.39 $ 1.05
Diluted (0.29) 0.34 0.37 1.02
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic $ (0.29) $ 0.36 $ 0.39 $ 1.04
Diluted (0.29) 0.34 0.37 1.01
========= ========= ========= =========
DIVIDENDS PER SHARE $ 0.15 $ 0.10 $ 0.35 $ 0.26
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------------- Paid-In Retained Comprehensive
Shares Amount Capital Income Income
------------------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996 40,229,081 $ 444 $ 178,763 $ 319,660 $ 2,071
Comprehensive income:
Net income -- -- -- 41,683 --
Change in unrealized gain on securities,
(net of tax of $1,000) -- -- -- -- 1,543
Comprehensive income
Retirement of Treasury stock -- (38) (41,177) -- --
Retirement of fractional shares (1,881) -- (34) -- --
Stock option exercises 1,011,881 9 7,418 -- --
Cash dividends paid to stockholders
($0.26 per share) -- -- -- (9,466) --
Repayment of ESOP principal -- -- -- -- --
Treasury stock purchases (981,025) -- -- -- --
----------- ----------- ----------- ----------- ----------
Balance at Sept. 30, 1997 40,258,056 $ 415 $ 144,970 $ 351,877 $ 3,614
=========== =========== =========== =========== ==========
Balance at Dec. 31, 1997 40,337,423 $ 415 $ 152,353 $ 354,797 $ 2,680
Comprehensive income:
Net income -- -- -- 15,522 --
Change in unrealized gain on securities,
(net of tax of $488) -- -- -- -- 797
Comprehensive income
Stock option exercises 259,740 -- 1,802 -- --
Issuance of common stock 1,751 -- 41 -- --
Cash dividends paid to stockholders
($0.35 per share) -- -- -- (13,343) --
Repayment of ESOP principal -- -- -- -- --
Release of SOP 93-6 unearned ESOP shares -- -- 3,772 -- --
Treasury stock repurchases (1,000) -- -- -- --
----------- ----------- ----------- ----------- ----------
Balance at Sept. 30, 1998 40,597,914 $ 415 $ 157,968 $ 356,976 $ 3,477
=========== =========== =========== =========== ==========
<CAPTION>
Borrowings Unearned
by Employee Employee
Stock Stock Total
Ownership Ownership Treasury Stockholders'
Plan Plan Shares Stock Equity
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at Dec. 31, 1996 $ (396) $ (2,883) $ (47,603) $ 450,056
Comprehensive income:
Net income -- -- -- 41,683
Change in unrealized gain on securities,
(net of tax of $1,000) -- -- -- 1,543
---------
Comprehensive income 43,226
Retirement of Treasury stock -- -- 41,215 --
Retirement of fractional shares -- -- -- (34)
Stock option exercises -- -- 1,901 9,328
Cash dividends paid to stockholders
($0.26 per share) -- -- -- (9,466)
Repayment of ESOP principal 140 -- -- 140
Treasury stock purchases -- -- (17,216) (17,216)
--------- --------- --------- ---------
Balance at Sept. 30, 1997 $ (256) $ (2,883) $ (21,703) $ 476,034
========= ========= ========= =========
Balance at Dec. 31, 1997 $ (221) $ (2,858) $ (20,835) $ 486,331
Comprehensive income:
Net income -- -- -- 15,522
Change in unrealized gain on securities,
(net of tax of $488) -- -- -- 797
---------
Comprehensive income 16,319
Stock option exercises -- -- 3,454 5,256
Issuance of common stock -- -- -- 41
Cash dividends paid to stockholders
($0.35 per share) -- -- -- (13,343)
Repayment of ESOP principal 221 -- -- 221
Release of SOP 93-6 unearned ESOP shares -- 2,858 -- 6,630
Treasury stock repurchases -- -- (27) (27)
--------- --------- --------- ---------
Balance at Sept. 30, 1998 $ -- $ -- $ (17,408) $ 501,428
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Sept. 30
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 15,522 $ 41,683
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Loan loss provisions 1,860 180
Provision for depreciation 7,272 6,865
Increase in assets held for sale (24,551) (168)
Increase in accrued interest receivable (4,606) (1,282)
Decrease in prepaid expenses and other assets 2,794 413
Increase (decrease) in other liabilities 30,552 (8,897)
Net amortization of yield adjustments (10,684) (1,167)
Other items, net 2,981 (9,944)
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 21,140 27,683
- --------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in loans receivable (870,441) (284,737)
Principal repayments on available for sale mortgage-
backed securities 160,216 94,540
Principal repayments on held to maturity mortgage-
backed securities 133,650 80,789
Purchase of available for sale mortgage backed securities (29,995) --
Maturities of available for sale investment securities 74,300 79,942
Maturities of held to maturity investment securities -- 1,574
Purchase of available for sale investment securities (134,332) (86,058)
Purchase of held to maturity investment securities -- (751)
Sale of available for sale investment securities 12,909 --
Additions to real estate (3,760) (8,367)
Real estate sold 6,247 8,544
Purchase of Federal Home Loan Bank stock (27,425) (4,931)
Additions to office properties and equipment (11,414) (12,986)
Sale of office properties and equipment 111 184
- --------------------------------------------------------------------------------------
Net cash used by investing activities (689,934) (132,257)
- --------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in deposits (27,777) (35,422)
New long-term borrowings 500,978 148,538
Repayment of long-term borrowings -- (75,852)
Increase (decrease) in short-term borrowings, net 202,818 164,353
Dividends paid to stockholders (13,343) (9,466)
Net proceeds from exercise of stock options 5,256 9,328
Issuance of common stock 41 --
Purchase of treasury stock (27) (17,216)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 4,322 (11,812)
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 672,268 172,451
- --------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,474 67,877
Cash and cash equivalents at beginning of period 238,133 222,101
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 241,607 $ 289,978
======================================================================================
See notes to consolidated financial statements
Supplemental Cash Flow Disclosures
Interest credited on deposits $ 98,974 $ 125,023
Interest paid on deposits 8,088 9,379
--------- ---------
Total interest paid on deposits 107,062 134,402
Interest paid on borrowings 40,352 28,382
Income taxes paid, net 1,317 15,295
Real estate acquired through foreclosure -- 2,278
Loans originated in connection with real estate
acquired through foreclosure 1,677 910
</TABLE>
6
<PAGE> 7
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared
according to generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Management, all necessary adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation have been
included. The results of operations for the three- and nine-month periods ended
Sept. 30, 1998 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., St. Paul Financial Development Corporation and St. Paul
Trust Company. The financial statements of the Bank include the accounts of its
subsidiaries.
On July 1, 1998, the Company completed a merger with Beverly Bancorporation,
Inc. that was accounted for as a pooling-of-interests. As a result, all
financial statements and analyses have been restated on a historical basis. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS - GENERAL" for further details. The
following table shows condensed statements of operations for the separate
companies for the nine month period ended Sept. 30, 1997 and for the six month
period ended June 30, 1998. The merger was completed on July 1, 1998.
<TABLE>
<CAPTION>
For nine months ended For six months ended
Sept. 30, 1998 June 30, 1998
---------------------------------- ------------------------------------
Beverly St. Paul Combined Beverly St. Paul Combined
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 33,247 $ 236,353 $ 269,600 $ 23,638 $ 156,449 $ 180,087
Interest expense 14,942 137,494 152,436 11,001 90,537 101,538
--------- --------- --------- --------- --------- ---------
Net interest income 18,305 98,859 117,164 12,637 65,912 78,549
Provision (reversal) of
loan losses 180 0 180 360 (1,000) (640)
--------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 18,125 98,859 116,984 12,277 66,912 79,189
Other operating income 8,041 32,567 40,608 5,295 23,593 28,888
Other operating expense 18,977 75,322 94,299 13,928 54,460 68,388
Loss (gain) from foreclosed
real estate (89) 142 53 (6) 84 78
--------- --------- --------- --------- --------- ---------
Net income before taxes and
extraordinary item 7,278 55,962 63,240 3,650 35,961 39,611
Income taxes 2,200 18,954 21,154 1,086 11,307 12,393
--------- --------- --------- --------- --------- ---------
Net income before extraordinary
item 5,078 37,008 42,086 2,564 24,654 27,218
Extraordinary item:
Loss on early extinguishment of
debt, net of tax 0 403 403 0 0 0
--------- --------- --------- --------- --------- ---------
Net income $ 5,078 $ 36,605 $ 41,683 $ 2,564 $ 24,654 $ 27,218
========= ========= ========= ========= ========= =========
</TABLE>
7
<PAGE> 8
3. At Sept. 30, 1998, the Company had the following outstanding commitments to
originate loans (dollars in thousands):
1-4 Family Mortgage Loans $146,371
Commercial and Commercial Real Estate Loans 70,069
1-4 Family Construction 753
Consumer Loans 8,770
Unused Lines of Credit 149,065
The Bank had commitments to purchase 1-4 family mortgage loans of $104 million
scheduled to close in the fourth quarter.
The Company anticipates funding these origination commitments with cash flow
from operations and incremental borrowings as necessary.
The Company had forward contracts at Sept. 30, 1998, to sell $35 million of 1-4
family mortgage loans. The consolidated financial statements contain market
value losses, if any, related to these contracts.
At Sept. 30, 1998, the Company has outstanding $4.9 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 1997, the Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The
implementation of some of the provisions of this Statement was delayed until
1998 as required by SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. These Statements provide 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. In accordance
with SFAS No. 125, as amended by SFAS No. 127, the Company began to report the
collateral that has been pledged to a third party in connection with a
repurchase agreement and for which the third party may sell or repledge the
collateral and which the Company does not have the right to redeem on short
notice, as "Securities Due from Brokers" on the Statement of Financial Position.
The amount due from brokers consists of the carrying value of MBS pledged as
collateral.
5. On December 31, 1997, the Company adopted SFAS No. 128, Earnings per Share.
Under the new requirements, the Company reports basic and diluted earnings per
share, in the place of the previously reported primary and fully diluted
earnings per share. Restatement of prior periods was required. Under SFAS No.
128, the computation of basic earnings per share excludes the dilutive effect of
common stock equivalents. The Company's only common stock equivalents are stock
options issued to employees and directors. Diluted earnings per share reflect
the potential dilutive effect of stock options, computed using the treasury
stock method and the average market price of the Company's common stock over the
period. For the Company, diluted earnings per share approximated the previously
8
<PAGE> 9
reported primary earnings per share. The impact of this Statement on future
earnings per share is largely dependent on future share prices and the amount of
stock options outstanding.
The following table sets forth the computation for basic and diluted earnings
per share for the three and nine months ended Sept. 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ ------------------------------------------
1998 1997 1998 1997
------------------ ------------------------------------------
<S> <C> <C> <C> <C>
Income(loss) before
extraordinary item $ (11,694) $ 14,184 $ 15,522 $ 42,086
============ ============ ============ ============
Denominator for basic
earnings per share-
weighted average shares 40,323,603 39,840,394 40,166,439 39,893,331
Effect of diluted securities:
Stock options issued to
employees and directors -- 1,396,778 1,268,575 1,352,109
------------ ------------ ------------ ------------
Denominator for diluted
earnings per share-
adjusted weighted
average shares and
assumed conversions 40,323,603 41,237,172 41,435,014 41,245,440
============ ============ ============ ============
Income(loss) before extraordinary
item per share:
Basic $ (0.29) $ 0.36 $ 0.39 $ 1.05
============ ============ ============ ============
Diluted $ (0.29) $ 0.34 $ 0.37 $ 1.02
============ ============ ============ ============
</TABLE>
6. The Company will begin to provide segment information beginning with the Dec.
31, 1998 Annual Report/Form 10-K, and will provide selected quarterly segment
information in Form 10-Q thereafter, as required by 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 not impact the primary financial statements.
7. In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, Employer's Disclosure about Pensions and Other Post-retirement
Benefits. This Statement revises an employer's financial statement disclosures
for pension and other post-retirement benefit plans. This Statement does not,
however, change the measurement or recognition of those plans, and will
therefore have no effect on the financial statements. This Statement is
effective for 1998.
9
<PAGE> 10
8. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. This Statement provides a standard for the
recognition and measurement of derivatives and hedging activities. Because of
the Company's minimal use of derivatives, Management does not anticipate that
the adoption of the new Statement will have significant impact on earnings or
the financial position of the Company. However, the Statement is complex and
defines derivatives broadly and will require an extensive accounting analysis to
determine if the Bank's instruments and contracts are subject to the Standard.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
St. Paul Bancorp, Inc. (the "Company") is the holding company
for St. Paul Federal Bank For Savings (the "Bank"), the largest independent
savings institution in the State of Illinois. At Sept. 30, 1998, the Company
reported total assets of $5.9 billion.
On July 1, 1998, the Company merged with Beverly
Bancorporation, Inc. ("Beverly"), the bank holding company of Beverly National
Bank and Beverly Trust Company. Beverly National Bank, with total assets of $705
million at June 30, 1998, operated 12 branches primarily in the south and
southwestern suburbs of Chicago. Beverly Trust Company provided a variety of
trust services for individuals and corporations, including asset management of
personal living trusts and corporate employee benefit plans, and the
administration of land trusts. The Company issued 1.063 shares of its common
stock in exchange for each outstanding common share of Beverly. The Company
issued approximately 6.1 million new shares of common stock and reserved an
additional 558,000 common shares in exchange for the outstanding stock options
issued to Beverly officers and directors. The combined shares issued and stock
options outstanding resulted in an initial transaction value of approximately
$151.0 million.
The merger was accounted for as a pooling-of-interests.
Accordingly, the Company has restated all financial information and analyses to
incorporate Beverly's results on a historical basis.
In connection with the merger, the Company recorded in the
third quarter of 1998, a merger-related charge of $11.5 million before income
taxes. This charge included one-time transaction costs, contract termination
penalties, severance, and additional provisions for loan losses to conform
Beverly's allowance for loan loss to the Company's methodology. See "RESULTS OF
OPERATIONS" for further details. Management expects that the transaction will be
accretive to earnings within the first twelve months after the merger.
Management expects to reduce annual Beverly expenses by $4.8 million or 19
percent of Beverly's general and administrative expenses. In addition, by
introducing the Bank's products, such as brokerage and annuity products, to the
Beverly customers, and Beverly products, such as trust operations and commercial
11
<PAGE> 12
banking to St. Paul customers, other income is expected to be enhanced by
approximately $1.0 million.
In August of 1998, the Company announced a cost-reduction plan
and certain information technology replacements to lower expenses and improve
information systems. The largest part of the charge related to compensation and
benefit plans. The Company's earnings based incentive bonus was suspended for
1999. The Board of Directors approved a resolution to amend the supplemental
executive and directors' pension plan to freeze accruals under the plan's
benefit formula and convert the present value of each participants accrued
benefit to an account balance and to make certain other changes. In addition,
the employee stock ownership plan was terminated.(1) In addition, the Company
offered an early retirement opportunity to certain employees. Through the early
retirement opportunity and other workforce reductions, the Company will be able
to reduce the workforce staff by approximately 90 full-time employees. In
aggregate, these cost reduction decisions are expected to result in pre-tax
annual cost savings of approximately $9.0 million in 1999.(2) See "RESULTS OF
OPERATIONS" for further details.
The Bank's branch network of 65 locations, including the
twelve Beverly locations, consists of 47 free-standing branches, 16 banking
offices located in grocery supermarkets and two Money Connection Centers. The
Bank closed one of its in-store locations in the second quarter of 1998, due to
the closing of the grocery store in which the branch was located.
Both the Company and the Bank operate other wholly owned
financial services companies, including Investment Network, Inc., Annuity
Network, Inc., SPF Insurance Agency, Inc., St. Paul Financial Development
Corporation ("SPFD"), and St. Paul Trust Company ("SPTC"). As of Sept 30, 1998,
customers maintained
- -------------
(1)Subject to receipt of favorable determination letter from the IRS.
(2)The one-time charge recorded in the third quarter, exclusive of the
pooling charges, totaled $25 million, which was higher than the previously
announced range of $19 million to $23 million. The higher charges primarily
relate to higher than anticipated costs for the qualified pension plan
associated with the early retirement plan. The higher pension cost was affected
by recent market fluctuations of plan assets, a change in the discount rate, and
the mix of the employees who participated in the program. Pension expense during
1999 also may be higher because of fluctuating market interest rates and asset
values.
12
<PAGE> 13
$659 million of investments through Investment Network, Inc. and $339 million of
annuity contracts through Annuity Network, Inc. SPFD is a residential and
commercial land development company focused in the greater Chicagoland area,
providing both equity and financing investments for real estate development
projects. At Sept. 30, 1998, SPFD had $20.6 million in real estate equity and
financing investments. SPTC (formerly known as Beverly Trust Company) provides a
variety of trust services to customers and at Sept. 30, 1998 had $333.3 million
of assets under management. In addition, in January 1998, ATM Connection, Inc.
began operations as a new subsidiary of the Bank. This subsidiary owns and
operates the ATM network of the Bank, which represents one of the largest
networks of ATMs in the Chicagoland area with over 550 machines.
In January 1998 the Bank acquired a privately-held residential
mortgage broker serving Chicago and its surrounding suburbs. This broker now
operates as a separate subsidiary of the Bank under the name, Serve Corps
Mortgage Corporation ("Serve Corps"). Serve Corps originates 1-4 family
residential mortgages primarily for sale, with servicing released, to third
party investors. The Bank anticipates that the acquisition of this operation
will increase overall 1-4 family loan origination volumes and enhance other
income through gains on loans sold to third party investors. Some lending
responsibilities previously performed by the Bank have been transferred into
Serve Corps' operations. During the first nine months of 1998 Serve Corps
originated $268.1 million of 1-4 family loans, including $92.6 million of loans
originated for the Bank's portfolio.
In general, the business of the Bank is to reinvest deposits
collected from branch facilities into interest-yielding assets, such as loans
secured by mortgages on real estate, securities, and to a lesser extent,
consumer and commercial loans. The Bank's 1-4 family residential mortgage
products are originated through its mortgage brokerage operations, retail
banking offices, and telephone banking facility. The Bank eliminated its 1-4
family correspondent lending unit in the third quarter. 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. During the first nine months of 1998, the Bank (including Serve
Corps) originated $604.4 million of 1-4 family loans, $62.6 million of home
equity/line of credit loans, and $18.7 million of other consumer loans.
13
<PAGE> 14
The Bank offers mortgage loans to qualifying borrowers to
finance apartment buildings and other commercial real estate, as well as other
commercial loan products. In recent years, the Bank made commercial real estate
loans only in several Midwestern states, such as Illinois, Indiana, Wisconsin,
Minnesota, and Ohio. In 1997, the Bank resumed its nationwide commercial real
estate lending program, to help offset repayments in its existing portfolio. See
"CREDIT RISK MANAGEMENT" for further details. During the first nine months, the
Bank originated $276.2 million of commercial and commercial real estate loans.
The commercial real estate loan portfolio is mainly comprised of loans secured
by multifamily real estate. The Bank acquired a commercial loan portfolio of
approximately $55 million in connection with the Beverly merger. This portfolio
constitutes Beverly's commercial loans not classified as commercial real estate
by management, and includes business lines of credit, term loans, letters of
credit, equipment lease financing, municipal financing, overdrafts, receivable
financing, SBA loans, and agricultural loans. The portfolio is primarily located
in Illinois and Indiana. This portfolio constitutes Beverly's commercial loans
not classified as commercial real estate by Management. The Bank plans to expand
this type of lending and has budgeted originations of $100 million for 1999.
To grow earning assets and offset heavy loan prepayments in
excess of loan origination, the Bank has actively purchased 1-4 family
adjustable rate whole loans for its portfolio. During the first three quarters
of 1998, the Bank purchased $1.4 billion of 1-4 family adjustable rate loans,
including $1.1 billion during the third quarter of 1998 alone. Also, the Bank
has purchase commitments for $104 million of 1-4 family loans scheduled to close
in the fourth quarter. The Bank also invests in mortgage-backed securities
("MBS"), government municipal and corporate debt securities and other equity
securities. The Bank assumed governmental and corporate bond portfolios from
Beverly. The Bank classifies investment securities as either available for sale
("AFS") or held to maturity ("HTM"). Unrealized gains and losses on AFS
securities are recorded as an adjustment to stockholders' equity, net of related
taxes.
The Bank offers a variety of deposit products including
checking, savings, money market accounts, and certificates of deposit ("CDs").
The Bank also relies on borrowings to help finance operations and fund growth of
interest earning assets.
Earnings of the Bank are susceptible to interest rate risk to
the extent that the Bank's deposits and borrowings reprice on a different basis
and in different periods than its securities and loans. Prepayment options
embedded in loans and MBS and varying demand for loan products, due to changes
in interest rates, create additional operating risk for the Bank in matching the
repricing
14
<PAGE> 15
of its assets and liabilities. The Bank tries to structure its balance sheet to
reduce exposure to interest rate risk and to maximize its return on equity,
commensurate with risk levels that do not jeopardize the financial safety and
soundness of the institution.
Changes in real estate market values also affect the Bank's
earnings. As changes occur in interest rates, the forces of supply and demand
for real estate, and the economic conditions of real estate markets, the risk of
actual losses in the Bank's loan portfolio will also change. Changing economic
conditions, market interest rates, and the overall business environment could
also effect the risk of actual loss in the Bank's commercial loan portfolio. See
"CREDIT RISK MANAGEMENT" for further details.
This report contains certain "forward-looking statements." The
Company desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protection of the safe harbor with
respect to all of such forward-looking statements. These forward-looking
statements describe future plans or strategies and include the Company's
expectations of future financial results. The Company's ability to predict
results or the effect of future plans or strategies is inherently uncertain.
Factors that could affect actual results include but are not limited to i)
general market rates, ii) changes in market interest rates and the shape of the
yield curve, iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, vii) changes in the quality or composition of
the Company's loan and investment portfolios, viii) demand for loan products,
ix) the level of loan and MBS repayments, x) deposit flows, xi) competition,
xii) demand for financial services in the Company's markets, xiii) changes in
accounting principles, policies or guidelines, xiv) expected merger cost savings
and revenue enhancements cannot be realized or realized within the expected
timeframe, xv) operational difficulties, customer service problems and
unanticipated cost overruns related to the integration of the business of
Beverly and systems conversions are greater than expected, xvi) expected cost
savings associated with the cost-reduction plan cannot be realized or realized
within the expected timeframe, xvii) unanticipated costs or expenses, xviii)
higher than anticipated costs pertaining to benefit plan modifications, early
retirement program, and technology initiatives, xix) projections of capital
expenditures and costs associated with correction and testing of systems in
connection with the Year 2000 issue, and xx) the Company cannot convert to its
new transaction processing systems in the desired timetable. These factors
should be considered in evaluating the
15
<PAGE> 16
forward-looking statements, and undue reliance should not be placed on such
statements.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
16
<PAGE> 17
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $5.9 billion at
Sept. 30, 1998, a $722.4 million increase over total assets reported at Dec. 31,
1997. Higher loans receivable generally produced the increase in total assets.
These increases were partly offset by lower MBS balances. The growth in total
assets was generally funded with higher borrowing balances.
Cash and cash equivalents totaled $241.6 million at Sept. 30,
1998, $3.5 million more than Dec. 31, 1997.(3)
Investment securities, comprised of U.S. Treasury and agency
debt securities, municipal and corporate bonds and other marketable equity
securities, totaled $235.8 million at Sept. 30, 1998, as compared to $187.6
million at Dec. 31, 1997.(3) At Sept. 30, 1998, $223.0 million of the Company's
investment securities were classified as AFS as compared to $174.2 million at
Dec. 31, 1997. The Company recorded an unrealized gain on AFS investment
securities of $3.5 million at Sept. 30, 1998, and $1.6 million at Dec. 31, 1997.
MBS (including securities due from brokers) totaled $688.9
million at Sept. 30, 1998, $266.4 million or 27.9 percent less than the $955.3
million of MBS at Dec. 31, 1997.(3) The Bank's MBS portfolio at Sept. 30, 1998,
included $194.3 million of loans originated and serviced by the Bank.
Approximately 44 percent of the MBS portfolio is classified as
AFS, and at Sept. 30, 1998, the Company reported an unrealized gain on its AFS
MBS of $2.1 million compared to an unrealized gain of $2.7 million at Dec. 31,
1997. At Sept. 30, 1998, 65 percent of the MBS portfolio had adjustable rate
characteristics (although some may be performing at initial fixed interest
rates), compared to 71 percent of the portfolio at Dec. 31, 1997.
- ---------------
(3) See "CASH FLOW ACTIVITY" for further details.
17
<PAGE> 18
Net loans receivable totaled $4.5 billion at Sept. 30, 1998 or
$879.9 million more than at Dec. 31, 1997.(3) At both Sept. 30, 1998 and Dec.
31, 1997, 85 percent of the loan portfolio had adjustable rate characteristics.
Loans held for sale increased $24.6 million during the first
nine months of 1998 to $44.1 million at Sept. 30, 1998. The increase in loans
held for sale resulted from the addition of Serve Corps, the Bank's new mortgage
loan brokerage subsidiary. Loans originated by Serve Corps are either classified
as held for sale (and sold to third parties) or originated for the Bank's
portfolio.
Deposits totaled $3.8 billion at Sept. 30, 1998, slightly
lower than at Dec. 31, 1997.
Total borrowings, which include FHLB advances, totaled $1.5
billion at Sept. 30, 1998, $703.2 million or 88.7 percent higher than the $793.0
million of borrowings at Dec. 31, 1997. During the first nine months of 1998,
the Bank used increased borrowings from the Federal Home Loan Bank to fund loan
purchases and used some long-term borrowings to refinance higher costing
short-term borrowings. See "CASH FLOW ACTIVITY" for further discussion.
Stockholders' equity of the Company was $501.4 million at Sept.
30, 1998 or $12.35 per share. In comparison, stockholders' equity at Dec. 31,
1997 was $486.3 million or $12.06 per share. The $15.1 million increase in
stockholders' equity during the nine months ended Sept. 30, 1998 resulted from
$15.5 million of net income and 45.3 million of capital provided by the exercise
of stock options granted to employees and directors, partly offset by dividends
paid to shareholders of $13.3 million. See "CAPITAL" and "CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY" for further analysis.
See "CREDIT RISK MANAGEMENT" for discussion of foreclosed real
estate balances.
CAPITAL
The Bank is subject to various capital requirements of the
federal government. Failure to meet minimum capital requirements can initiate
certain
- --------------
18
<PAGE> 19
mandatory (and possibly additionally discretionary) actions by the regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements and therefore the Company's financial statements. Under capital
adequacy guidelines and regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance sheet items calculated
under regulatory accounting practices. The Bank's capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of total and
Tier I capital to risk-weighted assets, and of Tier I capital to average
assets. Tier I capital equals the capital of the Bank less certain intangible
assets and the net assets of non-includable subsidiaries. Total capital equals
Tier I capital plus the Bank's general allowance for loan losses, up to certain
limits. As of Sept. 30, 1998, Management believes that the Bank meets all
capital adequacy requirements to which it is subject.
As of Sept. 30, 1998, 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, Tier I leverage ratios(4) as set forth in the table
below.
- ---------------
(4) Under separate OTS regulations, the Bank is required to maintain
minimum capital level ratios of core and tangible capital to adjusted assets and
total regulatory capital to risk-weighted assets. At Sept. 30, 1998, the Bank's
tangible and core capital ratio of 7.47 percent and risk-based capital of 14.99
percent exceed required capital levels.
19
<PAGE> 20
The Bank's actual amounts and ratios are also presented in the following
table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------- ----------------------- ----------------------
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
As of Sept. 30, 1998 ------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 472,538 14.99% > $252,259 > 8.00% > $315,324 > 10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 433,110 13.74% > $126,129 > 4.00% > $189,194 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 433,110 7.47% > $231,811 > 4.00% > $289,764 > 5.00%
- - - -
As of Dec. 31, 1997
Total Capital
(to Risk Weighted Assets) $ 475,129 16.63% > $228,522 > 8.00% > $285,652 > 10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 440,754 15.437% > $114,261 > 4.00% > $171,391 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 440,754 8.62% > $204,509 > 4.00% > $255,637 > 5.00%
- - - -
</TABLE>
All three of the capital ratios have each declined over 100
basis points from Dec. 31, 1997 to Sept. 30, 1998. The lower ratios were caused
by an increase in both risk-weighted assets and regulatory assets, as the level
of regulatory capital has remained relatively level over the period. The higher
asset levels were primarily due to purchasing 1-4 family loans funded through
borrowings during the first nine months of 1998.
The following schedule reconciles stockholders' equity of the
Company to the components of regulatory capital of the Bank at Sept. 30, 1998:
<TABLE>
<CAPTION>
Sept. 30,
Dollars in thousands 1998
- ----------------------------------------------------------------------
<S> <C>
Stockholders' equity of the Company $ 501,428
Less: capitalization of the Company
and non-Bank subsidiaries (63,640)
---------
Stockholder's equity of the Bank 437,788
Less: unrealized gain on
available for sale securities (3,007)
Less: investments in non-includable
subsidiaries (750)
Less: intangible assets and other non-includable assets (921)
---------
Tangible and core capital 433,110
Plus: allowable GVAs 39,428
---------
Risk-based capital $ 472,538
=========
</TABLE>
20
<PAGE> 21
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 never been
implemented by the OTS, 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 two percent. If a
change greater than two percent occurs, one-half of the percent change in the
market value of capital in excess of two percent is added to the institution's
risk- based capital requirement. At Sept. 30, 1998, the Bank had no "excess"
interest rate risk that would have required additional risk-based capital if the
regulation had been implemented by the OTS. Even if it had excess interest rate
risk, at Sept. 30, 1998, the Bank would have $220.3 million of excess risk-based
capital available to meet any additional capital requirement.
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.
Regulatory rules currently impose limitations on all capital
distributions by savings institutions, including dividends, stock repurchase and
cash-out mergers. Under the current rule, institutions are grouped into three
classifications depending upon their level of regulatory capital both before and
21
<PAGE> 22
after giving effect to a proposed capital distribution. The OTS recently
proposed revising its capital distribution regulation to conform the definition
of "capital distribution" to the definition used in its prompt corrective
regulations, and to delete the three classifications of institutions. Under the
proposal, there would be no specific limitation on the amount of permissible
capital distributions, but the OTS could disapprove a capital distribution if
the institution would not be at least adequately capitalized under the OTS
prompt correction action regulations following the distribution, or if the
distribution raised safety or soundness concerns, or if the distribution
violated a prohibition contained in any statute, regulation, or agreement
between the institution and the OTS, or a condition imposed on the institution
by the OTS. The OTS would consider the amount of the distribution when
determining whether it raised safety or soundness concerns. During the first
three quarters of 1998, the Bank has paid dividends to the Company equal to 100
percent of Bank's prior quarters net income.
22
<PAGE> 23
CASH FLOW ACTIVITY
Cash and cash equivalent balances at Sept. 30, 1998 totaled
$241.6 million compared to $238.1 million at Dec. 31, 1997. During the first
nine months of 1998, the major sources of funds included new borrowings and loan
and MBS repayments, while the Company's major uses of funds included purchases
and origination of loans for portfolio, and, funding net deposit outflows.
As part of Management's strategy to expand interest earning
assets, the Company purchased $1.4 billion of whole loans during the nine months
ended Sept. 30, 1998. These purchases, along with loans originated for
portfolio, accounted for the $870.4 million net increase in loans receivable
balance.(5) Loan repayments partly offset these increases. Loan repayments
during the third quarter of 1998 were approximately $440 million. The low
interest rate environment has produced a significant amount of repayment
activity in the Company's loan portfolio. In comparison, whole loan purchases in
1997 generally produced the $284.7 million net increase in loans receivables in
the first nine months of 1997. The addition of Serve Corps, accounted for the
$24.6 million increase in loans held for sale. During the first nine months of
1998, Serve Corps originated $259.5 million of loans and sold $235.2 million of
loans (including $93.0 million of loans purchased by the Bank).
The growth in loans receivable and loans held for sale was
funded primarily with new borrowings and loan and MBS repayments. The Company
increased borrowing balances by $702.8 million during the first nine months of
1998. In comparison, during the first nine months of 1997, the Company increased
net borrowing balances by $237.0 million, largely to fund whole loan purchases.
Of the increase in borrowing balances, $500 million was attributable to new
long-term borrowings. MBS repayments in 1998 totaled $293.9 million, compared to
$175.3 million during the same nine month period in 1998.
During the last nine months, the Company also funded a $27.8
million net outflow in deposits. Most of the decline in deposit balances
occurred in certificate of deposit ("CDs") products and checking account
products. In comparison, deposit balances declined by $35.4 million during the
same nine month period in 1997.
- ---------------
(5)See "CREDIT" for further details.
23
<PAGE> 24
Other uses of funds during 1998 included a $60.0 million net
increase in investment securities, $27.4 million for the purchase of FHLB stock,
and a $13.3 million increase in dividends paid to common shareholders.
Holding Company Liquidity. At September 30, 1998, St. Paul Bancorp, the "holding
company," had $112.8 million of cash and cash equivalents, which included
amounts due from depository institutions and investment securities with original
maturities of less than 90 days. In addition, the Company had $16.3 million of
investment securities and $854,000 of MBS classified as AFS. The Company also
maintains a $20.0 million revolving line of credit agreement from another
financial institution. At Sept, 30, 1998, no funds have been borrowed under this
agreement.
Sources of liquidity for St. Paul Bancorp during the first
nine months of 1998 included $23.4 million of dividends from the Bank, $13.2
million of repayments of advances to the Bank, $12.6 million of repayments of
advances to SPFD, and $1.0 million in dividends from the holding company's other
subsidiaries. Uses of St. Paul Bancorp's liquidity during the first nine months
of 1998 included the purchase of $43.2 million of investment securities, $13.3
million of dividends paid to stockholders, and advances to the Bank of $3.5
million(6). In July 1998, the Company's Board of Directors approved a 50%
increase in the quarterly dividend rate by increasing the dividend from $0.10
per share per quarter to $0.15 per share per quarter. The new quarterly dividend
rate began with the third quarter dividend payment.
Regulatory Liquidity Requirements. Savings institutions are required to 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, and
certain securities. This liquidity requirement may be changed from time to time
by the Director of the OTS to any amount within the range of 4 percent to 10
percent, depending upon economic conditions and the deposit flows of savings
institutions. In November 1997, the OTS revised its liquidity requirement to 4
- ---------------
(6) During 1998, 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.
24
<PAGE> 25
percent from 5 percent and expanded the asset types that qualify as liquid
assets. The OTS also added a qualitative liquidity requirement so the Bank must
maintain liquidity to ensure safe and sound operations. Because of the expanded
definition of liquid assets, the Bank's liquidity at Sept. 30, 1998 of $702.7
million substantially exceeded the 4 percent requirement of $140.4 million.
Because of the change in regulation, Management's regulatory liquidity
compliance focus has shifted from quantitative measures to qualitative safety
and soundness concerns.
25
<PAGE> 26
RATE/VOLUME ANALYSIS
The following tables present the components of the changes in net interest
income by volume and rate(7) for the three and nine months ended Sept. 30, 1998
and 1997:
<TABLE>
<CAPTION>
Three months ended Sept. 30, 1998 and 1997 Nine months ended Sept. 30, 1998 and 1997
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
------------------------------------------ -----------------------------------------
TOTAL TOTAL
Dollars in thousands VOLUME RATE CHANGE VOLUME RATE CHANGE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Loans receivable $ 9,732 $ (3,453) $ 6,279 $ 25,190 $ (7,278) $ 17,912
Mortgage-backed securities(8) (5,546) (1,030) (6,576) (15,084) (3,313) (18,397)
Investment securities-taxable 1,350 (349) 1,001 3,950 (586) 3,364
Investment securities-tax exempt 63 (57) 6 (26) (39) (65)
Equity investment securities 203 (16) 187 727 (36) 691
-------- -------- -------- -------- -------- --------
Total interest income 5,802 (4,905) 897 14,757 (11,252) 3,505
CHANGE IN INTEREST EXPENSE:
Deposits 73 (1,977) (1,904) (1,229) (5,301) (6,530)
Short-term borrowings (2,495) (235) (2,730) (4,811) (221) (5,032)
Long-term borrowings 5,987 (743) 5,244 16,124 (2,210) 13,914
-------- -------- -------- -------- -------- --------
Total interest expense 3,565 (2,955) 610 10,084 (7,732) 2,352
-------- -------- -------- -------- -------- --------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $ 2,237 $ (1,950) $ 287 $ 4,673 $ (3,520) $ 1,153
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(7)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.
(8 Includes securities due from brokers.
26
<PAGE> 27
RESULTS OF OPERATIONS
General. The Company recorded a net loss of $11.7 million during the third
quarter of 1998 or a loss of $0.29 per share. Without the one-time merger
related pre-tax charge of $11.5 million and the $25.0 million cost-reduction
plan pre-tax charge, the Company would have recorded net income of $14.2 million
or $0.34 per diluted share outstanding, relatively unchanged from the same
quarter in 1997. Net income for the first nine months of 1998 totaled $15.5
million or $0.37 per share. Without the one-time charges, net income for the
first nine months of 1998 would have been $41.4 million, or $1.00 per share,
compared to $41.7 million or $1.01 per share for the same period in 1997. In
both the quarter and the year-to-date period, higher general and administrative
costs ("G&A") mostly offset increases in net interest income and other income.
Operating results during the first nine 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 $39.8 million during the third
quarter of 1998, compared to $39.5 million of net interest income recorded
during the same quarter in 1997. For the nine month period ending Sept. 30,
1998, net interest income was $118.3 million compared to $117.2 million during
the same period in 1997. During both the quarter and year-to-date periods, net
interest income was impacted by a high level of repayments in the loan and MBS
portfolios and a greater reliance on borrowings as a source of funds. However, a
decrease in the cost of deposits helped to offset the impact on net interest
income. While interest earning asset levels have increased since Dec. 31, 1997,
most of the increase in the levels occurred late in the third quarter, and as a
result, the impact on net interest income during the quarter and for the year
was nominal.
The net interest margin ("NIM"), on a tax-equivalent basis,
was 3.04 percent during the third quarter of 1998, compared to 3.20 percent
during the same quarter in 1997 and 3.13 per cent for the second quarter 1998.
The NIM for first nine months of 1998 was 3.10 percent, compared to 3.22 percent
during the same period in 1997. The greater reliance on borrowings and declining
loan and
27
<PAGE> 28
MBS yields mainly produced the decline in the NIM in both the quarterly and
year-to-date comparisons. However, declining deposit costs and lower rates on
new borrowings partly offset some of the effect of lower asset yields.
Interest Income. Interest income on loans receivable rose $6.3 million to $74.3
million during the third quarter of 1998, compared to $68.0 million during the
same quarter in 1997. Interest income on loans receivable rose $17.9 million to
$211.8 million during the first nine months of 1998, compared to $193.9 million
during the same period in 1997. The increase in both the three and nine month
periods were primarily due to higher average loan balances, partly offset by a
decline in the effective loan yield. The increase in the average loan balance
was primarily due to whole loan acquisitions. Average loan balances increased by
$523.2 million and $449.8 million during the third quarter and year-to-date
periods, respectively. 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.
MBS interest income decreased $6.6 million during the third
quarter to $11.9 million, compared to $18.5 million during the same quarter a
year ago. For the first three quarters of 1998, MBS interest income declined
$18.4 million to $40.1 million, compared to $58.5 million during the same period
a year ago. For both the three and nine month periods, the decline was primarily
related to lower average balances and a lower effective yield. The decline in
average MBS balances was due to prepayments, as average balances declined by
$338.4 million during the third quarter and $306.2 million in the year-to-date
period. The lower effective MBS yield was associated with higher amortization of
net purchase premiums, as well as some downward repricing in the portfolio.
Interest income from investments increased $1.2 million during
the third quarter and $4.0 million during the first nine months of 1998. An
increase in the average balances generally produced the increase in both the
quarter and year-to-date periods. An increase in liquidity resulted in the
higher average investment balances. Lower yields earned on new investment
securities and the maturities of some higher rate securities produced a lower
overall investment yield.
28
<PAGE> 29
Interest Expense. Deposit interest expense declined by $1.9 million to $38.5
million during the third quarter of 1998 and $6.5 million to $115.1 million
during the first nine months of 1998. A lower effective cost of deposits
produced most of the decline in deposit interest expense. The lower effective
cost was mainly produced by the lowering of the rates paid on certain savings,
checking and money market products in response to lower market rates beginning
in early 1998 and through the remainder of the period. The decline in the CD
portfolio also contributed to the lower effective cost of deposits. Average
deposit balances were up slightly during the third quarter, but declined by
$27.8 million during the first nine months of 1998. The decline in the
year-to-date period was largely due to the maturity of some higher costing CD's
that were issued during 1997 and during the second half of 1996.
Borrowing interest expense increased by $2.5 million to $14.7
million during the third quarter of 1998, compared to the same period a year
ago, while borrowing interest expense for the first nine months of 1998
increased $8.9 million to $39.7 million compared to the same period in 1997. The
increase in both the three and nine month periods was due to higher average
borrowing balances, partly offset by a lower average interest cost. Average
balances rose by $240.9 million during the third quarter of 1998 and by $251.8
million for the first three quarters of 1998.(9) Management has primarily relied
on borrowings to fund whole loan acquisition growth. In addition to new
borrowings, which were at lower rates, Management refinanced some of the
short-term borrowings with lower costing long-term borrowings, contributing to
the lower average interest cost.
Interest Rate Spread. The Bank's ability to sustain current net interest income
levels during future periods is largely dependent, not only on the level of
interest earning assets, but also the size of the interest rate spread. The
interest rate spread was 2.68 percent at Sept. 30, 1998, compared to 2.87
percent
- ---------------
(9) The Company increased borrowings by approximately $650 million during
September 1998. As a result, period-end balances increased by more in the third
quarter than average balances.
29
<PAGE> 30
at June 30, 1998. Most of the decline in the interest rate spread during the
third quarter was caused by the relative size of the interest rate spread
between the whole loans purchased and their funding cost, compared to the
overall spread. Since the spread between the weighted average rate earned on the
new loans and the weighted average rate paid on the new borrowings was narrower
than the overall interest rate spread, these transactions caused the interest
rate spread to contract, even though net interest income increased.
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.
Provision for Loan Losses. The Company recorded a $2.5 million provision for
loan loss during the third quarter of 1998 in connection with the Beverly merger
to conform the Beverly portfolio to the Company's loan loss methodology. The
Company recorded no other provision for loan loss during the third quarter
compared to a $180,000 provision during the same quarter a year ago. Without the
merger-related provision, the Company reversed $640,000 of previous loan loss
provisions during the first nine months of 1998, all of which occurred during
the first two quarters of the year, compared to a $180,000 provision during the
same nine-month period in 1997. See "CREDIT RISK MANAGEMENT" for further
discussion of loss provisions and the adequacy of the accumulated provisions for
losses.
Other Income. Other income for the third quarter of 1998 was $14.0 million
compared to $13.9 million during the same quarter a year ago. Year-to-date other
income during 1998 totalled $42.9 million compared to $40.6 million during the
period in 1997. In the quarterly comparison, the increase in other income was
primarily due to higher gains from loan sales caused by the addition of the
Bank's new mortgage subsidiary, Serve Corps Mortgage Corp.(10) This increase was
partly offset by lower revenues for loan servicing activities and discount
brokerage operations. In the year-to-date period, higher other income was
associated with higher gains on loan sales from Serve Corps and higher income
- ---------------
(10)Gains are not recorded for loans transferred to the Bank.
30
<PAGE> 31
from real estate development operations. The sale of a 120-acre land parcel
during the first quarter of 1998 by the Company's real estate development
subsidiary delivered the increase in income from real estate development
operations during the first nine months of 1998.
General and Administrative Expense. General and administrative expenses
("G&A")totaled $32.4 million during the third quarter of 1998(excluding the
one-time charges), or $501,000 or 1.6 percent higher than during the same period
of 1997. G&A expense for the first nine months of 1998 totaled $100.8 million,
$6.5 million or 6.8 percent higher than the same period in 1997. Also see
"GENERAL" for additional details of the one-time charges.
The increase in the quarterly comparison was mainly produced
by a $914,000 increase in occupancy, equipment, and other office expenses. These
increases were primarily related to higher operating costs associated with
systems and the Bank's new operations center. Higher systems costs primarily
relate to the initiatives to replace core transaction processing systems and
compliance work in preparation for the year 2000. Higher advertising and other
expenses also contributed to the increase in G&A expense during the quarter. The
increase in other expense was primarily due to higher professional fees, related
to tax planning and systems consulting, and expenses associated with operating
Serve Corps. This increase was partly offset by approximately a $900,000
decrease in compensation and benefit expense related to certain management and
back office personnel that left the Company during the third quarter of 1998 in
connection with the Beverly merger.
The $6.5 million increase in G&A expense during the
year-to-date period was mainly due to a $3.3 million increase in occupancy,
equipment, and other office expense, a $1.1 million increase in compensation and
benefits expense, and higher advertising and other expense. Similar to the
quarterly period, higher office and occupancy expense was caused by the new
operations center and systems initiatives. The increase in compensation and
benefits was attributable to the addition of Serve Corps, as well as annual
merit increases and higher sales and productivity incentives. In addition,
higher employment taxes and higher costs related to the employee stock ownership
plan contributed
31
<PAGE> 32
to the increase. The increases in compensation and benefits were partly offset
by workforce reductions in the third quarter associated with the Beverly merger.
Higher professional fees and expenses associated with Serve Corps mainly
generated the higher other expense. Pension expense during 1999 also may be
higher because of fluctuating market interest rates and asset values.
As previously discussed, the Company recorded an $11.5 million
pre-tax charge associated with the Beverly merger. Of this charge, $9.0 million
was recorded in G&A expense. This charge included buyer and seller transaction
costs, severance and other human resource costs, contract termination penalties,
and other costs. Management expects to save approximately $4.8 million annually
in G&A costs as a result of the merger. Savings will mainly come in the
compensation and benefit area, as well as, lower occupancy and office expense,
professional services, and other expenses. At Sept. 30, 1998, of the total
merger-related charge, $2.8 million had not yet been paid out. The amounts
primarily relate to contract termination costs, severance to be paid to
transition employees, and other accrued costs, most of which is expected to be
paid within the next six months.
The Company also recorded a $25 million charge associated with
a cost-reduction plan and certain information technology initiatives. The cost
reduction plan is expected to save approximately $9.0 million in G&A expenses in
1999. Management expects to begin to realize some of the cost savings associated
with the cost-reduction plan in the fourth quarter of 1998. Most of the cost
reduction plan focused on the employee compensation and benefit plans.
Approximately $7.8 million of the charge was associated with modifications to
executives' and directors' pension plans. The current obligations of both plans
will be funded and frozen at current levels. This decision is expected to save
approximately $1.3 million annually.
Of the total cost reduction charge, $3.7 million of the charge
was related to the termination of the Company's leveraged employee stock
ownership plan. The termination of this plan is estimated to save the Company
about $1.1 million annually, as an accounting change in 1993 made the
maintaining of the leveraged plan cost prohibitive.
32
<PAGE> 33
Another $6.4 million of the charge was related to the early
retirement option offered to certain employees as well as a specific reduction
in workforce plan. This program, along with other staff reductions, will allow
the Company to reduce staffing levels by approximately 90 people and
compensation and benefit costs by approximately $3.5 million in 1999.
Management also suspended the incentive bonus paid to officers
in order to save approximately $3.0 million next year.
Information systems initiatives comprise $5.0 million of the
charge. The Company has entered into a licensing arrangement with EDS whereby
EDS will supply its core transaction process applications to the Bank. These new
system upgrades should allow the Company to adapt more quickly to technological
advances and to assimilate acquisitions, such as Beverly. Management also
expects to improve operations and customer service through this technology. The
annual operating expenses to run the new systems are expected to be
approximately the same as the costs that have been incurred to run the existing
systems.
Of the total $25.0 million charge, at Sept. 30, 1998, $14.7
million of expense had not yet been paid out. Most of these expenses are related
to the benefit plans and are expected to be paid out before the end of 1998.
The Company will also incur G&A costs in 1998 and 1999 related
to the systems requirements to ensure that the Bank can process transactions
subsequent to Jan. 1, 2000. The Year 2000 compliance issues resulted from both
certain computer programs and certain hardware recognizing only the last two
digits of the year instead of four digits. As a result, transactions processed
beginning in Year 2000 may not be recognized by the systems in the correct
period. This issue could result in system failures and miscalculations causing a
disruption of operations, and among other things, the inability to process
transactions. In order to address the Year 2000 issue, the Company established a
Year 2000 project in 1996.
Based upon initial assessments, the Company determined that it
will be required to modify or replace significant portions of its software and
certain hardware so that those systems can properly process transactions
beginning on Jan. 1, 2000. The Company currently believes that with these
modifications and the replacement of certain software and hardware components,
the Year 2000 compliance issue will be mitigated. However, if such modifications
and upgrades do not succeed, or not made in a timely fashion, the Year 2000
compliance issue
33
<PAGE> 34
could have a material impact on the Company. Furthermore, there can be no
assurances that the Company's assessment has failed to uncover each possible
Year 2000 issue as to the Company. Failure by the Company and/or its major
vendors, third party network service providers, and other material service
providers and customers to adequately address their respective Year 2000 issues
in a timely manner (insofar as they relate to the Company's business) could have
a material adverse effect on the Company's business, results of operations, and
financial condition. Potential worst case scenarios include the inability to
process customer deposit transactions, ATM service outages, ACH and payroll
deposit file transmission difficulties, inability to service the loan portfolio,
and disruption of customer service. The amount of the potential liability, if
any, that relate to these risks, cannot be reasonably estimated at this time.
The Company has divided work on the Year 2000 project into
four phases: assessment; correction; testing; and implementation. The Company
began the assessment of the Year 2000 issue in 1996. Critical risk elements were
identified and an inventory of computer hardware, software application, Bank
vendors and available internal resources was prepared. From this assessment, a
formal action plan was prepared and approved by the Bank's Board of Directors in
early 1997. The action plan divided the project into segments that were aligned
with the type of computer platform used by the Bank, including the mainframe
platforms of core deposit and loan transaction processing, mid-range platforms,
file servers, computer workstations, operational systems, and special function
systems. The Company also identified key third party vendors and customers to
assess their state of readiness on the Year 2000 issue. The assessment phase of
the plan has been completed. With the Beverly merger, the Company's Year 2000
plan has been expanded to incorporate Beverly.
Work on the correction phase began in 1997 and continues in
1998. In the third quarter of 1998, Management decided to replace its core
transaction processing systems. While Management believed it could make its
mission critical systems Year 2000 compliant within the required timeframe,
Management nevertheless decided to replace all of its systems for reasons
previously discussed. The Company spent approximately $1.7 million to ready for
the Year 2000 the existing core transaction processing systems that will now be
replaced.
The Company converted its residential loans to the Alltel loan
servicing system in the Fourth Quarter of 1998. The other major business
34
<PAGE> 35
applications and interfaces will be converted to the EDS/Miser system, running
under a new Unisys operating environment. The current teller platform system
will also be replaced. Conversions to these new systems are currently expected
to be substantially completed during January 1999. Management believes that
these systems will be Year 2000 compliant and has received assurances from its
vendors concerning Year 2000 compliance. The Company will take steps to confirm
the vendors' compliance. The conversions to the new systems will require new
mainframe hardware, as well as new interfaces to other systems and personal
computer hardware. The Company will make initial capital investments of
approximately $10.0 million associated with the new replacement systems. Also,
see the above discussion on the cost-reduction plan for the one-time charge of
$5.0 million associated with the technology initiatives. Management will also
test these new systems for Year 2000 compliance. The Company is also expected to
complete correction of all other systems and hardware during the fourth quarter
of 1998.
The Company will also be assuming additional operating risks
with the substantial conversions planned in the Fourth Quarter. These risks
include a decrease in the level of customer service, disruption of operations,
and financial considerations. The Company is taking steps to manage the
additional risk. The Board of Directors will utilize a steering committee made
up of certain members of senior management to direct the conversions. The
steering committee has hired an outside consultant to manage the project and
coordinate with the resources provided by the vendors. Management is committed
to completing these conversions within the required timetable and will use
available internal resources and hire external resources as necessary. EDS has
also agreed to pay penalties to the Company if the systems are not converted by
the January 1999 timetable.
Management currently estimates that the costs that the Bank
has incurred through 1998 for work on the Year 2000 project have been
approximately $2.2 million. Management also currently estimates that the Company
will spend a total of approximately $3.25 million to remedy the Year 2000 issue
during 1997, 1998, and
35
<PAGE> 36
1999. The above expenses only includes amounts spent on external consultants,
replacement hardware and software, and other incremental costs. The amounts do
not include the cost of internal resources devoted to the project. The Company
accounts for these costs as expense when incurred, and intends to fund these
costs from operations and excess liquidity.
The Company is currently formulating a contingency plan for
certain critical applications. These plans include, among other things, plans
for recovering data and mobilization of resources to resume core operations.
Operations of Foreclosed Real Estate. The net loss generated from foreclosed
real estate operations was $14,000 during the third quarter of 1998, compared to
$69,000 for the same quarter in 1997. For the first nine months of 1998, the net
loss generated from foreclosed real estate operations was $93,000, compared to
$53,000 for the same period in 1997. See "CREDIT RISK MANAGEMENT" for further
discussion of REO.
Income Taxes. The Company's effective annual income tax rate through the first
nine months of 1998 was 36.6 percent compared to 33.5 percent during the same
quarter in 1997. The increase in the effective tax rate was associated with
certain non-tax deductible charges contained in the merger and cost-reduction
plan charges. Without these charges, the effective income tax rate would have
been approximately 32.1 percent, which is the rate anticipated for the fourth
quarter of 1998. The implementation of certain tax planning strategies produced
the lower effective income tax rate in 1998, exclusive of the effect of the
one-time charges.
36
<PAGE> 37
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
Three months ended Sept. 30,
Dollars in thousands At Sept. 30, 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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:(b)
Taxable investment securities $ 310,844 5.47% $ 379,014 $ 5,194 5.44% $ 282,055 $ 4,193 5.90%
Tax-exempt investment securities(f) 47,753 7.15 46,111 547 7.24 42,673 541 7.74
Equity investment securities(c) 84,720 6.44 64,424 1,044 6.43 51,916 857 6.55
---------- ---- ---------- ------- ---- ---------- ------- ----
Total investments 443,317 5.84 489,549 6,785 5.74 376,644 5,591 6.20
Mortgage-backed securities/
securities due from brokers 688,856 6.80 734,635 11,922 6.49 1,073,064 18,498 6.90
Loans receivable(d) 4,590,977 7.26 4,045,957 74,311 7.35 3,522,782 68,032 7.72
---------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-earning assets $5,723,150 7.09% $5,270,141 $93,018 7.08% $4,972,490 $92,121 7.43%
========== ==== ========== ======= ==== ========== ======= ====
Total deposits $3,843,623 3.95% $3,865,688 $38,538 3.96% $3,858,766 $40,442 4.16%
Borrowings:(e)
Short-term borrowings 676,490 5.59 337,033 4,811 5.66 511,319 7,541 5.85
Long-term borrowings 816,693 5.61 687,627 9,901 5.71 277,732 4,657 6.65
---------- ---- ---------- ------- ---- ---------- ------- ----
Total borrowings 1,493,183 5.60 1,024,660 14,712 5.70 789,051 12,198 6.13
---------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities $5,336,806 4.41% $4,890,348 $53,250 4.32% $4,647,817 $52,640 4.49%
========== ==== ========== ======= ==== ========== ======= ====
Excess of interest-earning assets
over interest-bearing liabilities $ 386,344 $ 379,793 $ 324,673
========== ========== ==========
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.08x 1.07x
========== ========== ==========
Net interest income $39,768 $39,481
======= =======
Interest rate spread (tax equivalent yield) 2.68%
====
"Average" interest rate spread
(tax equivalent yield) 2.76% 2.94%
====
Net yield on average earning assets
(tax equivalent yield) 3.04% 3.20%
==== ====
</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 and other equity investments.
(d) Includes loans held for sale and loans placed on a nonaccrual status.
(e) Includes FHLB advances, securities sold under agreements to repurchase and
other borrowings.
(f) Effective yield and weighted average rate on tax-exempt securities are on a
tax equivalent basis assuming a 35% tax rate.
37
<PAGE> 38
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
Dollars in thousands At Sept. 30, 1998 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
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:(b)
Taxable investment securities $ 310,844 5.47% $ 399,958 $ 16,851 5.63% $ 306,713 $ 13,487 5.88%
Tax-exempt investment securities(f) 47,753 7.15 39,794 1,458 7.54 40,478 1,523 7.74
Equity investment securities(c) 84,720 6.44 59,035 2,884 6.53 44,170 2,193 6.64
---------- ---- ---------- -------- ---- ---------- -------- ----
Total investments 443,317 5.84 498,787 21,193 5.89 391,361 17,203 6.16
Mortgage-backed securities/
securities due from brokers 688,856 6.80 823,648 40,112 6.49 1,129,887 58,509 6.90
Loans receivable(d) 4,590,977 7.26 3,812,258 211,800 7.41 3,362,506 193,888 7.69
---------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning assets $5,723,150 7.10% $5,134,693 $273,105 7.11% $4,883,754 $269,600 7.38%
========== ==== ========== ======== ==== ========== ======== ====
Total deposits $3,843,623 3.95% $3,859,061 $115,125 3.99% $3,898,759 $121,655 4.17%
Borrowings:(e)
Short-term borrowings 676,490 5.59 275,954 11,831 5.73 388,101 16,863 5.81
Long-term borrowings 816,693 5.61 638,136 27,832 5.83 274,167 13,918 6.79
---------- ---- ---------- -------- ---- ---------- -------- ----
Total borrowings 1,493,183 5.60 914,090 39,663 5.80 662,268 30,781 6.21
---------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities $5,336,806 4.41% $4,773,151 $154,788 4.34% $4,561,027 $152,436 4.47%
========== ==== ========== ======== ==== ========== ======== ====
Excess of interest-earning assets
over interest-bearing liabilities $ 386,344 $ 361,542 $ 322,727
========== ========== ==========
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.08x 1.07x
========== ========== ==========
Net interest income $118,317 $117,164
======== ========
Interest rate spread (tax equivalent yield) 2.68%
====
"Average" interest rate spread
(tax equivalent yield) 2.77% 2.91%
==== ====
Net yield on average earning assets
(tax equivalent yield) 3.10% 3.22%
==== ====
</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 and other equity investments.
(d) Includes loans held for sale and loans placed on a nonaccrual status.
(e) Includes FHLB advances, securities sold under agreements to repurchase and
other borrowings.
(f) Effective yield and weighted average rate on tax-exempt securities are on a
tax equivalent basis assuming a 35% tax rate.
38
<PAGE> 39
KEY CREDIT STATISTICS
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997 Dec. 31, 1996
Dollars in thousands Dollar % Dollar % Dollar %
- ------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage and commercial loans:
1-4 family units $3,457,129 77% $2,443,135 68% $1,930,957 62%
Multifamily units 798,458 18 914,969 25 992,403 31
Commercial real estate 192,101 4 190,222 5 147,326 5
Commercial and industrial 48,718 1 55,309 2 52,988 2
Land and land development 1,055 * 1,467 * 2,834 *
---------- --- ---------- --- ---------- ---
Total mortgage and commercial loans $4,497,461 100% $3,605,102 100% $3,126,508 100%
========== === ========== === ========== ===
Consumer loans:
Secured by deposits $ 1,735 4% $ 1,015 2% $ 1,169 2%
Education 27 * 1,281 2 1,682 3
Home improvement 87 * 136 * 281 *
Auto 32,037 65 39,067 65 40,656 66
Credit cards 1,037 2 1,237 2 1,046 2
Personal and other 14,537 29 17,264 29 16,464 27
---------- --- ---------- --- ---------- ---
Total consumer loans $ 49,460 100% $ 60,000 100% $ 61,298 100%
---------- --- ---------- --- ---------- ---
Total loans held for investment $4,546,921 $3,665,102 $3,187,806
========== ========== ==========
Weighted average rate 7.26% 7.57% 7.72%
==== ==== ====
</TABLE>
*Less than 1 percent
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997 Dec. 31, 1996
Dollars in thousands Dollar % Dollar % Dollar %
- ----------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
1-4 family units $12,344 71% $ 9,836 77% $ 9,504 65%
Multifamily units 1,205 7 -- -- -- --
Commercial real estate 1,255 7 724 5 1,068 7
------- --- ------- ----- ------- -----
Total mortgage loans 14,804 85 10,560 82 10,572 72
Commercial/Industrial 309 2 405 3 448 3
Consumer loans 199 1 259 2 220 2
Real estate owned:
1-4 family units 1,943 11 1,515 12 1,723 12
Multifamily units -- -- -- -- -- --
Commercial real estate 138 1 82 1 1,544 11
------- --- ------- ----- ------- -----
Total real estate owned 2,081 12 1,597 13 3,267 23
------- --- ------- ----- ------- -----
Total nonperforming assets $17,393 100% $12,821 100% $14,507 100%
======= === ======= ===== ======= =====
</TABLE>
*Less than 1 percent
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Dec. 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs (recoveries) to average
loans receivable (0.00)% 0.05% 0.12%
Loan loss reserve to total loans 0.89 1.05 1.25
Loan loss reserve to nonperforming loans 264.26 343.63 355.74
Loan loss reserve to impaired loans 411.18 178.25 69.71
Nonperforming assets to total assets 0.29 0.25 0.30
General valuation allowance to non-
performing assets 233.53 290.52 241.33
- ----------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
CREDIT RISK MANAGEMENT
Lending
At Sept. 30, 1998, the loans receivable portfolio was comprised of 1-4
family mortgage loans, loans secured by commercial real estate, commercial loans
and, to a lesser extent, consumer loans. See "KEY CREDIT STATISTICS" for further
details.
Non-performing loans totaled $15.3 million at Sept. 30, 1998, up $4.4
million from Dec. 31, 1997. Half of the increase related to 1-4 family loans and
the other half related to commercial real estate loans.
At Sept. 30, 1998, the Bank had a net investment in impaired loans of
$9.8 million. At Sept. 30, 1998 all of the impaired loans were performing but
considered impaired.(11) As anticipated by Management, the level of impaired
loans has been reduced significantly over the past two years.
The allowance for loan losses at Sept. 30, 1998 was $40.5 million
compared to $38.6 million at Dec. 31, 1997, an increase of $1.9 million. The
following table provides a rollforward of the allowance for loan losses from
Jan. 1, 1997 through Sept. 30, 1998:
<TABLE>
<CAPTION>
1998 1997
--------------- ------------------------------
Nine Months Nine Months Year Ended
--------------- ------------ ----------
Dollars in thousands Ended Sept. 30 Ended Sept. 30 Dec. 31
- -------------------- ---------------- ------------------------------
<S> <C> <C> <C>
Beginning of Period $38,569 $39,985 $ 39,985
Provision for losses 1,860 180 360
Charge-offs (1,032) (2,989) (3,291)
Recoveries 1,073 957 1,515
------- ------- -------
End of Period $40,470 $38,133 $38,569
======= ======= =======
</TABLE>
- --------------
(11) "Impaired loans" are defined by generally accepted accounting
principles when 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.
40
<PAGE> 41
The general valuation allowance is evaluated based on a careful review
of the various risk components that are inherent in each of the loan portfolios.
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.
The adequacy of the allowance 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 allowance for loan losses reflects Management's
best estimate of the risk of credit loss perceived in the Bank's portfolios.
However, actual results could differ from this estimate and future additions or
subtractions to the allowance may be necessary based on unforeseen changes in
economic conditions. In addition, federal regulators periodically review the
Bank's allowance for losses on loans. Such regulators have the authority to
require the Bank to recognize additions to the allowance at the time of their
examinations.
Net loan recoveries in the first nine months of 1998 totaled $41,000,
compared to $2.0 million of net charge-offs in the first nine months of
1997.(12) Annualized net loan recoveries to average loans receivable was less
than 0.01 percent during the first nine months of 1998. In comparison, the
Company had net loan charge-offs during all of 1997 and 1996 equivalent to 0.05
percent and 0.12 percent of average loans receivable, respectively. See "KEY
CREDIT STATISTICS" for further details.
During the third quarter of 1998, the Company recorded a $2.5 million
provision for loan loss as part of the Beverly merger charge to conform
Beverly's loan portfolio to the Company's loan allowance methodology. See
"RESULTS OF OPERATIONS" for further details of the merger related charges.
Without the $2.5 million merger related provision for loan loss, the Company
reversed $640,000 of
- ---------------
(12) Gross loan charge-offs in the first nine months of 1998 totaled $1.0
million. Two thirds of the gross charge-offs were related to 1-4 family and
consumer loans; the remainder related to commercial real estate loans.
Recoveries during the first nine months of 1998 totaled $1.1 and were primarily
related to commercial loans.
41
<PAGE> 42
previous loan loss provisions during the first nine months of 1998. The
continued trend of the low level of non-performing loans, continued reductions
in balances in the Company's commercial real estate portfolio located outside
the Midwest, and the low level of charge-offs allowed the Company to reverse the
provisions during the first two quarters of 1998. In comparison, $180,000 of
loan loss provision was recorded during the first nine months of 1997. The
future level of loan loss provisions or reversal of previous provisions will be
subject to careful review of the risk elements of the portfolio by Management.
See "KEY CREDIT STATISTICS" for further details.
In addition to originating loans secured by 1-4 family mortgages and a
variety of consumer loans, the Company originates loans secured by commercial
real estate and commercial loans. The Company's commercial loan origination
efforts during the past several years has focused on the Midwestern states.
However, the Company began to originate new commercial real estate loans outside
the Midwest to help offset heavy prepayments in this portfolio. The commercial
loan portfolio is mainly local concentrated in the area surrounding the
Company's banking offices.
During the first nine months of 1998, the Bank purchased over $1.4
billion of whole loans, secured by 1-4 family residences throughout the United
States. These transactions were used to offset heavy prepayments in this
portfolio. The Bank applies its own loan origination underwriting standards as
part of the due diligence efforts in connection with 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. The Bank's largest concentrations of
commercial real estate loans are California, Washington and Illinois.
As of Sept. 30, 1998, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 9 percent.
42
<PAGE> 43
OTHER REAL ESTATE OWNED
REO totaled $2.1 million at Sept. 30, 1998 compared to $1.6 million at
the end of 1997. Most of the REO at both Sept. 30, 1998 and Dec. 31, 1997 were
1-4 family assets.
The allowance for real estate losses totaled $155,000 at Sept. 30, 1998
compared to $157,000 at Dec. 31, 1997. There was no provision for REO losses
during the first nine months of 1998 and 1997. See "RESULTS OF OPERATIONS" for
further details on REO provision.
In accordance with the Company's accounting policy, REO assets are
initially recorded at the lower of their net book value or fair value, less
estimated selling costs. The allowance 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 allowance for foreclosed real estate
is used for losses associated with risks inherent in the REO portfolio.
43
<PAGE> 44
PART II. -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) The Company filed a Report on Form 8-K on July 2, 1998 announcing the
completion of the merger with Beverly Bancorporation, Inc.
(b) The Company filed a Report on Form 8-K on August 17, 1998 reporting the
results of operation for the first month after the merger of St. Paul
Bancorp, Inc. and Beverly Bancorporation, Inc.
(c) The Company filed a Report on Form 8-K on August 18, 1998 announcing a
cost-reduction plan and a related one-time pre-tax charge.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. PAUL BANCORP, INC.
---------------------------------------
(Registrant)
Date: November 13, 1998 By: /s/ Joseph C. Scully
-------------------------------------
Joseph C. Scully
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 1998 By: /s/ Robert N. Parke
-------------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
45
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<PERIOD-END> SEP-30-1998
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