<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 March 31, 1999
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 - 39,926,093 shares, as of April 30, 1999
- ----------------------------------------------------------------------
1
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ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of March 31, 1999 and December 31, 1998.........................3
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998...............................4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1999 and 1998.........................5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998.........................6
Notes to Consolidated Financial Statements.........................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................13
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K..................................40
Signature Page....................................................41
Exhibits..........................................................42
2
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- -------------------------------------------------------------------------------
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
Mar. 31, Dec. 31,
Dollars in thousands 1999 1998
- -------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents
Cash and amounts due from
depository institutions $ 138,577 $ 128,958
Federal funds sold and interest-
bearing bank balances 117,018 83,300
Short-term cash equivalent securities 69,902 227,062
-------------------------------
Total cash and cash equivalents 325,497 439,320
Investment securities
(Market: Mar. 31, 1999-$220,073;
Dec. 31, 1998-$214,227) 219,711 213,882
Mortgage-backed securities
(Market: Mar. 31, 1999-$609,267;
Dec. 31, 1998-$525,774) 606,829 522,423
Securities due from brokers
(Market: Dec. 31, 1998-$79,679) - 79,679
Loans receivable (Net of allowance
for loan losses:
Mar. 31, 1999-$40,303; Dec. 31,
1998-$40,423) 4,564,713 4,477,581
Loans held for sale, at lower of cost
or market
(Market: Mar. 31, 1999-$33,857;
Dec. 31, 1998-$66,241) 33,537 65,354
Accrued interest receivable 34,429 35,048
Foreclosed real estate (Net of allowance
for losses:
Mar. 31, 1999-$155; Dec. 31, 1998-$155) 814 1,942
Real estate held for development or investment 9,712 12,552
Investment in Federal Home Loan Bank stock 70,304 66,304
Office properties and equipment 74,074 75,020
Prepaid expenses and other assets 40,866 45,011
------------------------------
Total Assets $ 5,980,486 $ 6,034,116
==============================
LIABILITIES:
Deposits $ 3,805,457 $ 3,894,971
Short-term borrowings 319,705 395,318
Long-term borrowings 1,255,414 1,125,361
Advance payments by borrowers for
taxes and insurance 12,790 14,484
Other liabilities 90,580 94,058
------------------------------
Total Liabilities 5,483,946 5,524,194
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: 80,000,000 shares;
Issued: Mar. 31, 1999-41,580,589 shares;
Dec. 31, 1998-41,592,023 shares;
Outstanding: Mar. 31, 1999-39,861,186
shares; Dec. 31, 1998-40,724,824 shares) 416 416
Paid-in capital 158,880 158,764
Retained income, substantially restricted 370,719 363,931
Accumulated other comprehensive income:
Unrealized gain on securities net
of taxes ($1,056 at Mar. 31, 1999
and $1,234 at Dec. 31, 1998) 1,669 2,138
Treasury stock (Mar. 31, 1999-1,719,403
shares; Dec. 31, 1998-867,199 shares) (35,144) (15,325)
------------------------------
Total stockholders' equity 496,540 509,924
------------------------------
Total Liabilities and Stockholders' Equity $ 5,980,486 $ 6,034,116
==============================
See notes to consolidated financial statements.
3
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended
March 31,
------------------------------
Dollars in thousands except per share amounts 1999 1998
----------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 79,915 $ 67,766
Mortgage-backed securities/securities
due from brokers 10,238 15,169
Taxable investment securities 4,198 6,385
Nontaxable investment securities 541 397
Equity investment securities 1,335 898
------------------------------
Total interest income 96,227 90,615
INTEREST EXPENSE:
Deposits 34,947 38,509
Short-term borrowings 4,607 3,641
Long-term borrowings 15,073 9,233
------------------------------
Total interest expense 54,627 51,383
------------------------------
Net interest income 41,600 39,232
Reversal of provision for loan losses - (320)
------------------------------
Net interest income after provision
for loan losses 41,600 39,552
OTHER INCOME:
Loan servicing fees 101 179
Deposit fee income 4,856 5,444
ATM operations 2,992 2,853
Gain on loan sales 339 1,247
Gain on securities sales - 46
Discount brokerage commissions 1,825 1,695
Income from real estate operations 1,274 1,309
Insurance and annuity commissions 815 664
Trust revenues 610 613
------------------------------
Total other income 12,812 14,050
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 16,250 18,368
Occupancy, equipment and other
office expense 11,050 9,849
Advertising 1,728 1,704
Federal deposit insurance 719 726
Other 2,860 2,681
------------------------------
General and administrative expense 32,607 33,328
Loss on foreclosed real estate (116) (36)
------------------------------
Income before income taxes 21,689 20,238
Income tax expense 6,878 6,391
------------------------------
NET INCOME $ 14,811 $ 13,847
==============================
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.35
Diluted 0.36 0.33
==============================
DIVIDENDS PER SHARE $ 0.20 $ 0.10
==============================
See notes to consolidated financial statements.
4
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Borrowings Unearned
By Employee
Accumulated Employee Stock
Common Stock Other Stock Option Total
------------ Paid-in Retained Comprehsive Option Plan Treasury Stockholders'
Shares Amount Capital Income Income Plan Shares Stock Equity
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, 1997 40,337,423 $415 $152,353 $354,797 $2,680 $ (221) $(2,858) $ (20,835) $ 486,331
Comprehensive Income:
Net Income - - - 13,847 - - - - 13,847
Change in unrealized gain
on securities (net of tax
of $121) - - - - (320) - - - (320)
----------
Comprehensive Income 13,527
Issuance of common stock 114,739 - 295 - - - - 1,352 1,647
Cash Dividends $0.10
per share) - - - (3,908) - - - - (3,908)
Repayment of ESOP
Principal - - - - - 50 - - 50
---------------------------------------------------------------------------------------------------
March 31, 1998 40,452,162 $415 $152,648 $364,736 $2,360 $ (171) $(2,858) $ (9,483) $ 497,647
===================================================================================================
Dec. 31, 1998 40,724,824 $416 $158,764 $363,931 $2,138 $ - $ - $ (15,325) $ 509,924
Comprehensive Income:
Net Income - - - 14,811 - - - - 14,811
Change in unrealized
gain on securities (net
of tax of $178) - - - - (469) - - - (469)
----------
Comprehensive Income 14,342
Issuance of common stock 158,362 - 116 - - - - 2,479 2,595
Cash Dividends ($0.20
per share) - - - (8,023) - - - - (8,023)
Treasury Stock Purchases (1,022,000) - - - - - - (22,298) (22,298)
---------------------------------------------------------------------------------------------------
March 31, 1999 39,861,186 $416 $158,880 $370,719 $1,669 $ - $ - $ (35,144) $ 496,540
===================================================================================================
</TABLE>
See notes to consolidated financial statements
5
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended Mar. 31
Dollars in thousands 1999 1998
------------------------------
OPERATING ACTIVITIES
Net income $ 14,811 $ 13,847
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Reversal of provision for loan losses - (320)
Provision for depreciation 2,507 2,546
Decrease (increase) in assets held for sale 31,817 (14,882)
Decrease (increase) in accrued
interest receivable 619 (1,083)
Decrease in prepaid expenses and
other assets 4,145 393
Decrease in other liabilities (3,478) (3,172)
Net amotization of yield adjustments 2,169 (2,079)
Other items, net 274 (4,193)
- ------------------------------------------------------------------------------
Net cash provided (used) by
operating activities 52,864 (8,943)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in loans receivable (89,569) (79,144)
Principal repayments on available for
sale mortgage-backed securities 44,260 57,675
Principal repayments on held to maturity
mortgage-backed securities 42,117 40,856
Purchase of available for sale mortgage
backed securities (90,984) (19,650)
Sale of available for sale mortgage
backed securities - 9,470
Maturities of available for sale
investment securities 68,005 26,518
Maturities of held to maturity
investment securities 125 180
Purchase of available for sale
investment securities (53,043) (94,390)
Purchase of held to maturity investment
securities (21,900) -
Sale of available for sale investment
securities - 500
Additions to real estate (402) (1,895)
Real estate sold 4,812 2,571
Purchase of Federal Home Loan Bank stock (4,000) (546)
Additions to office properties and equipment (1,619) (4,773)
Sale of office properties and equipment 58 1
- ------------------------------------------------------------------------------
Net cash used by investing activities (102,140) (62,627)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in deposits (89,514) (39,926)
New long-term borrowings 205,000 25,000
Repayment of long-term borrowings (25,000) -
Increase (decrease) in short-term
borrowings, net (125,613) 73,679
Dividends paid to stockholders (8,023) (3,908)
Net proceeds from issuance of common stock 2,595 1,647
Purchase of treasury stock (22,298) -
Decrease in advance payments by borrowers
for taxes and insurance (1,694) (1,569)
- ------------------------------------------------------------------------------
Net cash provided by (used by)
financing activities (64,547) 54,923
- ------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (113,823) (16,647)
Cash and cash equivalents at beginning
of period 439,320 238,133
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 325,497 $ 221,486
==============================================================================
See notes to consolidated financial statements.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid on deposits 40,649 38,373
Interest paid on borrowings 21,915 16,341
Income taxes paid, net 1,512 210
Real estate acquired through foreclosure 621 688
Loans originated in connection with real estate
acquired through foreclosure - -
6
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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-month period ended March 31,
1999 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 three-month period ended March 31, 1998. The merger was
completed on July 1, 1998.
For three months ended
March 31, 1998
Beverly St. Paul Combined
-----------------------------
Interest income $11,704 $78,911 $90,615
Interest expense 5,463 45,920 51,383
-----------------------------
Net interest income 6,241 32,991 39,232
Provision (reversal) of
loan losses 180 (500) (320)
-----------------------------
Net interest income after
provision for loan losses 6,061 33,491 39,552
Other operating income 2,494 11,556 14,050
Other operating expense 6,075 27,253 33,328
Loss from foreclosed
real estate ( 2) (34) (36)
-----------------------------
Net operating income 2,478 17,760 20,238
Income taxes 769 5,622 6,391
-----------------------------
Net income $ 1,709 $12,138 $13,847
=============================
3. At March 31, 1999, the Company had the following outstanding commitments to
originate loans (dollars in thousands):
1-4 Family Mortgage Loans $ 115,524
7
<PAGE> 8
Commercial and Commercial Real
Estate Loans 27,232
Consumer Loans 7,340
Unused Lines of Credit 132,727
The Bank had commitments to purchase 1-4 family adjustable rate mortgage loans
of $29.5 million scheduled to close in the second quarter of 1999. The Bank also
had commitments to purchase $70.0 million of adjustable rate mortgage-backed
securities that are also scheduled to close in the second quarter of 1999.
The Company anticipates funding these origination commitments with cash flows
from operations and incremental borrowings as necessary.
The Company had forward contracts at March 31, 1999, to sell $27.2 million of
1-4 family mortgage loans. The consolidated financial statements contain market
value losses, if any, related to these contracts.
At March 31, 1999, the Company has outstanding $8.1 million of standby letters
of credit on behalf of St. Paul Financial Development Corporation and other
commercial customers to various counties and villages as a performance guarantee
for land development and improvements.
4. The following table sets forth the computation for basic and diluted earnings
per share for the three months ended March 31, 1999 and 1998:
Three months ended
------------------------
1999 1998
------------------------
Net Income $ 14,811 $ 13,847
===========================================================
Denominator for basic
earnings per share-
weighted average shares 40,411,343 40,050,940
Effect of diluted securities:
Stock options issued to
employees and directors 1,059,300 1,425,946
- -----------------------------------------------------------
Denominator for diluted
earnings per share-
adjusted weighted
average shares and
assumed conversions 41,470,643 41,476,886
===========================================================
Net Income per share:
Basic $ 0.37 $ 0.35
===========================================================
Diluted $ 0.36 $ 0.33
===========================================================
5. In 1998, the Company adopted 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
8
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financial statements. This Statement requires that financial information be
reported on the basis that it is reported internally for evaluating segment
performance. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption does not
impact the primary financial statements.
The Company operates many different businesses in the financial
services sector. For Segment Reporting, the Company has organized these
businesses into four distinct segments.
In the segment reporting process, balance sheets are created for each
segment, allocating assets, liabilities and equity based on the business lines
contained in the segment. The development of the balance sheets for each segment
also includes the effects of allocations of capital using a risk-adjusted
method, and the balances allocated from a central funding center in connection
with internal transfer pricing. The "eliminations" category adjusts for the
consolidated effects of the internal allocations.
An Internal ("transfer") pricing mechanism is used to value financial
assets and liabilities for each segment. Market yield curves are used to assign
rates to various balance sheet items that result in a funding charge and/or
credit to the segment. Because this is an internal funding system, the resulting
charge or credit is eliminated in interest income/expense.
First Quarter 1998 results for Beverly Bancorp are included in the
segment report.
CONSUMER FINANCIAL SERVICES This segment includes the following business
activities: the branch network and other deposit gathering support services of
the Bank, discount brokerage (Investment Network, Inc.), insurance agency
(Annuity Network, Inc. and St. Paul Federal Insurance Agency, Inc.), ATM
operations (ATM Connection, Inc.), and trust services ( St. Paul Trust Co. ).
COMMERCIAL AND MULTIFAMILY LENDING This segment is comprised of the multifamily,
commercial real estate, and business lending portfolios and related activities
of the Bank, activities of the real estate development company (St. Paul
Financial Development), and investments in low-income housing with tax credits
(Community Finance Corp.).
COMMUNITY LENDING This segment includes the company originated 1-4 family loan
portfolio including MBS swaps and gains on sales, all consumer loan activities,
loan originations and gains on sales from mortgage brokerage (Serve Corps), and
loan servicing for these portfolio loans and loans sold with servicing retained.
MONEY MANAGEMENT This segment is comprised of the wholesale acquisitions of 1-4
family mortgage portfolios, investment portfolios, wholesale financing
activities, internal funds transfer pricing allocations, holding company
activities and tax management.
9
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FINANCIAL RESULTS: FOR THREE MONTHS ENDED MARCH 31, 1999
=========================================================
Dollars in Thousands
<TABLE>
<CAPTION>
Consumer Commercial/ Consolidated
Financial Multifamily Community Money Financial
Services Lending Lending Mgmt. Elim. Statements
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest
Income $ 57,665 $ 21,350 $ 29,252 $ 70,987 $ (83,027) $ 96,227
Interest
Expense 37,153 15,470 22,601 62,430 (83,027) 54,627
---------- ---------- ---------- ---------- ----------- ----------
Net Interest
Income 20,512 5,880 6,651 8,557 0 41,600
Provisions 0 0 0 0 0 0
NII After
Provisions 20,512 5,880 6,651 8,557 0 41,600
Other Income 11,104 1,094 396 219 0 12,812
Other Expense 25,053 1,954 4,757 843 0 32,607
---------- ---------- ---------- ---------- ----------- ----------
Net Operating
Income 6,562 5,020 2,290 7,933 0 21,805
REO 0 0 116 0 0 116
Income 6,562 5,020 2,174 7,933 0 21,689
Before Tax
Income Taxes 2,577 1,820 865 1,616 0 6,878
---------- ---------- ---------- ---------- ----------- ----------
Net Income $ 3,985 $ 3,200 $ 1,309 $ 6,317 $ 0 $ 14,811
========== ========== ========== ========== =========== ==========
ACTUAL
ASSETS $4,242,026 $1,167,559 $1,651,789 $4,623,623 $(5,704,510) $5,980,486
========== ========== ========== ========== =========== ==========
</TABLE>
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FINANCIAL RESULTS: FOR THREE MONTHS ENDED MARCH 31, 1998
=========================================================
Dollars in Thousands
<TABLE>
<CAPTION>
Consumer Commercial/ Consolidated
Financial Multifamily Community Money Financial
Services Lending Lending Mgmt. Elim. Statements
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest
Income $ 60,344 $ 25,728 $ 29,509 $ 54,824 $ (79,790) $ 90,615
Interest
Expense 41,151 17,356 23,635 49,032 (79,790) 51,383
---------- ---------- ---------- ---------- ----------- ----------
Net Interest
Income 19,193 8,373 5,874 5,792 0 39,232
Provisions 0 (242) (25) (52) 0 (320)
NII After
Provisions 19,193 8,615 5,900 5,844 0 39,552
Other Income 11,189 1,005 1,582 273 0 14,050
Other Expense 24,083 2,440 5,299 1,506 0 33,328
---------- ---------- ---------- ---------- ----------- ----------
Net Operating
Income 6,300 7,180 2,183 4,611 0 20,274
REO 0 36 0 0 0 36
Income 6,300 7,144 2,183 4,611 0 20,238
Before Tax
Income Taxes 2,384 2,491 785 731 0 6,391
---------- ---------- ---------- ---------- ----------- ----------
Net Income $ 3,915 $ 4,653 $ 1,398 $ 3,880 $ 0 $ 13,847
========== ========== ========== ========== =========== ==========
ACTUAL
ASSETS $4,186,203 $1,240,951 $1,611,607 $3,275,762 $(5,023,352) $5,291,171
========== ========== ========== ========== =========== ==========
</TABLE>
The $2.5 million decline in the Commercial Lending segment's net interest income
was due primarily to a significant compression in the segment's net interest
spread. The average yield on the portfolio declined along with lower mortgage
market rates; meanwhile, the average internal transfer funding rate declined
much less. The Company uses the Federal Home Loan Bank yield curve for internal
transfer pricing; this curve generally follows the treasury yield curve
movements. Also contributing to the decline in net interest income was a $62
million decline in average interest earning asset balances.
The $2.8 million increase in net interest income for the Money Management
Segment was due to the Bank's leveraging strategy. This segment purchases whole
loans. Average interest earning asset balances increased $657 million, while
average borrowings increased $577 million. The segment was able to replace
higher cost FHLB advances with lower cost advances, resulting in a 36 basis
point decline in the average cost of funds, while maintaining the average yield
on interest earning assets.
11
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6. 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
this 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.
7. In 1999, the Company adopted SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Entity - An amendment of FASB No. 65." This Statement
requires that after the securitization of mortgage loans, an entity classify the
resulting mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"(i.e.,
trading, available for sale, or held to maturity). This Statement does not have
a material impact on the Bank's existing operations.
8. In January 1999, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP provides guidance on accounting for the costs related to
developing, obtaining, modifying and/or implementing internal use software. The
implementation of this SOP should not have a material impact on the Company.
12
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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 March 31, 1999, the Company had nearly
$6.0 billion in total assets.
On July 1, 1998, the Company merged with Beverly Bancorporation, Inc.
("Beverly"), the bank holding company of Beverly National Bank. 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. The Company issued
1.063 shares of its common stock in exchange for each outstanding common share
of Beverly. The merger was accounted for as a pooling-of-interests transaction.
Accordingly, the Company has restated all financial information and analyses to
incorporate Beverly's results on a historical basis.
At March 31, 1999, the Bank's branch network consisted of 61 locations,
including the twelve Beverly locations. The network included freestanding
branches, banking offices located in grocery supermarkets and two "Money
Connection Centers."(1) The Bank will close two other in-store banking offices
in the second quarter of 1999 when the grocery stores in which they are located
also close. The Bank will combined the operations of these locations with nearby
branches.
The Bank also operates one of the largest networks of automated teller
machines ("ATMs") in the Chicagoland area with approximately 550 machines. This
network includes approximately 250 ATMs located in White Hen Pantry convenience
- ----------------
(1) The Bank's two Money Connection Centers were opened in late 1997 and early
1998. These locations were designed to leverage a smaller space by combining
self-service banking options with branch personnel to deliver a full line of
banking services.
13
<PAGE> 14
stores and additional ATMs in grocery stores, gas stations, and other
convenience stores. See "RESULTS OF OPERATIONS" for further discussion of ATM
operations.
Both the Company and the Bank operated other wholly owned financial
services companies in 1999, including Investment Network, Inc., Annuity Network,
Inc., SPF Insurance Agency, Inc., St. Paul Financial Development Corporation
("SPFD"), Serve Corps Mortgage Corporation ("Serve Corps"), ATM Connection,
Inc., and St. Paul Trust Company. At March 31, 1999, customers maintained $749
million of investments through Investment Network, Inc. and $350 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 debt financing for real estate development projects.
At March 31, 1999, SPFD had $21.4 million in real estate equity and financing
investments. Serve Corps originates 1-4 family residential mortgages primarily
for sale, with servicing released, to third party investors. The Bank purchases
loans for its portfolio from Serve Corps. During 1999, Serve Corps originated
$92 million of 1-4 family loans, including $70 million of loans originated for
the Bank's portfolio. ATM Connection, Inc. owns and operates the ATM network of
the Bank. St. Paul Trust Company (formerly known as Beverly Trust Company)
provides a variety of trust and fund management services to customers and at
March 31, 1999 had $346 million of assets under management. St. Paul Trust
Company was acquired as part of the Beverly merger in 1998.
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 1998. 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 three months of 1999, the Bank (including Serve Corps) originated $131
million of 1-4 family loans, including home equity/line of credit loans, and $6
14
<PAGE> 15
million of other consumer loans. These amounts include loans originated and sold
to third party investors.
The Bank offers mortgage loans to qualifying borrowers to finance
apartment buildings and commercial real estate, as well as other commercial loan
products. During the first quarter of 1999, the Bank originated $128 million of
commercial and commercial real estate loans. The commercial real estate loan
portfolio is mainly comprised of loans secured by multifamily real estate. In
addition to multifamily real estate, a small portion of the Bank's commercial
real estate portfolio is secured by industrial, retail, and office properties.
The Bank acquired a commercial lending department and commercial and commercial
real estate loan portfolio of approximately $188 million in connection with the
Beverly merger. Most of Beverly's commercial loan portfolio was secured by real
estate. At March 31, 1999, approximately $47 million of commercial and
commercial real estate portfolio included other commercial loans, such as
business lines of credit, term loans, letters of credit, equipment lease
financing, municipal financing, overdrafts, receivable financing, SBA loans, and
agricultural loans. During the first quarter of 1999, the Bank originated $2.5
million of these types of commercial loans. This commercial loan portfolio is
primarily located in Illinois and Indiana. In recent years, the Bank made
commercial real estate loans only in specific Midwestern states, such as
Illinois, Indiana, Wisconsin, Minnesota, and Ohio. In 1997, the Bank resumed its
nationwide commercial real estate lending program in selected markets, to help
offset repayments in its existing portfolio. See "CREDIT RISK MANAGEMENT" for
further details.
To grow earning assets and offset the heavy loan prepayments in excess
of loan originations, the Bank has actively purchased 1-4 family adjustable rate
whole loans for its portfolio. During 1998, the Bank purchased over $1.6 billion
of 1-4 family adjustable rate loans, and during the first quarter of 1999, the
Bank purchased $247 million of 1-4 family whole loans. Management expects to use
loan purchases in 1999 to continue to build assets and offset a reduced but
continued high level of loan repayments. The Bank also invests in
mortgage-backed securities ("MBS"), federal, state, municipal and corporate debt
securities and other equity securities. The Bank assumed a state, municipal and
16
<PAGE> 16
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 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 affect the risk of actual loss in the Bank's commercial loan portfolio.
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.
16
<PAGE> 17
Factors that could affect the 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) greater than expected
operational difficulties, customer service problems and unanticipated cost
overruns related to the integration of the business of Beverly and systems
conversions, xv) unanticipated costs or expenses, and xvi) projections of
capital expenditures and costs associated with correction and testing of systems
in connection with the Year 2000 issue. These factors should be considered in
evaluating the forward-looking statements, and undue reliance should not be
placed on such statements.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
17
<PAGE> 18
STATEMENT OF FINANCIAL CONDITION
- --------------------------------
St. Paul Bancorp reported total assets of $5.98 billion at
March 31, 1999, a $53.6 million decrease over total assets reported at Dec. 31,
1998. Most of the decline in total assets resulted from an $113.8 million
decrease in cash and cash equivalent balances. Higher loans receivable of $87.1
million partly offset this decline. On the liability side, deposit balances
shrank by $89.5 million, while borrowing balances were up by $54.4 million.
Cash and cash equivalents totaled $325.5 million at March 31,
1999 compared to $439.3 million at year-end 1998.(2)
Investment securities comprised of U.S. Treasury and agency
debt securities, municipal and corporate bonds and other marketable equity
securities, totaled $219.7 million at March 31, 1999, as compared to $213.9
million at December 31, 1998. At March 31, 1999, 96 percent of the Company's
investment securities were classified as AFS as compared to 95 percent at
December 31, 1998. The Company recorded an unrealized gain on AFS investment
securities of $1.7 million at the end of the first quarter 1999, and $2.5
million at December 31, 1998.
MBS totaled $606.8 million at March 31, 1999, compared to
$602.1 million at the end of 1998.(3) MBS repayments received during the first
quarter, partly offset by the purchase of $91 million of securities produced the
slight decline in balances. The weighted average yield on the MBS portfolio
declined 6 basis points to 6.65 percent at March 31, 1999 from 6.71 percent at
year-end 1998. The repayment of higher rate MBS and the purchase of the new
securities at a weighted average rate less than the rate on the entire portfolio
primarily generated the slight decline in the weighted average yield.
Approximately 63 percent of the MBS portfolio is classified as AFS, and at March
31, 1999, the Company reported an unrealized gain on its AFS MBS of $1.0 million
compared to an unrealized gain of $740,000 at December 31, 1998.
- ------------------
(2) See "CASH FLOW ACTIVITY" for further details.
--------------------
(3) At December 31, 1998 MBS includes $79.8 million of MBS classified as
securities due from brokers.
18
<PAGE> 19
Net loans receivable rose $87.1 million to $4.6 billion at
March 31, 1999, up from $4.5 billion at December 31, 1998. The purchase of
$247.2 million of whole loans and loans originated for portfolio produced the
increase in loans receivable balances. While loan repayment activity has
remained high over the past several quarters the amount of repayments
experienced in the first quarter of 1999 has declined from the levels
experienced in the third and fourth quarters of 1998. The weighted average loan
yield declined 3 basis points to 7.11 percent at March 31, 1999 from 7.14
percent at the end of 1998. The repayment of higher rate loans and the purchase
and origination of lower rate loans has led to the continued trend of a
declining weighted average loan rate. While level of repayments experienced in
the first quarter of 1999 was still high, the level was lower than the third and
fourth quarters of 1998.
Loans held for sale decreased $31.8 million during the first
quarter of 1999 to $33.5 million at March 31, 1999. A decrease, as compared to
the fourth quarter 1998, in the loans originated by Serve Corps, the Bank's
mortgage loan brokerage subsidiary, and an increase in the amount of loans
purchased from Serve Corps by the Bank for its own portfolio caused the decrease
in loans classified as held for sale. 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 declined $89.5 million during the first three months
of 1999 to total $3.8 billion at March 31, 1999. Lower CD balances of $73.7
million largely produced the decline in deposits. A decline in checking account
balances also contributed to the decrease. The weighted average deposit rate
decreased by 14 basis points over the first three months of 1999 to 3.64
percent. A decline in the weighted average rate paid on CD balances and a
decline in average CD balances, the highest-cost deposit product, mostly caused
this decrease in the weighted average rate.
Total borrowings, which include FHLB advances, totaled $1.6
billion at March 31, 1999 or $54.4 million higher than at December 31, 1998. The
Company has used borrowing balances as a source of funds for whole loan
purchases and to fund net deposit outflows. The weighted average rate paid on
borrowings declined 4 basis points to 5.33 percent at March 31, 1999 from
December 31, 1999. See "CASH FLOW ACTIVITY" for further discussion.
19
<PAGE> 20
Stockholders' equity of the Company totaled $496.5 million
($12.46 per share outstanding) at March 31, 1999, down $13.4 million from
year-end 1998. The decrease in stockholders' equity during the first quarter of
1999 was largely due to the Company's common stock repurchase program. During
the first three months of 1999, the Company spent $22.3 million to repurchase
1,022,000 shares of its common stock. See "CASH FLOW ACTIVITY - HOLDING COMPANY"
for further details. In addition, the payment of $8.0 million of quarterly
dividends to shareholders also contributed to the decrease in stockholders'
equity. These decreases were partly offset by net income for the first quarter
of $14.8 million and $2.6 million of capital provided by the exercise of
employee stock options. 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 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.
20
<PAGE> 21
As of March 31, 1999, the Bank meets all capital adequacy requirements to which
it is subject.
As of March 31, 1999 and December 31, 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, and 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 March 31, 1999, the Bank's
tangible and core capital ratio of 7.69 percent and risk-based capital of 15.50
percent exceed required capital levels.
21
<PAGE> 22
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:
--------------- -------------------- ------------------
<S> <C> <C> <C>
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
As of Mar. 31, 1999
Total Capital
(to Risk Weighted Assets) $ 489,042 15.50% >$ 252,445 >8.00% >$ 315,556 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 449,588 14.25% >$ 126,222 >4.00% >$ 189,334 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 449,588 7.69% >$ 233,954 >4.00% >$ 292,442 > 5.00%
- - - -
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $ 486,590 15.62% >$ 249,195 >8.00% >$ 311,494 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 447,635 14.37% >$ 124,597 >4.00% >$ 186,896 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 447,635 7.62% >$ 234,935 >4.00% >$ 293,668 > 5.00%
- - - -
</TABLE>
Both the ratio of total capital to risk weighted assets and Tier I capital
to risk weighed assets declined slightly over the first three months of 1999. An
increase in risk weighted assets, partly offset by a small increase in the level
of capital, produced the lower ratio. The ratio of Tier I capital to regulatory
assets increased by 7 basis points, largely due to an increase in Tier I
capital. While the capital of the Company declined during the first quarter,
mainly due to the stock repurchase program, the capital levels of the Bank have
increased slightly.
The following schedule reconciles stockholders' equity of the Company to
the components of regulatory capital of the Bank at Mar. 31, 1999:
Mar. 31,
Dollars in thousands 1999
- ------------------------------------------------------------------------
Stockholders' equity of the Company $ 496,540
Less: capitalization of the Company
and non-Bank subsidiaries (44,296)
- ------------------------------------------------------------------------
Stockholder's equity of the Bank 452,244
Less: unrealized gain on
available for sale securities (1,290)
Less: investments in non-includable
subsidiaries (585)
Less: intangible assets and other non-includable assets (781)
- ------------------------------------------------------------------------
Tangible and core capital 449,588
Plus: allowable GVAs 39,454
- ------------------------------------------------------------------------
22
<PAGE> 23
Risk-based capital $ 489,042
========================================================================
Under the Federal Deposit Insurance Corporation Improvement Act, the
OTS 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 current OTS capital distribution regulations, as long as
the Bank meets the OTS capital requirements before and after the payment of
dividends and meets the standards for expedited treatment of applications
(including having certain regulatory composite, compliance and Community
Reinvestment Act ratings), the Bank may pay dividends to the Company without
prior OTS approval equal to the net income to date over the calendar year, plus
retained net income over the preceding two years. In addition, the OTS has the
discretion to prohibit any otherwise permitted capital distribution on general
safety and soundness grounds, and must be given 30 days' advance notice of all
capital distributions during which time it may object to any proposed
distribution.
23
<PAGE> 24
During 1999, the Bank plans to pay dividends to the Company equal
to 100 percent of Bank's prior quarter's net income.
24
<PAGE> 25
CASH FLOW ACTIVITY
- ------------------
Cash and cash equivalent balances at March 31, 1999 totaled
$325.5 million, down $113.8 million from December 31, 1998. During the first
three months of 1999, the major sources of funds included new borrowings, loan
and MBS repayments, and a decrease in the amount of loans held for sale. The
Company's major uses of funds included purchases and origination of loans for
portfolio, purchases of MBS, funding net deposit outflows, and the repurchase of
Company common stock.
As part of Management's strategy to expand interest earning
assets, the Company purchased $247 million of whole 1-4 family loans during the
first three months of 1999. These purchases, along with loans originated for
portfolio, accounted for the $89.6 million net increase in loans receivable
balance and were a major use of funds during the first quarter of 1999. (5) Loan
repayments partly offset these increases. Loan repayments during the first
quarter of 1999 were approximately $394 million. The low interest rate
environment has produced a significant amount of repayment activity in the
Company's loan portfolio. While the amount of repayments in the first quarter
was high in historical terms, the level has decreased from the amount of loan
repayments experienced in the third and fourth quarters of 1998. In comparison,
whole loan purchases in 1998 generally produced the $79 million net increase in
loans receivable in the first quarter of 1998.
During the first quarter of 1999, the Company also used funds
to purchase $90 million of MBS. This purchase was partly offset by the repayment
in the MBS portfolio totaling $86.4 million. In comparison, during the first
quarter of 1998, the Company purchased no new MBS and received $98.5 million of
MBS repayments.
A $31.8 million decrease in assets held for sale was also a
source of funds during the first quarter of 1999. The decrease in assets held
for sale was largely due to a decrease in the originations volumes at Serve
Corps, the Bank's mortgage loan broker subsidiary. In addition, the Bank
increased the amount of Serve Corps' production purchased for its own
subsidiary. In comparison, during the first three months of 1998, the amount of
assets held for
25
<PAGE> 26
sale increased by $14.9 million. The Bank purchased the operations of Serve
Corps during January of 1998, resulting in the increase in assets held for sale
during the first quarter of 1998.
New borrowings were a significant source of funds during the
first three months of 1999. During the first quarter, the Company increased net
borrowing balances by $45.6 million, with most of the increase occurring in
long-term borrowings. These new borrowings replaced other short-term borrowings,
and provided liquidity for asset growth and net deposit outflows. During the
first three months of 1998, the Company increased borrowing balances by $98.7
million, largely to fund whole loan acquisitions.
During the first quarter of 1999, the Company also funded an
$89.5 million net outflow in deposits. Most of the decline in deposit balances
occurred in CD products. The Company has lowered the offering rates on new CD
products in response to market conditions and in an effort to lower its cost of
funds. In comparison, deposit balances declined by $39.9 million during the same
three month period in 1998.
The Company also used $22.3 million of funds during the first
three months of 1999 to repurchase over 1 million shares of its own common
stock. These repurchases were part of a share repurchase program announced in
January 1999. See "HOLDING COMPANY LIQUIDITY" following for further details. The
Company made no similar repurchases during the first three months of 1998.
Holding Company Liquidity. At March 31, 1999, the holding company had $77.3
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 $34.5 million of investment securities
classified as AFS. The Company also maintains a $20.0 million revolving line of
credit agreement from another financial institution. At March 31, 1999, no funds
have been borrowed under this agreement.
Sources of liquidity for St. Paul Bancorp during the first
three months of 1999 included $12.6 million of dividends from the Bank and
$561,000 in dividends from the holding company's other subsidiaries. Uses of
holding company
- ------------------
(5) See "CREDIT RISK MANAGEMENT" for further details.
26
<PAGE> 27
liquidity during the first quarter of 1999 included $22.3 million to repurchase
shares of common stock, the purchase of $21.9 million of investment securities,
and $8.0 million of dividends paid to stockholders.
In January 1999, the Company's Board of Directors approved a
new stock repurchase program and an increase in the dividend. First, the Company
announced its intentions to repurchase up to 2 million (or about 5 percent) of
its outstanding common stock over the first six months of 1999. During the first
quarter of 1999, the Company repurchased 1,022,000 of its shares in open market
or privately negotiated transactions. Second, the Company increased the
quarterly dividend rate to $0.20 per share, up from $0.15 per share. The new
quarterly dividend rate began with the first quarter 1999 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 1997, the OTS revised its liquidity requirement to 4 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. At March 31, 1999, the Bank's
liquid assets substantially exceeded the 4 percent requirement of $171 million.
Because of the change in regulation, Management's regulatory liquidity
compliance focus has shifted from quantitative measures to qualitative safety
and soundness concerns.
27
<PAGE> 28
RATE/VOLUME ANALYSIS
- --------------------
The following tables present the components of the changes in net interest
income by volume and rate (6) for the three months ended March 31, 1999
and 1998:
INCREASE/(DECREASE) DUE TO
--------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
--------------------------------------------------------------------
CHANGE IN INTEREST AND DIVIDEND INCOME:
Loans receivable $17,100 $(4,951) $12,149
Mortgage-backed securities(7) (4,661) (270) (4,931)
Taxable investment securities (666) (1,521) (2,187)
Non-taxable investment securities 133 11 144
Dividends on equity investment securities 554 (117) 437
------- ------- -------
Total interest and dividend income 12,460 (6,848) 5,612
CHANGE IN INTEREST EXPENSE:
Deposits 61 (3,623) (3,562)
Short-term borrowings 934 32 966
Long-term borrowings 7,061 (1,221) 5,840
------- -------- -------
Total interest expense 8,056 (4,812) 3,244
------- -------- -------
NET CHANGE IN NET INTEREST AND DIVIDEND
INCOME BEFORE PROVISION FOR LOAN LOSSES $ 4,404 $(2,036) $ 2,368
======= ======= =======
- ------------------
(6) This analysis allocates the change in interest and dividend 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 and dividend
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.
(7) Includes securities due from brokers.
28
<PAGE> 29
RESULTS OF OPERATIONS
- ---------------------
General. Net income for the first quarter of 1999 was $14.8 million or $0.36 per
diluted share outstanding, compared to $13.8 million, or $0.33 per diluted share
in the same quarter a year ago. An increase in net interest income combined with
lower general and administrative expenses produced the increase in net income.
These increases were partly offset by a decline in other income. Net income in
1999 was impacted by approximately $700,000 of non-recurring system conversion
costs. Without these costs, net income would have been $15.3 million, or $0.37
per share.
Net Interest Income. Net interest income totaled $41.6 million during the first
quarter of 1999, compared to $39.2 million of net interest income recorded
during the same quarter in 1998. An increase in interest earning assets largely
produced the increase in net interest income. Average interest earning asset
levels increased to $5.7 billion during the first quarter of 1999, or $685
million higher than during the same quarter in 1998. The increase in interest
earning assets was largely produced by the purchase of 1-4 family loans. A
declining cost of funds, mainly in the deposit portfolio, also contributed to
the increase in net interest income. These increases were partly offset by the
greater reliance on borrowing to fund the asset growth.
The net interest margin ("NIM"), on a tax-equivalent basis,
was 2.94 percent during the first quarter of 1999, compared to 3.15 percent
during the first quarter of 1998. Declining asset yields, caused by the
repayment of higher rate loans and MBS and the purchase or origination of lower
yielding assets, and a greater reliance on borrowings as a source of funds
produced the decline in the NIM. However, a decrease in the cost of deposits
partly offset these decreases in the NIM. The NIM increased 15 basis points when
compared to the NIM of 2.79 percent during the fourth quarter of 1998. The
declining effective cost of deposits was primarily responsible for the increase
in the NIM since the fourth quarter of 1998.
Interest Income. Interest income on loans receivable rose $12.1 million to $79.9
million during the first quarter of 1999, compared to $67.8 million during the
29
<PAGE> 30
same quarter in 1998. Higher average balances produced the increase in interest
income. Average loan balances increased $968.8 million to $4.6 billion in the
first quarter of 1999 as compared to the same quarter a year ago. Most of the
growth in loans receivable was accomplished through the purchase of 1-4 family
loans. The effective loan yield declined 52 basis points to 6.95 percent in the
first quarter of 1999 compared to 7.47 percent in the first quarter of 1998. 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 $4.9 million during the first
quarter to $10.2 million, compared to $15.2 million during the same quarter a
year ago. The decline in interest income was primarily related to lower average
balances due to MBS prepayments. Average balances declined by $287.7 million
during the first quarter of 1999 compared to the same quarter in 1998. The
effective MBS yield was 6.47 percent in the first quarter of 1999, or 12 basis
points less than the same quarter a year ago. The lower effective MBS yield was
associated with higher amortization of net purchase premiums and the repayment
of higher rate assets.
Interest income from investments decreased $1.6 million during
the first three months in 1999 compared to the same period in 1998. Most of the
decline was due to a lower effective yield earned on investment balances. The
effective investment yield declined 134 basis points to 5.38 percent in the
first quarter of 1999 compared to the same quarter of 1998. Lower yields earned
on new investment securities and the maturities of some higher rate securities
produced a lower overall investment yield. Average investment balances were
relatively flat.
Interest Expense. Deposit interest expense declined by $3.6 million to $34.9
million during the first quarter of 1999 compared to $38.5 million during the
first quarter of 1998. The decline in expense was due to a lower effective cost
of deposits. The effective cost of deposits declined 38 basis points to 3.67
percent during the first three months of 1999 compared to 4.05 percent during
the same quarter in 1998. A decline in effective cost of CDs and a decline in
30
<PAGE> 31
average CD balances largely produced the lower effective yield. Average deposit
balances were relatively unchanged at $3.9 million.
Borrowing interest expense increased by $6.8 million to $19.7
million during the first quarter of 1999, as compared to the same period a year
ago. The increase in expense was due to higher average borrowing balances,
partly offset by a lower average interest cost. Average balances rose by $602
million during the first quarter of 1999 over the same quarter a year ago.
Management has primarily relied on borrowings to fund whole loan acquisition
growth. The effective cost of borrowings was 5.38 percent, or 57 basis points
less than the first quarter in 1998. 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 2.79 percent at March 31, 1999, compared to 2.69
percent at December 31, 1998. A declining cost of funds in recent periods,
mainly in the deposit portfolio, accounted for most of the increase in the
interest rate spread since year-end 1998.
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 no provision for loan loss
during the first quarter of 1999. In comparison, the Company reversed $320,000
of previous loan loss provisions in the first quarter of 1998. See "CREDIT RISK
MANAGEMENT" for further discussion of loss provisions and the adequacy of the
accumulated provisions for losses.
31
<PAGE> 32
Other Income. Other income for the first quarter of 1999 totaled $12.8 million,
$1.2 million or 8.8 percent less than during the first quarter of 1998. Lower
gains on loan sales and other fee income produced the decrease in other income.
The decrease in gains on loan sales was caused by a decrease
in loan sales volumes at Serve Corps, the Bank's mortgage loan brokerage
subsidiary. In addition, the Bank purchased a large portion of Serve Corps'
originations (8). The decrease in other service fees related to lower
transaction accounts and fee waivers associated with the conversion to new data
processing systems.
These decreases were partly offset by slightly higher revenues
from ATM operations and discount brokerage operations. Higher transaction
volumes and an increase, during 1998, in the access fee charged to non-customers
who use the Bank ATMs added to revenues from ATM operations. Higher transaction
volumes also produced an increase in revenues from discount brokerage
operations.
Revenues from real estate operations decreased $35,000 in the
first quarter of 1999 compared to the same quarter in 1998. The Company recorded
a $1.0 million gain on the sale of land parcel in the first quarter of 1999. The
Company recorded a similar gain in the first quarter of 1998 from the sale of a
separate parcel of land.
General and Administrative Expense. General and administrative expenses ("G&A")
totaled $32.6 million during the first three months of 1999, or $721,000 less
than during the first quarter of 1998. G&A expense also included $700,000 of
non-recurring costs associated with system conversions. Without these costs, G&A
expense would have declined $1.4 million in the first quarter of 1999 compared
to the same quarter in 1998. A decline in compensation and benefits produced
most of the decline in G&A expense. This decline was partly offset by higher
occupancy, equipment and other office expense. The Company also expects to incur
additional G&A expense in 1999 for legal and proxy solicitation fees associated
- ------------------
(8) Gains are not recorded for loans transferred to the Bank.
32
<PAGE> 33
with a shareholder proposal to be voted on during the 1999 Annual Meeting of
Shareholders in May 1999.
Compensation and employee benefits totaled $16.3 million
during the first quarter of 1999, or $2.1 million less than the same quarter a
year ago. This decrease was mostly attributed to a reduction in the number of
employees through the elimination of duplicative positions in connection with
the July 1998 merger with Beverly Bancorporation, Inc., an early retirement
opportunity given to certain employees in connection with the cost reduction
plan announced in August 1998 and certain other staff reductions. In addition,
the suspension of the incentive bonus program for officers of the Company and
other modifications to employee benefit programs also contributed to the
reduction in compensation and benefits expense.
Occupancy, equipment, and other office expenses totaled $11.1
million during the first quarter of 1999 compared to $9.8 million in the same
quarter a year ago. Higher systems costs primarily relate to the initiatives to
replace core transaction processing systems implemented during the fourth
quarter of 1998 and first quarter of 1999. In addition, the Company also
experienced higher occupancy and maintenance costs.
Year 2000 Disclosure The Company incurred G&A costs in 1999 related to the
systems requirements to ensure that the Bank can process transactions subsequent
to January 1, 2000. The Year 2000 compliance issues result 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
33
<PAGE> 34
January 1, 2000. The Company subsequently decided to replace some of these
systems, including the core transaction processing systems, and implemented
these new systems during the first quarter of 1999. 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 are not made in a
timely fashion, the Year 2000 compliance issue could have a material impact on
the Company. Furthermore, there can be no assurances that the Company's
assessment has uncovered each possible Year 2000 issue that could affect 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, disruption of customer
service, and inability to produce accurate financial statements. The amount of
the potential liability, if any, that relates 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 applications, Bank
vendors and available internal resources was prepared. From this work, a plan
was prepared and approved by the Bank's Board of Directors in early 1997. The
plan focused on transaction processing applications, mainframe computer systems,
mid-range computer systems, networks, personal computers, and operational
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.
34
<PAGE> 35
Work on the correction phase began in 1997 and continued 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 to allow the
Company to adapt more quickly to technological advances and to assimilate
acquisitions, such as Beverly.
The Company converted its residential loans to the Alltel loan
servicing system in the fourth quarter of 1998. The other major business
applications and interfaces were converted to the EDS/Miser system in the first
quarter of 1999, running under a new Unisys operating environment. The teller
platform system was also replaced. Management believes that these new systems
are Year 2000 compliant and has received assurances from its vendors concerning
Year 2000 compliance. The Company has taken steps to confirm the vendors'
compliance. The conversions to the new systems required new mainframe hardware,
as well as new interfaces to other systems and personal computer hardware. The
Company is making initial capital investments of approximately $10.0 million
associated with the new replacement systems. The testing on the mainframe system
has been finished, however, complete testing of the custom interfaces between
the mainframe and other systems is expected to be completed in May 1999.
Compliance and testing work on most operational and specialized systems and
hardware has been completed. However, testing work on a mid-range operating
system software is expected to be completed in mid-May.
The Company assumed additional operating risks with the
substantial conversions undertaken during the fourth quarter of 1998 and first
quarter of 1999. These risks included a decrease in the level of customer
service, disruption of operations, and financial costs. Management took steps to
assess the additional risk. A senior level steering committee was assigned to
oversee the conversions. The committee hired an outside consultant to manage the
project and coordinate with the resources provided by the vendors. Management
has completed these data processing conversions and believes that the operating
risks have been substantially reduced.
35
<PAGE> 36
Management currently estimates that completion of the Year
2000 project will cost $3.7 million. Of this total cost, $2.9 million had
already been incurred by the end of the first quarter of 1999. The above
expenses only include 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 has completed written contingency plans for
business resumption in the event of a Year 2000 interruption for its mission
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 $116,000 during the first quarter of 1999, compared
to $36,000 for the same quarter in 1998. See "CREDIT RISK MANAGEMENT" for
further discussion of REO.
Income Taxes. A higher level of pretax income produced an increase in income tax
expense during the first quarter of 1999 as compared to the first quarter in
1998. While income tax expense increased, the effective income tax rate was
relatively unchanged from the same quarter in 1998. The Company's effective
annual income tax rate through the first three months of 1999 was 31.7 percent
compared to 31.6 percent during the same quarter in 1998.
36
<PAGE> 37
AVERAGE BALANCES, INTEREST AND AVERAGE
YIELDS
<TABLE>
<CAPTION>
Three months ended Mar. 31,
Dollars in thousands At Mar. 31, 1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
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 $ 328,704 5.24% $ 345,178 $ 4,198 4.93% $ 389,259 $ 6,385 6.65%
Non-taxable investment securities (c) 43,428 6.73 42,872 541 7.87 32,315 397 7.67
Equity investment securities (d) 104,803 5.57 91,801 1,335 5.90 54,473 898 6.69
- -------------------------------------------------------------------------------------------------------------------------
Total investments 476,935 5.45 479,851 6,074 5.38 476,047 7,680 6.72
Mortgage-backed securities/
securities due from brokers 606,829 6.65 632,636 10,238 6.47 920,345 15,169 6.59
Loans receivable (e) 4,638,553 7.11 4,596,672 79,915 6.95 3,627,904 67,766 7.47
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $5,722,317 6.92% $5,709,159 $96,227 6.77% $5,024,296 $90,615 7.24%
=========================================================================================================================
Total deposits $3,805,457 3.64% $3,858,897 $34,947 3.67% $3,852,809 $38,509 4.05%
Borrowings (f):
Short-term 319,705 5.56 317,567 4,607 5.88 253,163 3,641 5.83
Long-term 1,255,414 5.27 1,166,292 15,073 5.24 628,922 9,233 5.95
- -------------------------------------------------------------------------------------------------------------------------
Total borrowings 1,575,119 5.33 1,483,859 19,680 5.38 882,085 12,874 5.92
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $5,380,576 4.13% $5,342,756 $54,627 4.15% $4,734,894 $51,383 4.40%
=========================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 341,741 $ 366,403 $ 289,402
=========================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x 1.07x 1.06x
=========================================================================================================================
Interest income $41,600 $39,232
========================================================================================================================
Interest rate spread (tax equivalent yield) 2.79%
=========================================================================================================================
"Average" interest rate spread
(tax equivalent yield) 2.62% 2.84%
=========================================================================================================================
Net yield on average earning assets
(tax equivalent yield) 2.94% 3.15%
=========================================================================================================================
</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) Effective yield and weighted average rate on tax-exempt securities are
on a tax equivalent basis assuming a 35% tax rate.
(d) Includes investment in FHLB stock and other equity investments.
(e) Includes loans held for sale and loans placed on a nonaccrual status.
(f) Includes FHLB advances, securities sold under agreements to repurchase
and other borrowings.
37
<PAGE> 38
KEY CREDIT STATISTICS
<TABLE>
<CAPTION>
Mar. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
Dollars in thousands Dollar % Dollar % Dollar %
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOAN PORTFOLIO
Mortgage and Commercial Loans:
1-4 family units $3,304,732 72% $3,272,839 73% $2,283,982 63%
Commercial real estate 1,065,712 23 997,588 22 1,105,191 30
Commercial/industrial 46,568 1 47,731 1 55,309 1
Equity/Line of Credit 154,766 3 155,079 3 159,153 4
Land and land development 697 * 910 * 1,467 *
Consumer 32,541 1 43,857 1 60,000 2
- ---------------------------------------------------------------------------------------------
Total loans held for investment $4,605,016 100% $4,518,004 100% $3,665,102 100%
=============================================================================================
Weighted average rate 7.11% 7.14% 7.57%
=============================================================================================
*Less than 1%
Mar. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
Dollars in thousands Dollar % Dollar % Dollar %
- ---------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Mortgage and Commercial Loans:
1-4 family units $ 15,740 69% $ 12,282 62% $ 9,458 74%
Commercial/Commercial real estate 4,683 20 3,794 19 1,129 8
Equity/LOC 844 4 1,223 6 378 3
Consumer 707 3 512 2 259 2
- ---------------------------------------------------------------------------------------------
Total mortgage and Commercial loans 21,974 96 17,811 89 11,224 87
Real Estate owned:
1-4 family units 969 4 2,097 11 1,515 12
Commercial/Commercial real estate --- - --- -- 82 1
- ---------------------------------------------------------------------------------------------
Total real estate owned 969 4 2,097 11 1,597 13
- ---------------------------------------------------------------------------------------------
Total nonperforming assets $ 22,943 100% $ 19,908 100% $ 12,821 100%
=============================================================================================
Mar. 31, Dec. 31, Dec. 31,
1999 1998 1997
KEY CREDIT RATIOS
- --------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.01% *% 0.05%
Loan loss reserve to total loans 0.87 0.89 1.05
Loan loss reserve to nonperforming loans 183.11 226.96 343.63
Loan loss reserve to impaired loans 1,063.00 1,234.50 197.90
Nonperforming assets to total assets 0.38 0.33 0.25
General valuation allowance to non-
performing assets 176.05 203.83 290.51
- --------------------------------------------------------------------------------------------
</TABLE>
* Less than 0.01%
38
<PAGE> 39
CREDIT RISK MANAGEMENT
- ----------------------
LENDING
At March 31, 1999, 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 $22.0 million at Mar. 31, 1999, up $4.2
million from December 31, 1998. Of the increase, $3.3 million related to 1-4
family loans and the remaining $900,000 related to commercial and commercial
real estate loans. Total non-performing assets (including real estate owned)
were $22.9 million at March 31, 1999, or 0.38 percent of total assets. In
comparison, non-performing assets were $19.9 million, or 0.33 percent of total
assets at the end of 1998. While the level of non-performing assets has
increased, the levels still remain below levels experienced four years ago.
At March 31, 1999, the Bank had a net investment in impaired loans of
$3.8 million. All of the impaired loans were performing but considered
impaired. (9) As anticipated by Management, the level of impaired loans has been
reduced significantly over the past several years.
The allowance for loan losses at March 31, 1999 was $40.3 million
compared to $40.4 million at December 31, 1998, a decrease of $120,000. The
following table provides a rollforward of the allowance for loan losses from
January 1, 1998 through March 31, 1999:
1999 1998
-------------- ---------------------------
Three Months Three Months Year Ended
Dollars in thousands Ended Mar. 31 Ended Mar. 31 December 31
- -------------------- -------------- ---------------------------
Beginning of Period $40,423 $38,569 $38,569
Provision for losses -- (320) 1,860
Charge-offs (273) (127) (1,134)
Recoveries 153 397 1,128
-------------- ---------------------------
End of Period $40,303 $38,519 $40,423
============== ===========================
- -------------------
(9) "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.
39
<PAGE> 40
The level of net charge-offs in recent years has declined due the
continued trend of the low level of non-performing loans and the continued
reductions in balances in the Company's commercial real estate portfolio located
outside the Midwest. Net loan charge-offs were $120,000 during the first quarter
of 1999. In comparison, net charge-offs were only $6,000 during 1998 and $1.8
million during 1997. The gross charge-offs during the first quarter of 1999 were
$273,000 and recoveries were $153,000. Approximately two-thirds of the gross
charge-offs related to the commercial portfolio. The remainder of the
charge-offs were in the 1-4 family and consumer loan portfolios. The recoveries
during the first quarter of 1999 were mostly in the 1-4 family portfolio. The
ratio of net charge-offs to average loans receivable was 0.01 percent during the
first three months of 1999. This ratio was less than 0.01 percent in 1998 and
0.05 percent during 1997. See "KEY CREDIT STATISTICS" tables for further detail.
The Company recorded no provision for loan losses during the first
quarter of 1999 compared to the reversal of $320,000 of previous loan loss
provisions during the first quarter a year ago. The general trend of improved
credit quality, the decrease in the size of the Bank's commercial real estate
portfolio located outside of the Midwest, declining classified assets, and the
low level of non-performing assets, as well as the decrease in the net
charge-offs, has caused the allowance for loan losses to decrease in recent
years. The future level of loan loss provisions will be subject to careful
review of the risk elements of the portfolio by Management. See "KEY CREDIT
STATISTICS" for further details.
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.
40
<PAGE> 41
The Loan Loss Reserve Committee ("Reserve Committee") of the Bank's
Board of Directors approves the adequacy of the allowance for loan losses on a
quarterly basis. 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.
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 real estate loan
origination efforts during the past several years have focused on the Midwestern
states. However, the Company began to originate new commercial real estate loans
in selected markets outside the Midwest to help offset heavy prepayments in this
portfolio. The Bank's current commercial loan portfolio was mainly acquired
through the Beverly merger. The types of commercial loans originated includes
business lines of credit, term loans, letters of credit, equipment lease
financing, municipal financing, overdrafts, receivable financing, SBA loans, and
agricultural loans. The commercial loan portfolio is concentrated in the area
surrounding the Company's banking offices.
The Bank continues to purchase whole loans, secured by 1-4 family
residences throughout the United States. These transactions were used to offset
heavy prepayments in this portfolio and expand interest earning asset levels.
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, particularly California. The Bank's
largest concentration of commercial and commercial real estate loans outside
Illinois are California and Washington.
41
<PAGE> 42
As of December 31, 1998, the Bank's ratio of classified assets to
tangible capital and general valuation allowance was 7.6 percent. Classified
assets include REO and loans considered "substandard," "doubtful," or "loss"
under regulatory accounting purposes and the Bank's loan rating system.
OTHER REAL ESTATE OWNED
- -----------------------
REO totaled $969,000 at March 31, 1999 compared to $2.1 million
at the end of 1998. At both March 31, 1999 and December 31, 1998 all
REO assets were 1-4 family properties.
The allowance for real estate losses totaled $155,000 at both
March 31, 1999 and December 31, 1998. 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.
42
<PAGE> 43
PART II. -- OTHER INFORMATION
- -------- -----------------
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) The Company filed a Report on Form 8-K on January 28, 1999 announcing
the Company's intention to repurchase up to 2 million shares of its
common stock (or approximately 5 percent of shares outstanding) over
the next six months. In addition, the Company announced an increase in
the quarterly dividend rate to $0.20 per share from $0.15 per share.
43
<PAGE> 44
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: May 14, 1999 By: /s/ Joseph C. Scully
-----------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: May 14, 1999 By: /s/ Robert N. Parke
-----------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
44
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 138,577
<INT-BEARING-DEPOSITS> 9,518
<FED-FUNDS-SOLD> 107,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 594,239
<INVESTMENTS-CARRYING> 232,301
<INVESTMENTS-MARKET> 235,101
<LOANS> 4,638,553
<ALLOWANCE> 40,303
<TOTAL-ASSETS> 5,980,486
<DEPOSITS> 3,805,457
<SHORT-TERM> 319,705
<LIABILITIES-OTHER> 103,370
<LONG-TERM> 1,255,414
0
0
<COMMON> 416
<OTHER-SE> 496,124
<TOTAL-LIABILITIES-AND-EQUITY> 5,980,486
<INTEREST-LOAN> 79,915
<INTEREST-INVEST> 14,266
<INTEREST-OTHER> 2,046
<INTEREST-TOTAL> 96,227
<INTEREST-DEPOSIT> 34,947
<INTEREST-EXPENSE> 54,627
<INTEREST-INCOME-NET> 41,600
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 32,607
<INCOME-PRETAX> 21,689
<INCOME-PRE-EXTRAORDINARY> 14,811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,811
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 2.94
<LOANS-NON> 15,249
<LOANS-PAST> 6,725
<LOANS-TROUBLED> 257
<LOANS-PROBLEM> 3,858
<ALLOWANCE-OPEN> 40,423
<CHARGE-OFFS> 273
<RECOVERIES> 153
<ALLOWANCE-CLOSE> 40,303
<ALLOWANCE-DOMESTIC> 40,303
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
