1
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BUSINESS HIGHLIGHTS / FINANCIAL REVIEW St. Paul Bancorp, Inc.
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ASSETS AT YEAR-END 1997
Investment Securities $ 41.6 million
Other Assets $ 187.8 million
Cash and Cash Equivalents $ 204.7 million
MBS $ 917.9 million
Loans Receivable $ 3.2 billion
WEIGHTED AVERAGE INTEREST RATE SPREAD AT YEAR-END (in percent)
1988 2.28
1989 2.25
1990 2.48
1991 2.95
1992 3.48
1993 3.30
1994 2.76
1995 2.72
1996 2.78
1997 2.66
LOAN PORTFOLIO AT YEAR-END 1997
Consumer $ 13.2 million
Income Producing Property $ 974.8 million
1-4 Family $ 2.3 billion
NONPERFORMING ASSETS TO TOTAL ASSETS AT YEAR-END (in percent)
1988 1.25
1989 0.93
1990 1.07
1991 2.17
1992 1.38
1993 1.34
1994 0.66
1995 0.71
1996 0.29
1997 0.23
DEPOSITS AT YEAR-END 1997
Money Market $ 219.7 million
Checking $ 421.4 million
Saving $ 674.2 million
CDs $ 2.0 billion
NET LOAN CHARGE-OFFS TO AVERAGE LOANS (in percent)
1988 0.08
1989 0.55
1990 0.18
1991 0.45
1992 0.34
1993 0.56
1994 0.39
1995 0.21
1996 0.15
1997 0.05
Contents
18 Ten-Year Summary
MANAGEMENT'S DISCUSSION AND ANALYSIS
20 Overview
21 Statement of Financial Condition
24 Cash Flow Activity
27 Results of Operations
33 Credit Risk Management
36 Interest Rate Risk
FINANCIAL STATEMENTS AND NOTES
40 Consolidated Financial Statements
44 Notes to Consolidated Financial Statements
65 Report of Independent Auditors
10-K
66 Annual Report on Form 10-K
70 Officers and Directors
72 Investor Information
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17
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TEN-YEAR SUMMARY
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At or for the years ended Dec. 31-Dollars in thousands, except
per share amounts 1997 1996 1995
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SUMMARY OF FINANCIAL CONDITION
ASSETS:
Cash and cash equivalents $ 204,683 $ 190,208 $ 186,621
Investment securities 41,574 49,103 92,778
Mortgage-backed securities 917,863 1,162,982 975,422
Loans receivable-net of allowance 3,205,443 2,782,116 2,683,890
Other assets 187,773 172,761 177,968
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Total assets $ 4,557,336 $ 4,357,170 $ 4,116,679
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 3,284,428 $ 3,337,055 $ 3,231,810
Short-term borrowings 370,203 366,854 175,368
Long-term borrowings 418,855 194,390 266,059
Other liabilities 65,938 70,761 59,245
Subordinated capital notes - - -
Stockholders' equity 417,912 388,110 384,197
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Total liabilities and stockholders' equity $ 4,557,336 $ 4,357,170 $ 4,116,679
===================================================================================================================
SUMMARY OF OPERATIONS
Interest income $ 315,217 $ 296,256 $ 278,750
Interest expense 185,385 171,510 162,116
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Net interest income 129,832 124,746 116,634
Provision for loan losses - 1,750 1,900
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Net interest income after provision for loan losses 129,832 122,996 114,734
Other income 45,166 35,720 33,721
SAIF recapitalization - 21,000 -
Other general and administrative expense 100,750 96,818 90,165
Gain/(loss) on foreclosed real estate 301 (1,215) (1,159)
Income taxes 25,088 13,426 20,737
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Income before extraordinary item 49,461 26,257 36,394
Extraordinary item, net of income taxes (403) - -
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Net income (a) $ 49,058 $ 26,257 $ 36,394
===================================================================================================================
Basic earnings per share before extraordinary item (a) (b) $ 1.46 $ 0.77 $ 1.05
Diluted earnings per share before extraordinary item (a) (b) 1.42 0.74 0.99
===================================================================================================================
Basic earnings per share (a) (b) $ 1.45 $ 0.77$ $ 1.05
Diluted earnings per share (a) (b) 1.40 0.74 0.99
===================================================================================================================
SELECTED FINANCIAL AND OTHER DATA
Weighted average basic shares outstanding (b) 33,797,844 33,922,146 34,609,393
Weighted average diluted shares outstanding (b) 34,947,217 35,702,664 36,583,455
Dividends per share (b) $ 0.36 $ 0.23 $ 0.16
Dividend payout ratio (c) 25.71% 31.91% 16.04%
Earning assets to interest-bearing liabilities 1.07x 1.07x 1.07x
Weighted average rate on loans, MBS and investments 7.28% 7.36% 7.28%
Weighted average cost of money 4.62% 4.58% 4.56%
Interest rate spread 2.66% 2.78% 2.72%
Nonperforming assets to total assets 0.23% 0.29% 0.71%
Return on average assets (d) 1.09% 0.62% 0.90%
Average equity as a percentage of average assets 8.90% 9.04% 9.10%
Return on average stockholders' equity (net worth) (d) 12.24% 6.85% 9.86%
Number of full-time equivalent employees 1,079 1,064 1,060
Number of office locations 53 52 52
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(a) 1996 net income without the $21.0 million charge to recapitalize the SAIF
deposit insurance fund would have been $40.2 million; basic and diluted
earnings per share would have been $1.18 and $1.12, respectively. See
Management's Discussion and Analysis for further details.
(b) Restated for a three-for-two stock split distributed to shareholders on
July 14, 1997, a five-for-four stock split distributed to shareholders on
Jan. 14, 1997 and a three-for-two stock split distributed to shareholders
on Jan. 4, 1994.
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St. Paul Bancorp, Inc.
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1994 1993(e) 1992 1991 1990 1989 1988
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$ 159,948 $ 336,331 $ 311,567 $ 314,623 $ 168,411 $ 241,544 $ 186,896
99,643 142,051 107,732 25,410 40,435 691 14,274
1,126,617 733,649 643,941 717,354 689,066 643,870 464,947
2,568,381 2,304,319 2,270,198 2,415,540 2,404,760 2,320,371 2,350,499
176,948 189,026 166,822 190,316 143,561 166,205 114,627
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$ 4,131,537 $ 3,705,376 $ 3,500,260 $ 3,663,243 $ 3,446,233 $ 3,372,681 $ 3,131,243
=============================================================================================================================
$ 3,232,903 $ 3,252,618 $ 2,985,124 $ 3,004,419 $ 2,665,733 $ 2,581,769 $ 2,394,528
221,180 620 134,509 135,775 319,271 46,108 79,003
271,747 63,350 51,899 198,753 178,200 437,174 356,903
54,310 41,459 41,387 59,232 41,744 68,594 67,783
- - - 12,176 11,951 14,745 15,582
351,397 347,329 287,341 252,888 229,334 224,291 217,444
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$ 4,131,537 $ 3,705,376 $ 3,500,260 $ 3,663,243 $ 3,446,233 $ 3,372,681 $ 3,131,243
=============================================================================================================================
$ 253,262 $ 256,937 $ 278,687 $ 321,291 $ 316,275 $ 302,308 $ 274,598
135,069 132,982 165,844 222,487 227,661 221,239 196,929
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118,193 123,955 112,843 98,804 88,614 81,069 77,669
5,150 10,750 10,625 11,100 35,652 21,656 4,178
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113,043 113,205 102,218 87,704 52,962 59,413 73,491
29,771 32,506 28,348 22,647 22,283 17,612 17,482
- - - - - - -
87,166 82,747 71,240 64,754 62,797 56,309 52,731
(2,145) (2,516) (1,316) (1,898) (2,266) (4,631) (503)
18,991 19,061 20,325 16,507 3,252 5,450 14,536
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34,512 41,387 37,685 27,192 6,930 10,635 23,203
- - - - 1,470 - (712)
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$ 34,512 $ 41,387 $ 37,685 $ 27,192 $ 8,400 $ 10,635 $ 22,491
=============================================================================================================================
$ 0.96 $ 1.13 $ 1.11 $ 0.80 $ 0.21 $ 0.32 $ 0.69
0.91 1.08 1.07 0.79 0.20 0.31 0.69
=============================================================================================================================
$ 0.96 $ 1.13 $ 1.11 $ 0.80 $ 0.25 $ 0.32 $ 0.67
0.91 1.08 1.07 0.79 0.25 0.31 0.67
=============================================================================================================================
36,130,877 36,464,359 34,016,327 33,788,636 33,726,930 33,610,937 33,508,843
37,961,364 38,166,743 35,281,871 34,388,314 34,020,437 34,614,148 33,701,252
$ 0.16 $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.13 $ 0.10
17.65% 13.15% 13.35% 18.04% 58.01% 44.16% 14.89%
1.06x 1.07x 1.06x 1.06x 1.06x 1.05x 1.06x
6.98% 6.96% 7.74% 8.91% 9.72% 9.75% 9.40%
4.22% 3.66% 4.26% 5.96% 7.24% 7.50% 7.12%
2.76% 3.30% 3.48% 2.95% 2.48% 2.25% 2.28%
0.66% 1.34% 1.38% 2.17% 1.07% 0.93% 1.25%
0.88% 1.10% 1.05% 0.76% 0.25% 0.33% 0.72%
9.05% 8.64% 7.57% 6.78% 6.80% 6.76% 6.63%
9.72% 12.77% 13.88% 11.15% 3.66% 4.82% 10.88%
1,103 1,046 883 829 804 845 849
52 50 40 37 34 33 29
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(c) Based upon diluted earnings per share.
(d) 1996 return on average assets and return on average stockholders' equity
would have been 0.95% and 10.48%, respectively, without the $21.0 million
charge to recapitalize the SAIF deposit insurance fund. See Management's
Discussion and Analysis for further details.
(e) Includes the operations of Elm Financial Services since the acquisition
date of Feb. 23, 1993.
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19
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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OVERVIEW
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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 Dec. 31, 1997, the Company reported
total assets of $4.6 billion. At year-end 1997, the Bank operated 53 branches
in the Chicago metropolitan area, with an additional branch scheduled to open
in April 1998. After the opening of its newest location, the Bank's branch
network will consist of 35 free-standing offices, 17 banking offices located in
grocery supermarkets and two Money Connection Centers. The Bank opened its
first Money Connection Center in December 1997 in a Chicago storefront
location. This location is designed to leverage a smaller space and the lower
initial investment of grocery store branches. The locations will combine
self-service banking options with branch personnel to deliver a full range of
bank services and broaden the appeal and convenience to customers. The second
Money Connection Center is scheduled to open in April 1998.
The Bank also operates one of the largest networks of automated teller
machines ("ATMs") in the Chicagoland area with 451 machines at Dec. 31, 1997.
This network includes 257 ATMs located in White Hen Pantry convenience stores
in the eight-county Chicago area, including stores in northwest Indiana. In
December 1997, the Bank also announced an agreement to place ATMs in 25 Eagle
Food Centers grocery stores, with the option of adding another 30 machines at a
later date. With the addition of the 25 Eagle ATMs, the Bank's network will
consist of approximately 475 machines.
Both the Company and the Bank continued to operate other wholly owned
financial services companies during 1997, including St. Paul Financial
Development Corporation ("SPFD"), Annuity Network, Inc., SPF Insurance Agency,
Inc., and Investment Network, Inc. As of Dec. 31, 1997, customers maintained
$661 million of investments through Investment Network, Inc. and $331 million
of annuity contracts through Annuity Network, Inc. SPFD is a residential and
commercial land development company focused in the greater Chicagoland area,
providing both equity and financing investments for real estate development
projects. At Dec. 31, 1997, SPFD had $32.1 million in real estate equity and
financing investments. In January 1998, ATM Connection, Inc. began operations as
a new subsidiary of the Bank. This subsidiary owns and operates the ATM network
of the Bank. See Note A-Summary of Significant Accounting Policies for
descriptions of all affiliates and subsidiaries.
In January 1998, the Bank acquired a privately-held residential mortgage
broker serving Chicago and its surrounding suburbs. This broker will operate as
a separate subsidiary of the Bank under the name Serve Corps Mortgage
Corporation. Serve Corps will originate 1-4 family residential mortgages for
sale to third party investors or held for investment in the Bank's portfolio.
The Bank anticipates that the acquisition of this operation will increase
overall 1-4 family loan origination volumes and enhance other income for gains
on loans sold to third party investors. Some Bank lending functions will also
be integrated into the Serve Corps operations.
In general, the business of the Bank is to reinvest funds obtained from
its retail banking facilities into interest-yielding assets, such as loans
secured by mortgages on real estate, securities, and to a lesser extent,
consumer and commercial real estate loans. In 1997, the Bank's 1-4 family
residential mortgage products were originated through its retail banking
offices and telephone banking facility, as well as a correspondent loan program
in the Chicago metropolitan area and several Midwestern states. The addition of
the Bank's mortgage broker subsidiary will provide an expanded base for 1-4
family loan originations beginning in 1998. The Bank also originates a variety
of consumer loan products, including home equity loans, secured lines of
credit, education, auto and credit card loans through the retail banking
offices. The Bank has also entered agreements to sell lesser quality home
equity and automobile loans to third parties rather than retaining them for its
portfolio. During 1997, the Bank originated $212.3 million of 1-4 family loans,
$72.7 million of home equity/line of credit loans and $11.1 million of other
consumer loans.
The Bank offers mortgage loans to qualifying borrowers to finance
apartment buildings and to a much lesser extent, commercial real estate. In
recent years, the Bank made these income producing property loans in several
Midwestern states, such as Illinois, Indiana, Wisconsin, Minnesota and Ohio. In
1997, the Bank resumed its nationwide income producing property lending program
to help offset prepayments of loans in the existing portfolio. The Bank will
only originate new loans in those markets where Management believes the
economies are strong or to borrowers with whom the Bank has an established
relationship. During 1997, the Bank originated loans under this program in
California, Washington, Arizona and Colorado. In late 1997, the Board of
Directors also approved a program to originate loans secured by industrial,
office, and, to a lesser extent, shopping center properties located in the
Midwest. See Credit Risk Management for further details. During 1997, the Bank
originated $259.7 million and purchased $19.6 million of income property loans,
and originated $2.3 million of loans under the industrial, office and shopping
center program.
To supplement its loan origination efforts, the Bank has actively
purchased 1-4 family adjustable rate whole loans for its portfolio. During
1997, the Bank purchased $797.9 million of 1-4 family loans located nationally.
See Credit Risk Management for further details. The Bank also invests in
mortgage-backed securities ("MBS"), government and other investment-grade,
liquid investment securities. The Bank classified investment securities as
either available for sale ("AFS") or held to maturity ("HTM"), with unrealized
gains and losses on AFS securities recorded as an adjustment to stockholders'
equity, net of related taxes.
As a consumer-oriented retail financial institution, the Bank gathers
deposits from the neighborhoods and surrounding suburbs of the metropolitan
Chicago area, which largely have favorable savings patterns and high levels of
home ownership. The Bank offers a variety of deposit products including
checking, savings, money market accounts and certificates of deposit ("CDs").
The Bank also relies on borrowings to help finance operations and the creation
of interest earning assets.
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20
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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Earnings of the Bank are susceptible to interest rate risk to the extent
that the Bank's deposits and borrowings reprice on a different basis and in
different periods than its securities and loans. Prepayment options embedded in
loans and MBS and varying demand for loan products, due to changes in interest
rates, create additional operating risk for the Bank in matching the repricing
of its assets and liabilities. The Bank tries to structure its balance sheet to
reduce exposure to interest rate risk and to maximize its return on equity,
commensurate with risk levels that do not jeopardize the financial safety and
soundness of the institution.
Changes in real estate market values also affect the Bank's earnings. As
changes occur in interest rates, the forces of supply and demand for real
estate, and the economic conditions of real estate markets, the risk of actual
losses in the Bank's loan portfolio will also change. See Credit Risk
Management for further details.
In March 1998, the Company announced an agreement to merge with Beverly
Bancorporation, Inc. ("Beverly"), the bank holding company of Beverly National
Bank and Beverly Trust Company. Beverly, with total assets of $669 million,
currently operates 13 branches serving the south and southwestern suburbs of
Chicago. The Company will issue 1.063 shares of its common stock in exchange
for each outstanding common share of Beverly, subject to adjustment under
certain circumstances. Based upon current Beverly shares, the Company is
expected to issue approximately 6.4 million new shares of common stock that
will result in an initial value of the transaction of approximately $170
million, based upon the price of the stock at the time of announcement. The
Company intends to account for the transaction as a pooling of interests. The
agreement is subject to regulatory and shareholder approvals, including
approval by the Company's shareholders of an increase in the number of
authorized shares of common stock and the issuance of stock in the merger. The
combined entity would have total assets of over $5 billion, more than 60
branches and an ATM network of over 550 machines. The merger is expected to be
completed in the summer of 1998.
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 expressed purpose of availing itself of the protection of the safe harbor
with respect to all of such forward-looking statements. These forward-looking
statements describe future plans or strategies and include the Company's
expectations of future financial results. The Company's ability to predict
results or the effect of future plans or strategies is inherently uncertain.
Factors that could affect actual results include but are not limited to i)
general market rates, ii) changes in market interest rates and the shape of the
yield curve, iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, vii) changes in the quality or composition of
the Company's loan and investment portfolios, viii) demand for loan products,
ix) the level of loan and MBS repayments, x) deposit flows, xi) competition,
xii) demand for financial services in the Company's markets, and xiii) changes
in accounting principles, policies or guidelines. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.
The Company does not undertake and specifically disclaims any obligation
to update any forward-looking statements to reflect occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
STATEMENT OF FINANCIAL CONDITION
- --------------------------------
Total assets of the Company increased $200.2 million, or 4.6 percent, to $4.6
billion at Dec. 31, 1997. Most of the growth in total assets occurred in loan
receivable balances. On the liability side, borrowings increased by $227.8
million, while deposit balances decreased by $52.6 million.
Cash and cash equivalents totaled $204.7 million at Dec. 31, 1997, an
increase of $14.5 million or 7.6 percent. See Cash Flow Activity and
Consolidated Statements of Cash Flow for further details.
Investment securities, consisting of U.S. Treasury and agency
marketable-debt securities and other marketable-equity securities, totaled
$41.6 million at Dec. 31, 1997, down $7.5 million from Dec. 31, 1996. At both
Dec. 31, 1997 and 1996, all of the Company's investment securities were
classified as AFS. The Company recorded an unrealized gain of $428,000 on AFS
investment securities at year-end 1997, compared to an unrealized loss of
$137,000 at Dec. 31, 1996.
The MBS balances declined $245.1 million, or 21.1 percent, to $917.9
million at Dec. 31, 1997 as compared to $1.2 billion at Dec. 31, 1996.
Principal repayments received during the year produced the reduction in MBS
balance. See Cash Flow Activity for further details. The weighted average yield
of the entire MBS portfolio was 6.87 percent at Dec. 31, 1997, down five basis
points from year-end 1996. At Dec. 31, 1997, 74 percent of the MBS portfolio
had adjustable rate characteristics, compared to 77 percent at Dec. 31, 1996.
At year end 1997, slightly more than half of the MBS balances were classified
as AFS, and the Company recorded an unrealized gain on its AFS MBS of $2.6
million, compared to $3.8 million at Dec. 31, 1996.
Loans receivable rose $423.3 million, or 15.2 percent, during the year to
total $3.2 billion at Dec. 31, 1997. The purchase of $797.9 million of 1-4
family loans and $19.6 million of income producing property loans mainly
produced the increase. These purchases, combined with originations of loans
held for investment, were partly offset by principal repayments received during
the year. See Loan Portfolio table for further details of the composition of
the portfolio and Cash Flow Activity for changes in the 1-4 family and income
producing property portfolios. The loans receivable portfolio consists mainly
of adjustable rate products, as approximately 85 percent of the portfolio had
adjustable rate characteristics at Dec. 31, 1997, up from 82 percent at year
end 1996. See Results of Operations-Comparison of Years Ended Dec. 31, 1997 and
1996- Net Interest Income for further discussion. The weighted average yield on
loans receivable declined 17 basis points to 7.49 percent at Dec. 31, 1997
compared to 7.66 percent at Dec. 31, 1996. The purchase of
loans at weighted average rates less than the portfolio average and the
repayment of higher yielding loans produced the decline in the weighted average
rate.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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Deposit balances decreased $52.6 million to $3.3 billion at Dec. 31, 1997.
Most of the decrease in balances occurred in the CD portfolio which declined
$60.9 million from Dec. 31, 1996. The Bank did not retain a portion of the
higher rate, shorter-term CDs that matured during the year and were issued
during the special promotions of 1996. The weighted average deposit rate
declined five basis points to 4.26 percent at year-end 1997. Lower CD balances
combined with a reduction in the rates paid on checking and savings accounts
generated the decline in the weighted average rate in 1997. See Cash Flow
Activity, Results of Operations-Years Ended Dec. 31, 1997 and 1996 and Note N-
Deposits for further details.
In 1997, Management used borrowings to help achieve the goal of higher
interest earning asset levels. Total borrowings increased 40.6 percent to
$789.1 million at Dec. 31, 1997 from $561.2 million at year-end 1996, with most
of the increase occurring in long-term borrowings. Short-term borrowings, which
totaled $370.2 million at Dec. 31, 1997, mainly consist of advances from the
Federal Home Loan Bank ("FHLB") and borrowings under agreements to repurchase
securities sold. Long-term borrowings, which totaled $418.9 million at Dec. 31,
1997, were mainly comprised of FHLB advances and $100 million of senior notes
issued by the Company in February 1997. A portion of the proceeds from the
issuance of the senior notes was used to redeem, at par, the Company's $34.5
million of subordinated notes due in 2000. See Cash Flow Activity, Results of
Operations-Years Ended Dec. 31, 1997 and 1996 and Note O-Borrowings for further
details.
The combined weighted average cost of borrowings declined to 6.09 percent
at Dec. 31, 1997 from 6.22 percent at Dec. 31, 1996. The repayment of the
Company's subordinated debt and lower rates on new long-term FHLB advances
produced the 13 basis point decline in the weighted average borrowing rate.
Stockholders' equity rose $29.8 million to $417.9 million at Dec. 31, 1997
from $388.1 million at Dec. 31, 1996. Book value per share increased to $12.22
per share at year-end 1997 from $11.36 per share at Dec. 31, 1996. Net income
for 1997 of $49.1 million and $10.3 million of capital supplied by the exercise
of director and officer stock options mainly produced the increase in
stockholders' equity. However, the repurchase of $17.2 million of Company
common stock and the declaration of $12.2 million of dividends to shareholders
partly offset these increases to stockholders' equity.
During 1997, the Company executed a stock repurchase program by acquiring
981,825 shares of Company common stock, at a weighted average price of $17.56.
Under all purchase programs, the Company has spent $64.8 million to reacquire
5.2 million shares at a weighted average price of $12.44 per share.(1) See Cash
Flow Activity-Holding Company Liquidity for further details. The Company
retired 3.75 million shares of treasury stock during 1997, and 221,439 shares
of treasury stock were reissued in connection with the exercise of director and
officer stock options.
Except for certain interest rate exchange agreements used in connection
with interest rate risk management activities and forward loan sales
commitments, the Company does not use derivatives in its operations. The
notional amount (off-balance sheet) of interest rate exchange agreements at
Dec. 31, 1997 was $99.8 million, compared to $93.6 million at Dec. 31, 1996.
During 1997, a new interest rate exchange agreement of $25.0 million was partly
offset by the amortization of $18.8 million of notional amounts, resulting in
the increase in the notional amount of interest rate exchange agreements in
1997. See Interest Rate Risk, Note A-Summary of Significant Accounting
Policies, and Note T- Financial Instruments With Off-Balance Sheet Credit Risk
for further details.
During the first quarter of 1997, the Company adopted SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement provides accounting and reporting standards for
the sale, securitization, and servicing of receivables and other financial
assets and the extinguishment of liabilities. The adoption of this Statement
did not affect operations in a material way. The implementation of some of the
provisions of this Statement have been delayed until 1998 as required by SFAS
No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This Statement consolidates existing guidance on
disclosures about the Company's capital structure into one Statement. Because
the Company already makes the disclosures required by this Statement, the
adoption had no impact on the financial statements.
The Company also adopted SFAS No. 130, Reporting Comprehensive Income
during 1997. The provisions of this Statement become effective in 1998,
however, earlier adoption is allowed. This Statement establishes standards for
the reporting and display of comprehensive income and its components in the
full set of financial statements. This Statement affects the display of
comprehensive income in the financial statements and does not address
recognition or measurement of comprehensive income and its components. The
adoption of this Statement required the reclassification of prior comparable
periods.
(1) The Company repurchased 1.8 million shares of common stock in 1994, 443,337
shares in 1995, 1.9 million shares in 1996 and 981,825 in 1997.
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22
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the reporting of financial information from operating segments in annual and
interim financial statements. This Statement requires that financial
information be reported on the basis that it is reported internally for
evaluating segment performance and deciding how to allocate resources to
segments. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will have
no material impact on the financial statements. The Company will adopt SFAS No.
131 when the Statement becomes effective in 1998.
CAPITAL: The Office of Thrift Supervision ("OTS") sets regulatory capital
requirements for federally insured institutions such as the Bank. The OTS
requires the Bank to maintain minimum capital level ratios of core and tangible
capital to adjusted assets and total regulatory capital to risk-weighted
assets. At Dec. 31, 1997, the Bank's tangible and core capital ratio of 8.61
percent and risk-based capital of 17.12 percent exceed the required capital
levels. Under separate prompt corrective action regulations, the OTS can
enforce certain restrictions on savings institutions classified as
undercapitalized. The regulations require the Bank to maintain minimum ratios
of total and Tier I capital to risk-weighted assets, and Tier I capital to
average assets. At Dec. 31, 1997, the ratio of total capital to risk-weighted
assets of 17.12 percent, Tier I capital to risk-weighted assets of 15.85
percent, and Tier I capital to regulatory assets of 8.61 percent allowed the
Bank to be considered "well capitalized" under the OTS's prompt corrective
action regulations. See Note Q-Stockholders' Equity for further details and a
reconciliation of the Company's stockholders' equity to the regulatory capital
of the Bank.
In an attempt to address the interest rate risk inherent in the balance
sheets of insured institutions, the OTS proposed a regulation that adds an
interest rate risk component to the risk-based capital requirement for excess
interest rate risk. Under this proposed regulation, which has never been
implemented by the OTS, an institution is considered to have excess interest
rate risk if, based upon a 200 basis point change in market interest rates, the
market value of an institution's capital changes by more than two percent. If a
change greater than two percent occurs, one-half of the percent change in the
market value of capital in excess of two percent is added to the institution's
risk-based capital requirement. At Dec. 31, 1997, the Bank had "excess"
interest rate risk that would have required additional risk-based capital of
$3.7 million if the regulation had been implemented by the OTS. However, at
year-end 1997, the Bank had $220.0 million of excess risk-based capital
available to meet the additional capital requirement.
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 income
producing property loans. These rules allow the regulators to impose, on a
case-by-case basis, an additional capital requirement above the current
requirements where an institution has significant concentration of credit risk
or risks from nontraditional activities. The Bank is currently not subject to
any additional capital requirements under these regulations.
The OTS may establish capital requirements higher than the generally
applicable minimum for a particular savings institution if the OTS determines
the institution's capital was or may become inadequate in view of its
particular circumstances. Individual minimum capital requirements may be
appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses safety
or soundness concerns. The Bank has no such requirements.
Regulatory rules currently impose limitations on all capital distributions
by savings institutions, including dividends, stock repurchase and cash-out
mergers. Under the current rule, institutions are grouped into three
classifications depending upon their level of regulatory capital both before
and after giving effect to a proposed capital distribution. The OTS recently
proposed revising its capital distribution regulation to conform the definition
of "capital distribution" to the definition used in its prompt corrective
regulations, and to delete the three classifications of institutions. Under the
proposal, there would be no specific limitation on the amount of permissible
capital distributions, but the OTS could disapprove a capital distribution if
the institution would not be at least adequately capitalized under the OTS
prompt correction action regulations following the distribution, if the
distribution raised safety or soundness concerns, or if the distribution
violated a prohibition contained in any statute, regulation, or agreement
between the institution and the OTS, or a condition imposed on the institution
by the OTS. The OTS would consider the amount of the distribution when
determining whether it raised safety or soundness concerns. During 1997, the
Bank paid dividends to the Company equal to 100 percent of Bank net income.
See Note Q-Stockholders' Equity for further discussion of regulatory
capital requirements.
- --------------------------------------------------------------------------------
23
8
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOAN ORIGINATION AND PURCHASES
The following table sets forth loan originations and purchases for the years
ended Dec. 31, 1993 through 1997.
Dollars in thousands 1997 % 1996 % 1995 % 1994 % 1993 %
- ---------------------------------------------------------------------------------------------------------------------------
1-4 family units-first mortgages:
Originations $ 212,298 15% $ 245,433 21% $209,751 35% $612,596 81% $495,345 57%
Purchases 797,948 58 618,701 54 200,063 33 3,253 * 13,860 2
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 1-4 family units 1,010,246 73 864,134 75 409,814 68 615,849 81 509,205 59
Equity/Line of credit 72,695 5 69,058 6 51,231 8 40,212 5 40,229 4
Acquired from Elm Financial - - - - - - - - 229,083 26
- ---------------------------------------------------------------------------------------------------------------------------
Total 1-4 family units 1,082,941 78 933,192 81 461,045 76 656,061 86 778,517 89
Multifamily units 259,727 19 196,455 17 112,055 19 72,886 10 69,962 8
Commercial 22,050 2 6,280 1 4,225 1 5,110 1 1,300 *
Land loans - - 353 * 2,166 * 514 * - -
Consumer 11,092 1 15,966 1 24,277 4 26,408 3 25,016 3
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,375,810 100% $1,152,246 100% $603,768 100% $760,979 100% $874,795 100%
===========================================================================================================================
* Less than 1%
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOW ACTIVITY
- ------------------
SOURCES OF FUNDS: During 1997, the Company's major sources of funds included
$1.2 billion of mortgage loan and MBS repayments, $377.5 million from the
issuance of CDs, net new borrowings of $227.3 million and $59.2 million of
maturities on marketable-debt securities.
Loan and MBS repayments totaled $1.2 billion during 1997, or $347.4
million higher than during 1996. The increase in the level of repayments was
due to several factors. First, a large percentage of the Bank's income
producing property loan portfolio matured in 1997. In addition to those loans
scheduled to mature, declining long-term interest rates and increased lending
competition caused a high level of repayments in this portfolio. Maturities and
repayments on income producing property loans increased $187.8 million during
1997 compared to 1996. Second, the declining long-term interest rates also
produced a high level of refinance activity in the 1-4 family loan and MBS
portfolios. As the spread narrowed between rates on adjustable rate loans and
new fixed rate loans, borrowers chose the certainty of a fixed rate product,
resulting in higher repayments for adjustable rate lenders such as the Bank.
Lastly, the Bank experienced a high amount of repayments in its portfolio of
adjustable rate loans with low initial fixed interest periods of one to five
years, as the borrowers refinanced their loans before the expiration of low,
introductory rates.
The issuance of CDs during 1997 totaled $377.5 million, or $71.0 million
less than the issuance during 1996. During 1996, the Bank relied on special
promotions and features to attract depositors to CDs and provide a source of
funds. During 1997, the Bank reduced its emphasis on CDs as a source of funds
and did not retain certain higher rate, short-term CD products that matured in
1997. Also, checking, savings and money market account balances increased $8.2
million during 1997, compared to $4.8 million in 1996.
During 1997, funds provided by borrowings totaled $227.3 million, as
compared to $119.7 million during 1996. During the first quarter of 1997, the
Company issued $100 million of 7.125% senior notes. A portion of the note
issuance proceeds was used to repay the $34.5 million of 8.25% subordinated
notes. In addition, the Bank used borrowing balances to fund a significant
portion of whole loan acquisitions. See Statement of Financial Condition for
further details. Subject to sufficient available collateral, the Bank has $1.0
billion of unused lines available to borrow under agreements to repurchase, can
obtain additional FHLB advances up to 170% of qualifying mortgages, and can
issue an additional $400.0 million of mortgage-backed notes. See Note O-
Borrowings for further details.
The maturity of $59.2 million of investment securities also provided
additional liquidity during 1997. In comparison, during 1996, $63.3 million of
funds were provided by the maturity and sale of investment securities.
USES OF FUNDS: During 1997, the Company used $1.4 billion of funds to purchase
and originate loans, $438.3 million to repay maturing CDs, $51.1 million to
acquire AFS investment securities, $17.2 million to repurchase Company common
stock, and $12.6 million for additions to office properties and equipment.
Loans originated and purchased totaled $1.4 billion during 1997, compared
to $1.2 billion in 1996. As part of Management's strategy to replace loan
repayments and build interest earning asset levels, the Bank purchased $817.6
million of mortgage loans during 1997, compared to
- --------------------------------------------------------------------------------
24
9
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$630.7 million in 1996. In addition to the acquisition of whole loans, loans
originated during 1997 totaled $558.2 million. Approximately 89 percent of
these originations were from retail operations. In comparison, loans originated
during 1996 totalled $521.6 million, with 71 percent if these origination from
retail operations. Higher income producing property loan originations and
special 1-4 family fixed-rate loan origination programs produced the increase
in loan originations from the retail operations. The addition of the Bank's new
mortgage broker subsidiary is expected to increase loan origination volumes
during 1998. However, since these loans may be sold to third party investors,
the volume of loan sales is also expected to increase.
Payments for maturing CDs increased $90.3 million to $438.3 million in
1997. The scheduled maturity of some of the Bank's higher rate CD products
produced the increase in payments for maturing CDs.
In addition, during 1997, $51.1 million of funds were used to purchase AFS
investment securities. In comparison, during 1996, $20.2 million of funds were
used to purchase AFS investment securities.
During 1997, the Company used $17.2 million of funds to acquire 981,825
shares of its own common stock. See Holding Company Liquidity and Note W-Parent
Company-Only Financial Information for further details. In comparison, the
Company used $24.9 million to acquire 1,903,125 shares of its own common stock
during 1996.
The Company increased office property and equipment expenditures to $12.6
million in 1997, compared to $9.7 million of expenditures during 1996.
Additions in 1997 included the purchase of a $5.4 million, 70,000 square foot
office facility to be used as an operations center. This new facility should be
in place by April 1998. The Company also used $1.7 million of funds in 1997 to
exercise its purchase option under a capital lease arrangement related to a
branch facility. For further details on the new operations center and planned
additions to the Bank's branch network, see Results of Operations-Comparison of
Years Ended Dec. 31, 1997 and 1996.
HOLDING COMPANY LIQUIDITY: At Dec. 31, 1997, St. Paul Bancorp, the "holding
company," had $53.5 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 $15.6
million of investments in debt and equity securities classified as AFS. The
Company also maintains a $20.0 million revolving line of credit agreement from
another financial institution. At Dec. 31, 1997, no funds had been borrowed
under this agreement.
Sources of liquidity for St. Paul Bancorp during 1997 included $98.4
million from the issuance of senior debt, $48.1 million of dividends from the
Bank, $10.3 million of capital supplied by the exercise of stock options, and
$2.2 million of dividends from SPFD and Annuity Network, Inc. Uses of St. Paul
Bancorp's liquidity in 1997 included the repayment of $34.5 million of
subordinated debt, advances to the Bank of $28.7 million,(2) the $20.2 million
purchase of investment securities, the acquisition of $17.2 million of Company
common stock under the stock repurchase program, $13.0 million of additional
advances to SPFD, and $12.2 million of dividends paid to stockholders. See Note
W-Parent Company-Only Financial Information for further details.
In 1997, the Company acquired 981,825 of its common shares (at a weighted
average price of $17.56) under a stock repurchase program. The program expired
in January 1998.
Dividend payments from the Bank to the holding company are regulated by
the OTS. Management plans to pay dividends to the holding company from the Bank
equal to 100% of the Bank's net income during 1998. See Note Q-Stockholders'
Equity for further details.
REGULATORY LIQUIDITY: Savings institutions are required to maintain average
daily balances of liquid assets equal to a specified percentage of the
institution's average net withdrawable deposits plus short-term borrowings.
Liquid assets include cash, certain time deposits, federal funds sold, and
certain securities. This liquidity requirement may be changed from time to time
by the Director of the OTS to any amount within the range of 4 percent to 10
percent, depending upon economic conditions and the deposit flows of savings
institutions. In November 1997, the OTS revised its liquidity regulations
decreasing the liquidity requirement to 4 percent from 5 percent and greatly
increasing the assets that qualify as liquid assets. The OTS also added a
qualitative liquidity requirement so the Bank must maintain liquidity to ensure
safe and sound operations. Because of the expanded definition of liquid assets,
the Bank's liquidity at Dec. 31, 1997 of $667.6 million greatly exceeded the 4
percent requirement of $145.5 million. Because of the change in regulation,
Manage-ment's regulatory liquidity compliance focus has shifted from
quantitative measures to qualitative safety and soundness concerns. See Note O-
Borrowings for a description of the Bank's available borrowing facilities.
(2) During 1997, the Company used its excess liquidity to advance funds to the
Bank for use in the Bank's operation. The advance is due upon demand and earns
a rate of interest comparable to what the Company could earn on its investment
portfolio.
- --------------------------------------------------------------------------------
25
10
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
At or for the years ending Dec. 31-Dollars in thousands
AT DEC. 31, 1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- ------------------------------------------------------ ----------------------------------- --------------------------------------
Investments:
Investment securities (b) $ 41,574 5.62% $ 63,149 $ 3,951 6.26% $ 77,465 $ 4,234 5.47%
Federal funds and
interest-bearing
bank balances 59,094 5.37 93,537 4,986 5.33 52,871 2,734 5.17
Other investments (c) 94,348 5.87 74,424 4,668 6.27 73,933 4,525 6.12
- ------------------------------------------------------ ----------------------------------- --------------------------------------
Total investments 195,016 5.67 231,110 13,605 5.89 204,269 11,493 5.63
Mortgage-backed
securities (b) 917,863 6.87 1,053,590 72,252 6.86 870,541 55,124 6.33
Loans receivable (d) 3,256,866 7.49 3,032,736 229,360 7.56 2,985,103 229,639 7.69
- ------------------------------------------------------ ----------------------------------- --------------------------------------
Total interest-earning
assets $4,369,745 7.28% $4,317,436 $315,217 7.30% $4,059,913 $296,256 7.30%
====================================================== =================================== ======================================
Deposits:
Interest-bearing
checking $ 227,879 1.40% $ 228,940 $ 3,781 1.65% $ 233,689 $ 4,098 1.75%
Non-interest-bearing
checking 154,747 - 148,430 - - 130,765 - -
Other non-interest-
bearing accounts 39,275 - 41,381 - - 31,252 - -
Money market accounts 219,336 3.77 218,599 8,031 3.67 206,555 6,938 3.36
Savings accounts 674,058 2.31 680,904 16,570 2.43 691,518 16,750 2.42
Certificates of deposit 1,969,133 5.74 2,005,043 113,831 5.68 1,981,979 111,647 5.63
- ------------------------------------------------------ ----------------------------------- --------------------------------------
Total deposits 3,284,428 4.26 3,323,297 142,213 4.28 3,275,758 139,433 4.26
Borrowings: (e)
Short-term borrowings 370,203 5.82 419,662 24,430 5.82 255,901 14,598 5.70
Long-term borrowings 418,855 6.33 276,758 18,742 6.77 248,642 17,479 7.03
- ------------------------------------------------------ ----------------------------------- --------------------------------------
Total borrowings 789,058 6.09 696,420 43,172 6.20 504,543 32,077 6.36
- ------------------------------------------------------ ----------------------------------- --------------------------------------
Total interest-bearing
liabilities $4,073,486 4.62% $4,019,717 $185,385 4.61% $3,780,301 $171,510 4.54%
====================================================== =================================== ======================================
Excess of interest-earning
assets over interest-
bearing liabilities $ 296,259 $ 297,719 $ 279,612
====================================================================================================================================
Ratio of interest-earning
assets to interest-
bearing liabilities 1.07x 1.07x 1.07x
====================================================================================================================================
Net interest income $129,832 $124,746
====================================================================================================================================
Interest rate spread 2.66%
====================================================================================================================================
"Average" interest
rate spread 2.69% 2.76%
====================================================================================================================================
Net yield on average
earning assets 3.01% 3.07%
====================================================================================================================================
1995
- ------------------------------------------------------------------------
Effective
Average Yield/
Balance(a) Interest Rate
- ------------------------------------------------------------------------
Investments:
Investment securities (b) $ 96,551 $ 5,015 5.19%
Federal funds and
interest-bearing
bank balances 40,846 2,386 5.84
Other investments (c) 62,823 3,996 6.36
- ------------------------------------------------------------------------
Total investments 200,220 11,397 5.69
Mortgage-backed
securities (b) 1,047,704 65,723 6.27
Loans receivable (d) 2,633,455 201,630 7.66
- ------------------------------------------------------------------------
Total interest-earning
assets $3,881,379 $278,750 7.18%
========================================================================
Deposits:
Interest-bearing
checking $ 237,826 $ 4,218 1.77%
Non-interest-bearing
checking 114,105 - -
Other non-interest-
bearing accounts 29,642 - -
Money market accounts 215,128 6,703 3.12
Savings accounts 721,848 17,502 2.42
Certificates of deposit 1,863,205 104,318 5.60
- ------------------------------------------------------------------------
Total deposits 3,181,754 132,741 4.17
Borrowings: (e)
Short-term borrowings 168,675 10,389 6.16
Long-term borrowings 267,931 18,986 7.09
- ------------------------------------------------------------------------
Total borrowings 436,606 29,375 6.73
- ------------------------------------------------------------------------
Total interest-bearing
liabilities $3,618,360 $162,116 4.48%
========================================================================
Excess of interest-earning
assets over interest-
bearing liabilities $ 263,019
========================================================================
Ratio of interest-earning
assets to interest-
bearing liabilities 1.07x
========================================================================
Net interest income $116,634
========================================================================
Interest rate spread
========================================================================
"Average" interest
rate spread 2.70%
========================================================================
Net yield on average
earning assets 3.01%
========================================================================
(a) All average balances based on daily balances.
(b) Average balances exclude the effect of unrealized gains or losses on
available for sale investment securities.
(c) Includes investment in FHLB stock and other short-term investments.
(d) Includes loans held for sale and loans placed on a nonaccrual status.
(e) Includes FHLB advances, securities sold under agreements to repurchase and
other borrowings.
- --------------------------------------------------------------------------------
26
11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
Years ended Dec. 31-Dollars in thousands
1997 VS. 1996 1996 vs. 1995
increase/(decrease) due to increase/(decrease) due to
- ------------------------------------------------------------------------------------------------------------------------------------
Total Total
Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $ 3,634 $(3,913) $ (279) $ 27,048 $ 961 $ 28,009
Mortgage-backed securities 12,281 4,847 17,128 (11,213) 614 (10,599)
Investment securities (846) 563 (283) (1,032) 251 (781)
Federal funds and interest-bearing bank balances 2,165 87 2,252 644 (296) 348
Other short-term investments 30 113 143 685 (156) 529
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 17,264 1,697 18,961 16,132 1,374 17,506
CHANGE IN INTEREST EXPENSE:
Deposits 2,031 749 2,780 3,969 2,723 6,692
Short-term borrowings 9,527 305 9,832 5,025 (816) 4,209
Long-term borrowings 1,922 (659) 1,263 (1,357) (150) (1,507)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,480 395 13,875 7,637 1,757 9,394
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income before provision for loan losses $ 3,784 $ 1,302 $ 5,086 $ 8,495 $ (383) $ 8,112
====================================================================================================================================
This analysis allocates the change in interest income and expense related to volume based upon the change in the average balance
and prior period's applicable yield or rate paid. The change in interest income and expense related to rate is based upon the change
in yield or rate paid and the prior period's average balances. Changes due to both rate and volume have been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The effect of nonperforming
assets has been included in the rate variance. Average balances exclude the effect of unrealized gains and losses on investment
securities.
- ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF YEARS ENDED DEC. 31, 1997 AND 1996
GENERAL: Net income during 1997 totaled $49.1 million, or $1.40 per diluted
share outstanding, a 22 percent increase over 1996 net income of $40.2 million,
or $1.12 per diluted share, not including a one-time charge to recapitalize the
Savings Association Insurance Fund ("SAIF").(3) Including this one-time $21.0
million charge, net income in 1996 was $26.3 million or $0.74 per diluted
share. Higher other income and net interest income, as well as a lower loan
loss provision and lower costs to operate foreclosed real estate produced the
increase in net income during 1997. These increases in income were partly
offset by higher general and administrative ("G&A") expenses. In addition, 1997
results include a $403,000 extraordinary loss on the early extinguishment of
debt.
NET INTEREST INCOME: Net interest income rose 4.1 percent to $129.8 million in
1997, compared to $124.7 million in 1996. Expanded interest earning asset
levels produced most of the increase in net interest income. Management built
average interest earning assets, which increased $257.5 million to total $4.3
billion during 1997, through the purchase of 1-4 family whole loans. Increased
borrowings and liquidity mainly funded this growth. While net interest income
increased, the net interest margin ("NIM") declined six basis points to 3.01
percent in 1997 from 3.07 percent in 1996. Although higher interest earning
asset levels benefited net interest income, rising funding costs and a
declining loan yield produced the decrease in the NIM. The increased use of
borrowings mainly produced the rise in the Company's funding costs, while the
purchase and origination of new loans at rates less than the portfolio average
and the repayment of higher rate loans produced the decline in the effective
loan yield.
Interest income from loans receivable declined slightly to $229.4 million
in 1997 from $229.6 million in 1996. A 13 basis point decline in the effective
loan yield was mostly offset by a $47.6 million increase in average balances.
The acquisition of $797.9 million of 1-4 family whole loans and new loan
originations during 1997 caused average loan balances to increase to $3.03
billion in 1997. However, the securitization of $381 million of loans
receivable into MBS in December 1996 and principal repayments limited the
increase in average balances. The effective yield earned on loans was 7.56
percent in 1997 compared to 7.69 percent in 1996. The purchase of loans at
rates less than the portfolio average mainly produced the decline in yield. In
addition, increased repayment of higher rate loans also placed downward
pressure on the lower overall loan yield. The loan securitization into MBS also
contributed to the lower loan yield as higher rate loans were transferred into
MBS. These decreases were partly offset by lower interest reserves on
delinquent loans and a modest amount of favorable repricing in the adjustable
rate portfolio. The declining long-term interest rates during the end of 1997
and into 1998 has produced a high level of loan repayments and may continue to
impact loan interest income. Heavy repayments increase the reinvestment risk of
replacing higher yielding loans with lower rate products. Repayments also
accelerate the amortization of net origination costs and purchased loan
premiums.
(3) On Dec. 31, the Company adopted SFAS No. 128, Earnings per Share. Upon
adoption, the Company changed the method used to compute earnings per share and
restated all prior periods. Under the new requirements, the Company reports
basic and diluted earnings per share in the place of previously reported
primary and fully diluted earnings per share. Under SFAS No. 128, the
computation of basic earnings per share will exclude the dilutive effect of
common stock equivalents. Diluted earnings per share will reflect the potential
dilutive effect of common stock equivalents, computed using the treasury stock
method and the average market price of the Company's common stock over the
period. The Company's only common stock equivalents are stock options issued to
employees and directors. Diluted earnings per share reported approximate the
previously reported primary earnings per share. The impact of this Statement on
future earnings per share is largely dependent on future share prices and the
amount of stock options outstanding.
- --------------------------------------------------------------------------------
27
12
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Interest income from MBS increased $17.1 million during 1997, mainly due
to the $381 million loan securitization in December 1996. The securitization,
partly offset by repayments, generated a $183.0 million increase in average
balances. In addition, the transfer of higher rate loans into MBS also
benefited the effective MBS yield. The effective MBS yield was 6.86 percent in
1997 compared to 6.33 percent in 1996, an increase of 53 basis points. Similar
to the loan yield noted above, the level of repayments may exert downward
pressure on the MBS yield during 1998.
Interest income from the investment portfolio increased $2.1 million, to
total $13.6 million in 1997, largely due to a $26.8 million increase in average
balances and a 26 basis point increase in the effective investment yield. Most
of the increase in average balances occurred in fed funds and interest-bearing
bank balances as the Bank maintained higher liquidity during the year to help
fund whole loan acquisitions. The effective investment yield was 5.89 percent
in 1997 compared to 5.63 percent in 1996. A rise in short-term interest rates
during the first half of 1997 produced most of the increase in the effective
yield.
The increase in interest expense during 1997 was mostly produced by higher
average borrowing and deposit balances. Deposit interest expense was $142.2
million in 1997 compared to $139.4 million in 1996. The increase in average
balances occurred during 1996 and the first half of 1997, with the largest
increases occurring in CD, money market and checking account products. In 1996
and into the first half of 1997, Management built deposit balances as a source
of funds. However, in the latter half of 1997, in an effort to reduce deposit
costs, the Bank did not retain a large portion of the higher rate, short-term
CD products issued during 1996 and began lowering rates on certain new CD
offerings. The increase in the higher costing CD and money market average
balances also produced the increase in the effective cost of deposits. The
effective cost of deposits rose two basis points to 4.28 percent in 1997 from
4.26 percent in 1996.
Borrowing interest expense increased $11.1 million to total $43.2 million
in 1997 due to a $191.9 million increase in average balances, partly offset by
a 16 basis point decline in the effective cost of borrowings. Average borrowing
balances rose to $696.4 million from $504.5 million in 1996, with most of the
increase occurring in short-term balances.(4) The reliance on borrowings as a
source of funds for whole loan acquisitions and the $100 million senior notes
issued by the Company produced the higher average balances. The effective cost
of borrowings was 6.20 percent in 1997 compared to 6.36 percent in 1996.
Greater use of the lower costing short-term borrowings and the repayment of the
8.25 percent subordinated debt generated the lower effective cost. See
Statement of Financial Condition for further details.
The Bank's ability to sustain current net interest income levels during
future periods is largely dependent on maintaining the interest rate spread,
which is the difference between the weighted average rates on interest-earning
assets and interest-bearing liabilities. The interest rate spread was 2.66
percent at Dec. 31, 1997, or 12 basis points less than the Dec. 31, 1996
interest rate spread of 2.78 percent. As with the NIM, rising funding costs and
a declining weighted average loan interest rate produced the decline in the
spread. The Company's funding costs rose mainly due to the increased use of
borrowings. However, a decline in the weighted average rates paid on both
borrowings and deposits partly offset this contraction in the interest rate
spread. The acquisition of new loans at rates less than the portfolio average
and the repayment of higher rate loans mainly caused the decline in the
weighted average loan rate. See Cash Flow Activity for a discussion of changes
in interest-earning assets and interest-bearing liabilities.
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. See Interest Rate Risk for
further discussion.
Management expects that the current interest rate environment may continue
to place downward pressure on the NIM and interest rate spread. Low long-term
interest rates may increase the level of loan and MBS repayments and adversely
affect these yields. The Company's ability to originate loans and generate
interest-earning assets and the yields earned on these assets will also affect
the NIM and interest rate spread. However, the Company also expects to reduce
its cost of funds in early 1998. Management has taken steps to lower the
deposit costs by reducing the rates on new CD offerings and lowering the rates
on certain savings, money market and checking products. The low interest rate
environment has also presented the opportunity to replace certain short-term
borrowings with lower costing long-term borrowings.
Management also believes that several product-related factors will
continue to impact the interest rate spread. First, the Bank has $1.1 billion
of 1-4 family "adjustable" rate loans that have initial fixed interest rate
periods ranging from three to five years. At Dec. 31, 1997, only $147.4 million
of these loans were scheduled to reprice during the ensuing twelve months. If
interest rates remain at current levels at the time of repricing, the Bank may
experience an increase in the yields, but could also experience higher
prepayments.
Second, approximately $256.0 million of adjustable rate 1-4 family and
income producing property loans are at their interest rate floors. These loans
will not reprice until their fully indexed interest rate exceeds the floor
rate.(5)
Third, $1.0 billion of the Company's assets are tied to movements that lag
behind the movements in market interest rates. In general, this condition
benefits the Bank's asset yields as market rates decrease, but constrains
repricing as interest rates increase.
Lastly, nearly all adjustable rate loans and MBS contain periodic and
lifetime interest rate caps that limit the amount of upward repricing on loans
and MBS. At Dec. 31, 1997, the Company had $15.4 million of loans
(4) In 1997, short-term average balances increased $163.8 million while average
long-term borrowings increased only $28.1 million. In contrast, period-end
short-term balances increased by only $3.3 million and long-term balances
increased $224.5 million. Throughout most of 1997, the Bank used short-term
balances to fund whole loan acquisitions. However, in December 1997, the Bank
entered into several long-term FHLB borrowings which replaced some short-term
borrowings at lower interest rates.
(5) At Dec. 31, 1997, the weighted average fully indexed rate on these loans
was 7.48 percent and the weighted average floor was 8.03 percent. These
interest rate floors benefited net income by $2.2 million and the NIM and
interest rate spread during 1997 by 5 basis points. In comparison, at Dec. 31,
1996, the Bank had $405.7 million of loans at their floors, which benefited
interest income by $3.2 million and the NIM and interest rate spread by 8 basis
points.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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with interest rate caps that have kept the adjustable rates on these loans
below their fully indexed rates, compared to $39.5 million of loans subject to
caps at Dec. 31, 1996. At Dec. 31, 1997 and 1996, the Bank's MBS portfolio was
not adversely affected by the contractual periodic and lifetime caps. Most of
the annual interest caps in the Bank's loan and MBS portfolio are 2%.
On the liability side, the Company has $473.1 million of borrowings
scheduled to reprice during the next six months and a CD portfolio of $2.0
billion that has a weighted average remaining maturity of 10 months. The
Company also has $1.3 billion of deposits in checking, savings and money market
accounts expected to help mitigate the effect of a rapid change in interest
rates. See Interest Rate Sensitivity GAP Analysis following for further
details.
PROVISION FOR LOAN LOSSES: Due to continued positive trends in credit quality,
the Company recorded no provision for loan losses during 1997. In comparison,
the Company recorded a $1.8 million provision during 1996. See Credit Risk
Management and Note A-Summary of Significant Accounting Policies for further
discussion.
OTHER INCOME: Other income rose 26.4 percent to $45.2 million during 1997
compared to $35.7 million during the previous year. Higher revenues from ATM
operations produced most of the increase in other income. Higher contributions
from real estate development, discount brokerage and annuity operations also
produced the increase in other income.
Revenues from ATM operations increased 94.8 percent to $12.3 million in
1997. The January 1997 introduction of access fees to non-customers who use a
St. Paul ATM and the expansion of the ATM network in mid-1996 generated the
increase in ATM revenues. While the Company experienced a significant increase
in ATM revenues in 1997, several events could impact ATM revenues in the
future. First, the Bank expects to eventually lose the operation of up to 54
ATM machines located in a grocery store chain in the Chicagoland area, as those
stores install branches of another financial institution. However, the Bank
continues to seek partners in other ATM ventures, and during 1997 entered into
an agreement with a second grocery store chain to install 12 ATMs and has
reached an agreement with a third chain to install 25 ATMs during the first
quarter of 1998 with an option to install 30 more at a later date. In addition,
proposals have been discussed, from time to time, both at the federal and state
level to introduce legislation that could increase disclosures and/or limit the
Bank's ability to charge an access fee to non-customers who use a St. Paul ATM.
Management can give no assurances that such legislation will be enacted (and in
what form), nor can Management estimate the impact of such legislation on ATM
revenues.
Revenues from real estate development operations increased $1.6 million,
or 64.4 percent, in 1997 to $4.1 million. Most of the increase in revenues was
produced by the bulk sale of a 63 residential lot subdivision during the fourth
quarter of 1997. Total lot and home sales were 120 in 1997, compared to 82 in
1996. Revenues from the real estate development subsidiary can vary from year
to year due to changes in demand for residential real estate, the general
interest rate environment, and other economic trends. In addition, the
availability of quality financing investment opportunities, the amount of land
in inventory, and ability to acquire new development projects may cause revenue
volatility in future years.
Higher demand for the Company's discount brokerage products caused the
$1.6 million, or 30.9 percent, increased in revenues from discount brokerage
products. A 17.2 percent increase in transaction volumes, along with an
increase in the average commission earned on mutual fund sales produced the
increase in revenues. Higher annuity sales volumes also contributed to the
$562,000 increase in revenues from insurance and annuity operations. Many
factors can affect revenues from discount brokerage and insurance and annuity
operations, including interest rates, changes in the tax laws, and general
market and economic conditions. In addition, the sale of annuities can also be
impacted by the sale of other Bank products, such as CDs and discount brokerage
services.
While other income experienced double digit growth in 1997, Management
expects the increase to be more modest in 1998. Adjustments to the fee schedule
for retail deposit customers and greater penetration of discount brokerage and
annuity sales will contribute to growth in other income. In addition, the
January 1998 acquisition of a residential mortgage broker should enhance
non-interest income for those loans that the subsidiary sells to third party
investors.
G&A EXPENSE: G&A expenses rose 4.1 percent to $100.8 million during 1997
compared to $96.8 million in 1996, not including the $21.0 million SAIF charge.
With the SAIF charge, 1996 G&A expense was $117.8 million. Increases in
compensation and benefits and occupancy and office equipment produced the
higher level of G&A expense. However, lower federal deposit insurance premiums
partly offset these increases.
Compensation and benefits rose $3.9 million, or 7.4 percent, to total
$56.0 million in 1997. The increase in compensation and benefits was associated
with annual merit increases, higher sales incentives, and an increase in
employment taxes. Occupancy, equipment and office expense rose $3.7 million, or
14.2 percent, to $29.7 million in 1997. The 1996 expansion of the ATM network,
establishment of the Bank's new operations center, system projects and higher
depreciation on capital investments produced the increase in occupancy,
equipment and office expense. System projects include a review of information
systems to ensure compliance with transaction processing in the next century
(as discussed further below), evaluation of current information systems and
future needs, and projects related to financial management information.
During the third quarter of 1996, President Clinton signed legislation
that mandated the recapitalization of SAIF. This law required members of the
SAIF, such as St. Paul Federal Bank For Savings, to pay a one-time assessment
to bring the SAIF up to desired capitalization levels. St. Paul's share of the
special assessment was $21.0 million, which was included in G&A expense during
1996. After this special assessment, St. Paul's annual SAIF insurance premiums
dropped to about one-fourth of the previous level. Because of the lower
premiums, federal deposit insurance premiums decreased by $4.8 million to $2.8
million in 1997.
Management remains committed to ongoing expense control, and has reviewed
certain back-office operations to improve work flows, communications,
coordination, and service as a means to improve efficiency and control expense.
As part of this review, Management has outsourced the Bank's internal mail
handling operations and has used increased automation to reduce staffing levels
in the corporate purchasing department. The Company also conducted a review of
its information systems department
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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and chose to outsource its loan servicing system. Conversion is expected in
late 1998. The Company expects to experience higher system processing costs,
but has also avoided the Year 2000 risk in this system. Management also
discontinued its "Free Checking" program in favor of more cost effective
checking products that emphasize the benefits of electronic checking accounts,
ATMs and other automated delivery systems.
As part of the review of back-office operations, during 1997, the
Bank purchased a 70,000 square foot office facility to serve as an operations
center. The Bank plans to consolidate at least two of its leased premises into
this operations center. Funds for the purchase of this facility were provided
by operations.
Management will also increase the size of the branch network in 1998. In
December of 1997, the first Money Connection Center opened. A second location
in Chicago is scheduled to open in April 1998. These branches are located in
storefronts or neighborhood shopping centers, which have a similar cost
composition to the Bank's current in-store branch locations. These centers will
be located in areas with significant pedestrian traffic and will combine
self-banking features, such as ATMs and telephone banking, with branch
personnel to deliver a full range of banking services while keeping total
operating and staffing costs lower than free-standing branches. The Bank plans
to look for other opportunities to open these storefront branches in the
future. The Bank intends to fund all branch expansion with existing liquidity.
Management also expects G&A expenditures in 1998 related to the systems
requirements to ensure that the Bank can process transactions in the next
century. The Bank began in 1996 preliminary work on the Year 2000 compliance
issue. Critical risk elements were identified and an inventory of computer
hardware, software application, Bank vendors and available internal resources
was prepared. From this assessment, a formal action plan was prepared and
approved by the Bank's Board of Directors in early 1997. The action plan
divided the project into segments which were aligned with the type of computer
platform used by the Bank. Execution of the plan development work began in 1997
and is expected to continue into 1998. The Bank has dedicated sufficient
internal resources to this project and will continue to use external resources
as necessary to meet project deadlines. The Bank is committed to completing the
necessary compliance work by the end of 1998, with testing on the segments to
begin later in the year and into 1999. The OTS has mandated that all savings
institutions be Year 2000 compliant by the end of 1998, with 1999 set for
testing. At Dec. 31, 1997, Management believes that development work in each of
the segments is at least on schedule with compliance work to be completed and
some testing to begin before the end of the year. Management currently
estimates that the costs incurred in 1998 for work on the Year 2000 project
will not be material. The Bank intends to fund these costs from operations and
excess liquidity. The Bank expects that the outsourcing of the loan processing
system will be completed by the end of 1998, ensuring that this area is Year
2000 compliant within the required time frame.
Despite expense control measures, 1998 G&A levels are expected to increase
over 1997 levels. The operating costs for additions to the branch network,
expansion of the ATM network, an increase in planned advertising and
promotions, systems projects, higher compensation for retail personnel and
higher employee benefits expense will cause an increase in G&A expense.(6) In
addition, the acquisition of the mortgage broker at the beginning of 1998 will
also contribute to an expected rise in expense.
OPERATIONS OF FORECLOSED REAL ESTATE: The Company also benefited from improved
credit quality through a reduction in the net loss from the operation of
foreclosed real estate. In 1997, the Company recorded a gain of $301,000 for
foreclosed real estate operations. A gain on the sale of one property and the
reversal of $100,000 of prior real estate owned ("REO") provisions produced the
net gain in 1997. During 1996, the Company reported a net loss of $1.2 million.
The loss was mainly due to an REO provision recorded to reflect a loss on the
sale of an income producing property asset in 1996.(7) See Credit Risk
Management and Note I-Foreclosed Real Estate for further discussion of REO.
INCOME TAXES: The provision for income taxes was $25.1 million during 1997
compared to $13.4 million during 1996. A higher level of pre-tax income in 1997
as compared to 1996 (including the effect of the SAIF charge) primarily
produced the increase in expense. The effective income tax rate was 33.7
percent in 1997 compared to 33.8 percent during 1996. See Note P-Income Taxes
for a reconciliation of income tax expense at the federal statutory rate to the
Company's effective tax rate. At the end of 1997, Management began to undertake
certain additional tax planning strategies that may provide further benefit to
the Company's effective annual income tax rate. However, the amount of the
benefit to be realized is not yet determinable.
EXTRAORDINARY ITEM: During the first quarter of 1997, the Company recorded a
$403,000 extraordinary loss, net of $207,000 of tax, on the early
extinguishment, at par, of its $34.5 million of 8.25 percent subordinated debt
due in 2000. The write-off of unamortized issuance costs and discounts created
the loss at extinguishment. The subordinated debt was repaid with a portion of
the proceeds from the Company's issuance of $100 million of 7.125 percent
senior notes due in 2004. The future savings of replacing the higher costing
subordinated notes with the senior notes is expected to more than offset the
extraordinary loss incurred.
(6) Employee benefits expense in 1998 will be affected by higher costs to
maintain the Employee Stock Ownership Plan ("ESOP"). In 1998, all shares
released to ESOP participants will be accounted for under the American
Institute of Certified Public Accountants Statement of Position 93-6 Employers'
Accounting for Employee Stock Ownership Plans ("SOP 93-6"). Under SOP 93-6,
compensation expense is charged for the fair market value of the shares
released to the participants during the year. Under prior accounting rules,
compensation expense was charged for the cost of shares at the time of
acquisition by the ESOP trust. While the amount of compensation expense
associated with the ESOP will be dependent on the Company's common stock price
at the end of 1998, Management estimates, based upon the year-end 1997 stock
price, that SOP 93-6 will increase compensation expense by approximately
$600,000 over 1997. This accounting rule was established on a retroactive basis
in 1993. As a result of the rule, Management has not used the leveraged ESOP to
acquire additional shares for the trust.
(7) The additional loss in 1996 occurred when the Bank entered into a sales
contract with a buyer to purchase the multifamily property at a value lower
than the current book value. While the book value was supported by a current
appraisal, Management elected to accept a liquidation value, principally due to
the high vacancy levels, rather than holding this asset in an effort to achieve
stabilization of occupancy.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF YEARS ENDED DEC. 31, 1996 AND 1995
GENERAL: Net income during 1996 totaled $26.3 million, or $0.74 per diluted
share outstanding. Operating results in 1996 included a $21.0 million pre-tax
charge for the SAIF recapitalization. Without the SAIF recapitalization, 1996
net income would have been $40.2 million, representing a 10 percent increase
over 1995 net income of $36.4 million. Diluted earnings per share would have
increased 13 percent to $1.12 during 1996 from $0.99 during 1995.(8) The
increase in net income resulted from an $8.1 million increase in net interest
income, a $2.0 million increase in other income, and a lower effective income
tax rate. These increases in income were partly offset by a $6.7 million rise
in general and administrative ("G&A") expenses (excluding the impact of the
SAIF charge).
NET INTEREST INCOME: Net interest income totaled $124.7 million during 1996, up
7.0 percent or $8.1 million over 1995. The net interest margin ("NIM") for 1996
rose six basis points from 3.01 percent during 1995 to 3.07 percent during
1996. Management's focus on increasing interest earning asset levels produced
the increase in net interest income and the NIM as the Company purchased higher
yielding loans receivable balances with funds provided largely by the
repayments of lower yielding MBS balances and with higher deposit balances and,
to a lesser extent, borrowings. Upward repricing in the adjustable rate loans
and MBS portfolios also contributed to the increase the NIM. However, rising
deposit costs exert downward pressure on the NIM and increased interest
expense. The higher deposit costs were mainly associated with the growth in CD
balances, the highest costing deposit product.
Many of the same factors that impacted the NIM also impacted the Bank's
interest rate spread. The interest rate spread was 2.78 percent at Dec. 31,
1996, or 6 basis points higher than the interest rate spread of 2.72 percent at
Dec. 31, 1995. An increase in period-end MBS and loan balances, funded with
lower-costing investment balances and an increase in deposit and borrowing
balances combined to produced the increase in the interest rate spread. The
benefit to the spread produced by a lower period-end weighted average borrowing
rate was mostly offset by a higher weighted average deposit rate and a slight
decline in the weighted average loan rate.
PROVISION FOR LOAN LOSSES: The provision for loan losses of $1.8 million
recorded during 1996 was $150,000 less than the provision during 1995. The
reduction in the provision for loan losses reflects an improvement of the
credit quality of the Company's income producing property loan portfolio with
lower classified assets, the continued low level of nonperforming assets, and
lower outstanding loan balances in this portfolio.
OTHER INCOME: Other income rose 5.9 percent to $35.7 million during 1996
compared to $33.7 million during the previous year. Most of the increase in
other income was produced by higher revenues from discount brokerage operations
and ATM operations, as well as an increase in the gain on loan sales.
Higher demand for the products offered by the Bank's discount brokerage
operations resulted in a 28 percent increase in trading volumes and a $2.0
million increase in revenues. The $962,000 increase in ATM fee income was
mainly due to the expansion of the ATM network, including the addition of the
260 White Hen ATMs during the second quarter of 1996. The $446,000 increase in
gain on loan sales was mainly produced by the adoption of SFAS No. 122
Accounting for Mortgage Servicing Rights during 1996 that allowed the Bank to
capitalize certain costs as origination mortgage servicing rights that, under
prior accounting rules, would have reduced the gain on loan sales.
These increases in other income were partly offset by lower demand for
products offered by the Company's annuity and insurance operations, lower sales
volumes at the Company's real estate development operations, and lower loan
servicing fees associated with a decline in the average loan servicing
portfolio.
G&A EXPENSE: G&A expenses totaled $117.8 million during 1996, including the
$21.0 million SAIF charge. Without the SAIF charge, G&A expenses would have
been $96.8 million, $6.7 million or 7.4 percent higher than $90.2 million of
expense recorded during the previous year. Higher salaries and benefits of $3.9
million, occupancy and office expense of $2.7 million, and advertising of
$998,000 generated most of the increase in G&A expense. See Results of
Operations-Comparison of Years Ended Dec. 31, 1997 and 1996-G&A Expense for
further details of the $21.0 million SAIF charge.
The rise in compensation and employee benefits was associated with annual
merit raises, higher payroll taxes, an increase in pension expense associated
with a decrease in the interest rates used to measure the Bank's pension cost,
and higher medical costs. Higher occupancy and office expense was largely due
to the creation of the tele-banking center during the fourth quarter of 1995
and additional capital investments, such as the expansion of the ATM network
and a digital telephone system. Additional marketing promotions, mainly for the
Bank's speciality sports checking account programs and the introduction of the
White Hen ATMs, produced the increase in advertising expenditures.
OPERATIONS OF FORECLOSED REAL ESTATE: The Bank generated a net loss from its
foreclosed real estate operation of $1.2 million during 1996, or $56,000 more
than during 1995. A higher provision for losses on real estate owned ("REO"),
partly offset by a decline in the cost to operate the foreclosed assets,
produced the slight increase in the net loss. See Credit Risk Management and
Note I-Foreclosed Real Estate for further discussion of REO.
INCOME TAXES: The provision for income taxes was $13.4 million during 1996
compared to $20.7 million during 1995. A lower level of pre-tax income
(including the effect of the SAIF charge) primarily produced the decline in
expense. In addition, the adoption of certain tax planning strategies during
1996 allowed the company to achieve a lower effective income tax rate. The
effective income tax rate was 33.8 percent during 1996 compared to 36.3 percent
during the previous year. See Note P- Income Taxes for a reconciliation of
income tax expense at the federal statutory rate to the Company's effective tax
rate.
(8) The earnings per share comparison rose faster than the net income
comparison because 2.3 million shares of Company common stock were repurchased
during 1995 and 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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KEY CREDIT STATISTICS
At or for the years ended Dec. 31-Dollars in thousands
KEY CREDIT RATIOS
1997 1996 1995
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Net loan charge-offs to average loans receivable 0.05% 0.15% 0.21%
Net California loan charge-offs to average California loans receivable 0.27 0.56 0.48
Loan loss allowance to total loans 1.06 1.28 1.42
Loan loss allowance to nonperforming loans 391.88 377.19 216.62
Loan loss allowance to impaired loans 176.48 64.04 120.37
Nonperforming assets to total assets 0.23 0.29 0.71
General valuation allowance to nonperforming assets 321.34 248.88 123.94
================================================================================================================================
LOAN PORTFOLIO
1997 1996 1995 1994 1993
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MORTGAGE LOANS
1-4 family units $2,251,823 70% $1,753,907 63% $1,663,228 62% $1,530,132 59% $1,190,273 51%
Multifamily units 911,035 28 988,506 35 979,017 36 993,122 38 1,057,571 46
Commercial 63,742 2 54,985 2 54,981 2 63,983 3 73,029 3
Land and land development - - 1,633 * 1,940 * 224 * 10,307 *
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Total mortgage loans $3,226,600 100% $2,799,031 100% $2,699,166 100% $2,587,461 100% $2,331,180 100%
====================================================================================================================================
CONSUMER LOANS
Secured by deposits $ 1,015 8% $ 1,169 6% $ 2,307 10% $ 1,928 8% $ 2,300 11%
Education 44 * 210 1 261 1 584 3 2,166 11
Home improvement 136 1 281 1 576 2 832 4 1,110 6
Auto 10,818 82 16,197 85 20,034 86 19,392 83 13,971 71
Credit card and personal 1,225 9 1,193 7 165 1 380 2 166 1
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Total consumer loans $ 13,238 100% $ 19,050 100% $ 23,343 100% $ 23,116 100% $ 19,713 100%
====================================================================================================================================
Total loans held for investment $3,239,838 $2,818,081 $2,722,509 $2,610,577 $2,350,893
====================================================================================================================================
Weighted average rate 7.49% 7.66% 7.69% 7.51% 7.88%
====================================================================================================================================
* Less than 1%
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GEOGRAPHIC CONCENTRATION OF NONPERFORMING ASSETS
1997 1996
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Amount Percent Amount Percent
- ------------------------------------------------------------------------------------
STATE
California $ 965 9.4% $ 1,243 10.0%
Illinois 7,094 68.9 10,098 81.1
Maryland 638 6.2 - -
Missouri 508 4.9 355 2.8
Other 1,011 9.9 710 5.7
Consumer loans 76 0.7 46 0.4
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Total $10,292 100.0% $12,452 100.0%
====================================================================================
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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CREDIT RISK MANAGEMENT
- ----------------------
The Company's loans receivable portfolio is primarily comprised of residential
mortgages, secured by both single family and multifamily dwellings. To a much
lesser extent, the loan portfolio also includes commercial real estate loans,
land loans and consumer loans. See Loan Portfolio table for further detail.
At Dec. 31, 1997, nonperforming loans totaled $8.8 million compared to
$9.5 million at Dec. 31, 1996. At year-end 1997, the Company reported no
nonperforming loans from its income producing property portfolio compared to
$387,000 at Dec. 31, 1996. See Nonperforming Loans following for further
details and Note A-Summary of Significant Accounting Policies for a description
of the Company's policy for placing loans on nonaccrual. Delinquent real estate
loans accounted for on an accrual basis (i.e., still considered performing
loans) decreased to $58.4 million at Dec. 31, 1997 from $65.9 million at
year-end 1996. See Delinquent Loans Accounted for on an Accrual Basis table for
further detail. The gross investment in impaired loans, as defined by SFAS No.
114, Accounting by Creditors for Impairment of a Loan, declined sharply during
the year to $21.0 million (0.46 percent of total assets) at Dec. 31, 1997 from
$61.4 million (1.41 percent of total assets) at Dec. 31, 1996. As anticipated
by Management, the level of impaired loans was significantly reduced since
1996, primarily because of the resolution of several income producing property
loans that had been classified as impaired because of pending maturities.
The level of net charge-offs in recent years has declined consistent with
the reduction in the level of classified assets and nonperforming assets. Net
loan charge-offs during 1997 were $1.6 million, compared to $4.4 million during
1996 and $5.5 million during 1995. The net charge-offs during 1997 were
comprised of $2.8 million of gross charge-offs and $1.2 million of recoveries.
Of the $2.8 million of gross charge-offs, $1.9 million represented specific
reserves established prior to 1997, while the remainder was new "loss"
identified and charged-off during the year. As in prior years, most of the net
loan charge-offs during 1997 were associated with the Bank's income producing
property lending portfolio. The ratio of net charge-offs to average loans
receivable continued to decline and was 0.05 percent in 1997 compared to 0.15
percent during 1996 and 0.21 percent in 1995. See Allowance for Losses Activity
and Key Credit Statistics tables for further detail.
No loan loss provision was recorded during 1997. In comparison, the
Company recorded a $1.8 million loan loss provision in 1996 and a $1.9 million
provision in 1995. The general trend of improved credit quality, the decrease
in the size of the Bank's income producing property lending portfolio, and the
continued reduction in classified and nonperforming assets, as well as the
decrease in the net charge-offs has caused the allowance for loan losses to
decrease in recent years. If the positive trends noted above continue,
Management anticipates that no loan loss provision will be necessary in 1998.
Management will also review the possibility of reversal of loan loss provisions
in conjunction of the quarterly assessment of the adequacy of the loan loss
allowance performed in the normal course of business. See Key Credit Statistics
for further details. Also, see Note A-Summary of Significant Accounting
Policies for a discussion of the Bank's loan loss methodology.
The adequacy of the allowance for loan losses is approved on a quarterly
basis by the Loan Loss Reserve Committee ("Reserve Committee") of the Bank's
Board of Directors. The allowance for loan losses reflects Management's best
estimate of the allowance needed to provide for credit risks for income
property loans as well as all other perceived credit risks of the Bank.
However, actual results could differ from this estimate and future additions to
the 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.
The size of the Company's income producing property portfolio has declined
in recent periods. This decline has been due to the maturity of a significant
portion of the portfolio in recent periods and heavy repayments caused by a
decline in interest rates and increased lending competition. In 1997, in an
effort to replace some of the loans that have repaid, the Company resumed its
nationwide income producing property lending program. Under this expanded
program, the Bank began originating new income producing property loans in
those markets where Management believes the economies are strong or to
borrowers with whom it has an established relationship. Prior to 1997, the
Company focused its income producing property lending activities in the
Midwest. The Company also provides financing to facilitate the sale of REO,
refinance existing mortgages that have matured, and repurchase distressed loans
that have been sold with recourse. In 1997, the Company originated $105.2
million of income producing property loans, refinanced $143.4 million of
maturing loans, provided $2.7 million of loans to facilitate the sale of income
producing property foreclosed assets, and repurchased $9.4 million of loans
under recourse provisions.
During 1997, the Board of Directors also approved a program to provide
loans on real estate secured by industrial, office, and shopping center
properties. The initial focus of the program will be on industrial centers and
secondarily on office complexes. Loans on shopping centers will be considered
only on a very select basis. The geographic focus of the program will be in the
Midwestern states. Originations under this program were $2.3 million in 1997
and Management anticipates originations to be between $20 million and $25
million during 1998.
Management continues to monitor events in the submarkets in which the Bank
has substantial loan concentrations, particularly California. While some
softness persists in certain areas, Management is not aware of any unfavorable
changes in those economies that would have a significant adverse effect on the
Bank's loan portfolio. The Bank's largest concentration of income producing
property loans outside Illinois are California and Washington. See Note
V-Concentration of Credit Risk for further details.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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During 1997, the Bank purchased $797.9 million of whole loans, secured by
1-4 family residences located nationally. Prior to purchasing these loans, the
Bank performs due diligence procedures, and because of that process, Management
believes that the portfolios acquired present no greater risk than the Bank's
own originated 1-4 family portfolio. The Bank also purchased $10.3 million of
loans secured by income producing property located in Wisconsin. The Bank
applied its own loan origination underwriting standards to the purchase of
these loans. All purchased loans are subject to the Bank's quarterly review of
the adequacy of the general valuation allowance.
As of Dec. 31, 1997, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 18 percent, compared to the 34
percent ratio reported at Dec. 31, 1996 and a targeted level for 1997 of 34
percent. Classified assets include REO and loans considered "substandard,"
"doubtful," or "loss" under regulatory accounting purposes and the Bank's loan
rating system.
FORECLOSED REAL ESTATE: Foreclosed real estate assets declined to $1.5 million
at Dec. 31, 1997 from $2.9 million at Dec. 31, 1996. At Dec. 31, 1997 all REO
assets were 1-4 family residences compared to $1.3 million of income producing
property and $1.6 million of 1-4 family residences at Dec. 31, 1996. See Note
I-Foreclosed Real Estate and Results of Operations-Comparison of Years Ended
Dec. 31, 1997 and 1996- Operations of Foreclosed Real Estate for further
details.
The allowance for REO losses was $157,000 at Dec. 31, 1997 compared to
$284,000 at Dec. 31, 1996. The reversal of $100,000 of prior REO provisions for
losses and $27,000 of net charge-offs produced the reduction in the allowance
for REO losses during the year. In comparison, the Company recorded an $868,000
provision for REO loss in 1996 and $2.6 million of net charge-offs. Most of the
provision and net charge-offs were associated with the sale of two income
producing property loans in 1996.
ALLOWANCE FOR LOAN LOSSES ACTIVITY
At or for the years ended Dec. 31-Dollars in thousands
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Balance at Jan. 1 $35,965 $38,619 $42,196 $46,574 $48,681
Charge-offs:
Real estate loans:
1-4 family 564 276 506 444 187
Multifamily 1,747 4,614 4,167 8,592 13,863
Commercial 350 154 3,081 813 -
Land and land development - - - 85 -
Consumer 120 69 125 309 306
- ---------------------------------------------------------------------------------------------------------
Total charge-offs 2,781 5,113 7,879 10,243 14,356
Recoveries:
Real estate loans:
1-4 family 45 45 103 26 9
Multifamily 1,086 567 2,243 644 512
Commercial 66 38 - - -
Land and land development - - - - -
Consumer 14 59 56 45 49
- ---------------------------------------------------------------------------------------------------------
Total recoveries 1,211 709 2,402 715 570
- ---------------------------------------------------------------------------------------------------------
Net charge-offs 1,570 4,404 5,477 9,528 13,786
Acquired from Elm Financial - - - - 929
Provisions for losses charged to operations - 1,750 1,900 5,150 10,750
- ---------------------------------------------------------------------------------------------------------
Balance at Dec. 31 $34,395 $35,965 $38,619 $42,196 $46,574
=========================================================================================================
Ratio of net charge-offs to average loans:
Real estate loans:
1-4 family 0.02% 0.01% 0.02% 0.02% 0.01%
Multifamily 0.02 0.14 0.07 0.33 0.54
Commercial 0.01 * 0.12 0.03 -
Land and land development - - - * -
Consumer * * * 0.01 0.01
- ---------------------------------------------------------------------------------------------------------
0.05% 0.15% 0.21% 0.39% 0.56%
=========================================================================================================
* Less than 0.01%.
- ---------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
34
19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At Dec. 31-Dollars in thousands
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Balance applicable to:
Real estate loans:
1-4 family $ 5,993 69.5% $ 3,181 62.1% $ 3,163 61.0% $ 2,644 58.2% $ 2,354 50.9%
Multifamily, land
and commercial 28,033 29.9 32,315 36.9 34,861 37.8 38,840 40.5 43,628 48.0
Consumer 369 0.6 469 1.0 595 1.2 712 1.3 592 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
$34,395 100.0% $35,965 100.0% $38,619 100.0% $42,196 100.0% $46,574 100.0%
====================================================================================================================================
NONPERFORMING LOANS
At Dec. 31-Dollars in thousands
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis: (a)
Real estate loans:
1-4 family $5,516 $3,403 $ 3,741 $1,952 $ 6,045
Multifamily - - 8,665 3,813 12,907
Commercial - 387 1,360 437 2,598
Consumer 76 46 81 101 480
Other - - - - 2,406
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 5,592 3,836 13,847 6,303 24,436
Loans delinquent 90 days or more accounted for on an accrual basis: (b)
1-4 family 3,185 5,699 3,981 3,632 5,157
Consumer - - - - 75
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 3,185 5,699 3,981 3,632 5,232
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans $8,777 $9,535 $17,828 $9,935 $29,668
====================================================================================================================================
Troubled debt restructuring $ 857 $ - $ - $ - $15,646
====================================================================================================================================
(a) During 1997, the Bank recorded $218,000 of interest income on loans
accounted for on a nonaccrual basis at Dec. 31, 1997. Interest income for 1997
included $43,000 that would have been earned in 1996 had the loans been
accounted for on an accrual basis. Does not include impaired loans that are
considered performing, but nonetheless accounted for on a cash basis. See Note
A-Summary of Significant Accounting Policies for further discussion of the
Bank's policy for placing loans on a nonaccrual status.
(b) The Bank continues to accrue interest on government insured and 1-4 family
loans with original loan-to-value ratios of 80% or less that are 90 days or
more delinquent. While these loans are still accruing interest, they are
reported as nonperforming. See Note A-Summary of Significant Accounting
Policies for further discussion of the Bank's policy for placing loans on a
nonaccrual status.
- --------------------------------------------------------------------------------
DELINQUENT LOANS ACCOUNTED FOR ON AN ACCRUAL BASIS (a)
At Dec. 31-Dollars in thousands
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Real Estate Real Estate Real Estate Real Estate Real Estate
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate loans delinquent
30 to 59 days $50,964 1.57% $56,741 2.02% $56,554 2.09% $42,297 1.64% $51,732 2.20%
60 to 89 days 7,428 0.23 9,135 0.33 6,847 0.25 8,336 0.32 12,279 0.52
- ------------------------------------------------------------------------------------------------------------------------------------
Total $58,392 1.80% $65,876 2.35% $63,401 2.34% $50,633 1.96% $64,011 2.72%
====================================================================================================================================
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Consumer Consumer Consumer Consumer Consumer
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer loans delinquent
30 to 59 days $ 268 1.28% $ 344 1.22% $ 485 1.44% $ 545 1.65% $ 327 1.20%
60 to 89 days 39 0.18 118 0.42 89 0.26 155 0.47 103 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 307 1.46% $ 462 1.64% $ 574 1.70% $ 700 2.12% $ 430 1.58%
====================================================================================================================================
(a) See Note A-Summary of Significant Accounting Policies for further
discussion of the Bank's policy for placing loans on a nonaccrual status.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35
20
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTEREST RATE RISK
- ------------------
Interest rate risk represents a measure of the sensitivity of the Company's
earnings and the impact of stockholders' equity due to changes in interest
rates. Interest rate risk generally exists because the Company chooses to
accept this risk in connection with its profit motives and business objectives.
The principal objective of the Company's asset/liability management activities
is to maximize the level of net interest income while maintaining acceptable
levels of interest rate and liquidity risk and facilitating the funding needs
of the Company.
Management captures and measures the Bank's exposure to interest rate risk
using complex financial models. The OTS also monitors the Bank's interest rate
risk using its own model. These models measure interest rate risk by computing
the change in net interest income and market value of the Company's net assets
due to significant increases and decreases in interest rates. The results of
both models are reported quarterly to the Bank's Board of Directors and
reviewed to determine that the risks assumed were in conformity with the Bank's
policies for interest rate risk. The results of these models influence asset
and liability pricing decisions and the development of other strategies to
mitigate interest rate risk.(9)
Changes in interest rates can significantly impact the level of the
Company's net interest income and the market value of its net assets. On the
asset side, changes in interest rates affect the mortgage loans and MBS yields
and influence the amount of prepayments of these assets. The Company held a
significant amount of adjustable rate loans and MBS to better match repricing
of assets and liabilities in changing interest rate environments. Fluctuations
in interest rates also impact the yields earned on the investment portfolio,
which is mostly short term in nature. On the liability side, changes in
interest rates can impact the cost of the Company's source of funds, such as
borrowings and the CD portfolio. However, the Company's portfolio of checking,
savings and money market accounts help mitigate the impact of rapid changes in
interest rates. At Dec. 31, 1997, using the Company's sensitivity analysis
model, a 200 basis point increase in market interest rates would cause a $17.0
million, or 12.3 percent, decrease in net interest income and a $19.7 million,
or 5.3 percent, decline in the market value of its portfolio assets.(10) These
amounts were determined by considering the impact of hypothetical changes in
the current yield earned on the Company's interest-sensitive assets and the
rates paid on its interest-sensitive liabilities. The model also considers the
scheduled and assumed repricing and maturity of these assets and liabilities.
However, the model only assumes a rapid change in interest rates and does not
consider actions Management may take to help mitigate the impact of these
changes. In the event of a significant change in interest rates, Management may
take actions to modify the structure of its balance sheet and deploy other
strategies to mitigate the impact of changing interest rate conditions upon the
Company's net interest income or the market value of net assets. This
sensitivity analysis does not reflect the impact of these actions.
Traditionally, financial institutions also uses "GAP" analysis as a
measure of their interest rate sensitivity. GAP is the ratio of interest-rate
sensitive assets to interest-rate sensitive liabilities over specified time
horizons, expressed as a percent of total assets. A positive GAP indicates that
cumulative interest-rate sensitive assets exceed cumulative interest-rate
sensitive liabilities at the dates indicated, and suggests that net interest
income would increase if market rates increased. The GAP also assumes that
volumes and spreads are constant. Generally, the Bank's policy is to maintain a
balanced GAP. Management considers a range of plus or minus 15 percent to be a
desirable one-year GAP position.
Although GAP analysis provides some narrow insights into the repricing of
the Bank's balance sheet, for various reasons, GAP analysis in recent years has
not provided the Bank with a reliable measure of its interest rate risk
exposure because of its inherent limitations.(11) Internally, Management relies
on its models and financial simulations to evaluate interest rate risk. The
historical trend of the GAP at one, three and five years is presented below.
1997 1996 1995 1994 1993
- --------------------------------------------------------------------
One year (3.84)% (1.62)% 5.38% 4.40% 16.79%
Three years 12.17 7.34 10.87 3.93 10.94
Five years 11.26 8.79 7.32 3.17 10.63
- --------------------------------------------------------------------
The Bank's one-year GAP decreased from a negative 1.62 percent at Dec. 31,
1996 to a negative one-year GAP of 3.84 percent at Dec. 31, 1997. The negative
one-year GAP indicates that the cumulative one-year interest-rate sensitive
liabilities exceed the cumulative one-year interest-rate sensitive assets, and
indicates that net interest income could decrease if interest rates increased.
(9) The market values of assets and liabilities as computed by these models do
not represent the same market values as disclosed in Note X-Fair Value of
Financial Instruments as required by SFAS No. 107, Disclosures About Fair Value
of Financial Instruments. The Company's interest rate risk models compute
market values based upon assumed cashflows discounted at appropriate market
interest rates. Market values under SFAS No. 107 use quoted market prices
whenever available and core transaction accounts are valued at book value.
In cases where quoted market prices are not available, fair value is determined
using discount cashflow analysis and other techniques. SFAS No. 107 also
excludes non-financial assets and liabilities. In contrast, the interest rate
risk models include all assets and liabilities in the computation of the impact
of changing interest rates on the Company's balance sheet.
(10) Management selected the 200 basis point increase in interest rates
scenario because the OTS requires the Bank to measure its interest rate risk
based upon 200 basis point changes in interest rates.
(11) Management believes that GAP analysis is of limited value in assessing the
extent of interest rate risk because it fails to account for interest rate
floors, caps basis risk (i.e., the divergent characteristics of different types
of financial instruments) when repricing occurs, and the interplay of the
pricing of new transactions upon the net interest spread, especially during a
volatile interest rate horizon. GAP analysis also has other inherent problems.
For example, an institution's assets could theoretically reprice on the first
day of the year and the institution's liabilities could reprice on the last day
of the year but be perfectly matched under GAP. In this example, the
institution actually would be exposed to interest rate risk the entire year
because of the repricing differences. GAP also assumes that the interest rate
spread between interest earning assets and liabilities is constant and that the
"GAP" represents the only risk. However, in reality, the interest rate spread
is constantly changing, sometimes significantly, as transactions occur or
instruments reprice. See Results of Operations- Comparison of Years Ended Dec.
31, 1997 and 1996-Net Interest Income for a discussion of factors effecting the
Bank's interest rate spread.
Interest rate floors in effect on $256.0 million of adjustable rate loans
at Dec. 31, 1997 and $405.7 million at Dec. 31, 1996 should be considered in
evaluating the GAP results. Floors establish a minimum rate for ARMs, even
though the fully indexed rate on ARMs may be lower. Consequently, the floors
create an artificial fixed rate loan for a period of time and limit repricing
when interest rates rise. Interest rate caps also should be considered in
understanding GAP results, and nearly all adjustable rate loans and MBS contain
periodic or lifetime interest rate caps. Periodic rate caps limit the total
rate adjustment on a loan over a 12-month period.
- --------------------------------------------------------------------------------
36
21
-----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
INTEREST RATE SENSITIVITY GAP ANALYSIS (a)
At Dec. 31, 1997-Dollars in thousands
More Than
Weighted % of 6 Months 6 Months Over
Average Rate Balance Total or Less to 1 Year 1-3 Years 3-5 Years 5 Years
----------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS:
Investments: (b)
Adjustable rate 5.37% $ 59,094 1% $ 59,094 $ - $ - $ - $ -
Fixed rate 5.86 135,922 3 76,309 1,000 10,025 - 48,588
Mortgage-backed securities:(c)
Adjustable rate 6.86 681,742 16 267,662 219,138 194,942 - -
Fixed rate 6.91 236,121 5 17,887 16,893 58,884 47,571 94,886
Mortgage loans:(c)
Adjustable and renegotiable rate 7.39 2,758,774 64 1,196,575 445,973 959,232 156,994 -
Fixed rate 8.08 467,826 11 49,197 57,182 146,554 99,864 115,029
Consumer loans (c) 7.68 13,238 * 2,017 1,266 3,928 3,019 3,008
Loans held for sale 7.70 17,028 * 17,028 - - - -
----------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets 7.28% $4,369,745 100% $1,685,769 $ 741,452 $1,373,565 $307,448 $ 261,511
==================================================================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking and other deposit accounts 0.76% $ 421,402 10% $ 114,432 $ 23,958 $ 78,536 $ 56,742 $ 147,734
Savings accounts 2.31 674,166 17 222,408 42,674 134,016 90,112 184,956
Money market deposit accounts 3.76 219,727 5 219,727 - - - -
Fixed-maturity certificates (d) 5.74 1,969,133 48 972,155 618,227 255,518 76,782 46,451
----------------------------------------------------------------------------------------------------------------------------------
4.26 3,284,428 80 1,528,722 684,859 468,070 223,636 379,141
Borrowings:
FHLB advances 5.84 341,085 8 140,000 - 100,000 100,248 837
Other borrowings 6.20 431,573 12 333,104 - - - 98,469
Mortgage-backed note 8.54 16,400 * - - 16,400 - -
----------------------------------------------------------------------------------------------------------------------------------
6.09 789,058 20 473,104 - 116,400 100,248 99,306
----------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities 4.62% $4,073,486 100% $2,001,826 $ 684,859 $ 584,470 $323,884 $ 478,447
==================================================================================================================================
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 2.66% $ 296,259 $ (316,057) $ 56,593 $ 789,095 $(16,436) $ (216,936)
==================================================================================================================================
Cumulative GAP $ (316,057) $(259,464) $ 529,631 $513,195 $ 296,259
Cumulative GAP to total assets without
regard to hedging transactions (6.94)% (5.69)% 11.62% 11.26% 6.50%
Cumulative GAP to total assets with
impact of hedging transactions (4.92)% (3.84)% 12.17% 11.26% 6.50%
----------------------------------------------------------------------------------------------------------------------------------
* Less than 1%.
(a) Mortgage loan repricing/maturity projections were based upon principal
repayment percentages in excess of the contractual amortization schedule of the
underlying mortgages. Multifamily mortgages were estimated to be prepaid at a
rate of approximately 18% per year; adjustable rate mortgage loans on single
family residences and loan securities were estimated to prepay at a rate of 22%
per year; fixed rate loans and loan securities were estimated to prepay at a
rate of 12% per year. Loans with an adjustable rate characteristic, including
loans with initial fixed interest rate periods, are considered by Management to
have an adjustable rate.
Checking accounts were estimated to be withdrawn at rates between 15% and
21% per year. Most of the regular savings accounts were estimated to be
withdrawn at rates between 18% and 26% per year, although for some of the
accounts, Management assumed an even faster rate.
Except for multifamily loans, the prepayment assumptions included in this
schedule are based upon the Bank's actual prepayment experience over the past
year, as well as Management's future expectations of prepayments. The Bank
assumed a prepayment percentage of 18% because of current market conditions and
the nature of the Bank's multifamily portfolio. The new decay assumption on
passbook and checking accounts is based on a historical regression analysis of
the Bank's growth in these accounts.
(b) Includes investment in FHLB stock.
(c) Excludes accrued interest and allowance for loan losses.
(d) The following table presents the amount of the Bank's time deposits in
amounts of $100,000 or more at Dec. 31, 1997 maturing during the periods
indicated.
----------------------------------------------------------------------------------------------------------------------------------
Maturing Amount
----------------------------------------------------------------------------------------------------------------------------------
Jan. 1, 1998 to March 31, 1998 $ 46,233
April 1, 1998 to June 30, 1998 41,750
July 1, 1998 to Dec. 31, 1998 70,156
After Dec. 31, 1998 36,389
----------------------------------------------------------------------------------------------------------------------------------
$194,528
==================================================================================================================================
----------------------------------------------------------------------------------------------------------------------------------
37
22
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
------------------------------------------------------------------------------
Loan Maturity Table*
Based upon contractual maturities at Dec. 31, 1997-Dollars in thousands
2003 and
1998 1999-2002 thereafter Total
------------------------------------------------------------------------------------------------------------
Mortgage Loans
1-4 family units $ 47,101 $186,189 $2,018,533 $2,251,823
Multifamily and other 109,138 261,951 603,688 974,777
------------------------------------------------------------------------------------------------------------
Total mortgage loans 156,239 448,140 2,622,221 3,226,600
Consumer loans 3,283 6,947 3,008 13,238
------------------------------------------------------------------------------------------------------------
Total loans receivable $159,522 $455,087 $2,625,229 $3,239,838
============================================================================================================
* Excludes loans held for sale.
------------------------------------------------------------------------------------------------------------
LOANS DUE AFTER DEC. 31, 1998*
Based upon contractual maturities at Dec. 31, 1997-Dollars in thousands
Fixed Adjustable
Rate Rate Total
------------------------------------------------------------------------------------------------------------
Mortgage Loans
1-4 family units $304,108 $1,900,614 $2,204,722
Multifamily and other 118,233 747,406 865,639
------------------------------------------------------------------------------------------------------------
Total mortgage loans 422,341 2,648,020 3,070,361
Consumer loans 9,955 - 9,955
------------------------------------------------------------------------------------------------------------
Total loans receivable $432,296 $2,648,020 $3,080,316
============================================================================================================
* Excludes loans held for sale.
------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
At Dec. 31-Dollars in thousands
1997 1996 1995
------------------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing bank balances $ 59,094 $ 75,572 $ 41,706
Cash equivalent marketable-debt securities:
U.S. Treasury securities 51,972 14,451 33,179
Commercial paper 4,188 2,048 -
Marketable-debt securities of the U.S. government 31,174 49,103 92,778
Marketable-equity securities 10,400 - -
MBS:
Federal Home Loan Mortgage Corporation (FHLMC) 79,884 103,998 157,099
Federal National Mortgage Corporation (FNMA) 419,467 531,045 135,399
Privately issued 332,660(a) 433,108 586,596
Collateralized Mortgage Obligations (CMOs) 85,852(a) 94,831 96,328
------------------------------------------------------------------------------------------------------------
Total MBS $ 917,863 $1,162,982 $ 975,422
------------------------------------------------------------------------------------------------------------
$1,074,691(b) $1,304,156 $1,143,085
============================================================================================================
(a) The following table summarizes securities of issuers in excess of 10% of
stockholders' equity at Dec. 31, 1997.
Issuer Amortized Cost Fair Value
------------------------------------------------------------------------------------------------------------
Countrywide Mortgage-Backed Securities, Inc. $112,175 $114,959
Merrill Lynch Mortgage Investors, Inc. 81,214 82,682
Saxon Mortgage Securities Corporation 43,717 43,160
------------------------------------------------------------------------------------------------------------
Total $237,106 $240,801
============================================================================================================
(b) See Note B-Cash and Cash Equivalents, Note C-Investment Securities and Note D-Mortgage-backed Securities
for contractual maturity information.>>
-------------------------------------------------------------------------------------------------------------
38
23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
For the year ended Dec. 31-Dollars in thousands
1997 1996 1995
- ---------------------------------------------------------------------------------------
FHLB advances
Average month-end balance $183,400 $229,900 $109,000
Average month-end rate 5.95% 5.81% 6.25%
Highest month-end balance $305,000 $330,300 $125,300
Securities sold under agreements to repurchase
Average month-end balance $249,600 $ 43,800 $ 60,400
Average month-end rate 5.73% 5.57% 6.17%
Highest month-end balance $330,000 $ 50,000 $100,000
- ---------------------------------------------------------------------------------------
39
24
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION St. Paul Bancorp, Inc.
----------------------------------------------------------------------------------------------------------------------------------
At Dec. 31-Dollars in thousands 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents-Note B
Cash and amounts due from depository institutions $ 89,429 $ 98,137
Federal funds sold and interest-bearing bank balances 59,094 75,572
Short-term cash equivalent securities 56,160 16,499
----------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 204,683 190,208
Investment securities-Notes C and O
(Market: Dec. 31, 1997-$41,574; Dec. 31, 1996-$49,103) 41,574 49,103
Mortgage-backed securities-Notes D and O
(Market: Dec. 31, 1997-$921,277; Dec. 31, 1996-$1,158,171) 917,863 1,162,982
Loans receivable-Notes E, F, O and V
(Net of allowance for loan losses: Dec. 31, 1997-$34,395; Dec. 31, 1996-$35,965) 3,205,443 2,782,116
Loans held for sale, at lower of cost or market-Note G
(Market: Dec. 31, 1997-$17,091; Dec. 31, 1996-$12,021) 17,028 11,992
Accrued interest receivable-Note H 26,313 25,745
Foreclosed real estate-Note I
(Net of allowance for losses: Dec. 31, 1997-$157; Dec. 31, 1996-$284) 1,358 2,634
Real estate held for development or investment-Note J 15,287 15,783
Investment in Federal Home Loan Bank stock-Notes K and O 38,188 35,211
Office properties and equipment-Note L 52,135 47,286
Prepaid expenses and other assets-Note M 37,464 34,110
----------------------------------------------------------------------------------------------------------------------------------
Total assets $4,557,336 $4,357,170
==================================================================================================================================
LIABILITIES
Deposits-Note N $3,284,428 $3,337,055
Short-term borrowings-Note O 370,203 366,854
Long-term borrowings-Note O 418,855 194,390
Advance payments by borrowers for taxes and insurance 21,232 21,561
Other liabilities 44,706 49,200
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,139,424 3,969,060
COMMITMENTS-Notes L, T and U
STOCKHOLDERS' EQUITY-Notes Q and R
Preferred stock (par value $.01 per share: authorized-10,000,000 shares; none issued) - -
Common stock (par value $.01 per share: authorized-40,000,000 shares;
issued: Dec. 31, 1997-35,443,867 shares; Dec. 31, 1996-38,392,810 shares;
outstanding: Dec. 31, 1997-34,204,659 shares; Dec. 31, 1996-34,163,988 shares) 354 384
Paid-in capital 114,648 148,265
Retained income, substantially restricted 324,937 288,065
Accumulated other comprehensive income:
Unrealized gain on securities, net of tax-Notes B, C and D 1,887 2,278
Borrowings by employee stock ownership plan-Notes O and S (221) (396)
Unearned employee stock ownership plan shares
(Dec. 31, 1997-364,963 shares; Dec. 31, 1996-368,157 shares)-Note S (2,858) (2,883)
Treasury stock (Dec. 31, 1997-1,239,208 shares; Dec. 31, 1996-4,228,822 shares) (20,835) (47,603)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 417,912 388,110
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,557,336 $4,357,170
==================================================================================================================================
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
40
25
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY St. Paul Bancorp, Inc.
- -------------------------------------------------------------------------------
For the years ended Dec. 31-Dollars in thousands, except per share amounts
Accumu- Borrowings Unearned
lated by Employee
Other Employee Stock Total
Common Stock Compre- Stock Ownership Stock-
----------------- Paid-In Retained hensive Ownership Plan Treasury holders
Shares Amount Capital Income Income Plan Shares Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1994 35,215,275 $371 $137,866 $238,929 $(3,531) $(1,000) $(2,883) $(18,355) $351,397
Comprehensive income:
Net income - - - 36,394 - - - - 36,394
Change in unrealized gain/(loss)
on securities (net of tax
of $2,754)-Notes B, C and D - - - - 4,523 - - - 4,523
Unrealized loss from
transfer of securities
(net of tax of $1,149)-Note A - - - - (1,887) - - - (1,887)
-------
Comprehensive income 39,030
Stock option exercises -Note R 383,814 4 3,125 - - - - - 3,129
Cash dividends
($0.16 per share) - - - (5,532) - - - - (5,532)
Repayments of ESOP
principal-Note O - - - - - 515 - - 515
Treasury stock purchases (443,337) - - - - - - (4,342) (4,342)
- ------------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1995 35,155,752 $375 $140,991 $269,791 $ (895) $ (485) $(2,883) $(22,697) $384,197
Comprehensive income:
Net income - - - 26,257 - - - - 26,257
Change in unrealized gain/(loss)
on securities (net of tax
of $1,942)-Notes B, C and D - - - - 3,173 - - - 3,173
------
Comprehensive income 29,430
Stock option exercises-Note R 911,361 9 7,274 - - - - - 7,283
Cash dividends ($0.23 per share) - - - (7,983) - - - - (7,983)
Repayments of ESOP
principal-Note O - - - - - 89 - - 89
Treasury stock purchases (1,903,125) - - - - - - (24,906) (24,906)
- ------------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1996 34,163,988 $384 $148,265 $288,065 $ 2,278 $ (396) $(2,883) $(47,603) $388,110
Comprehensive income:
Net income - - - 49,058 - - - - 49,058
Change in unrealized gain
on securities (net of tax
of $239)-Notes B, C and D - - - - (391) - - - (391)
------
Comprehensive income 48,667
Retirement of treasury stock - (38) (41,177) - - - - 41,215 -
Retirement of fractional shares (1,880) - (34) - - - - - (34)
Stock option exercises-Note R 1,024,376 8 7,535 - - - - 2,790 10,333
Release of SOP 93-6 shares-
Note S - - 59 - - - 25 - 84
Cash dividends ($0.36 per share) - - - (12,186) - - - - (12,186)
Repayments of ESOP
principal-Note O - - - - - 175 - - 175
Treasury stock purchases (981,825) - - - - - - (17,237) (17,237)
- ------------------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1997 34,204,659 $354 $114,648 $324,937 $ 1,887 $ (221) $(2,858) $(20,835) $417,912
====================================================================================================================================
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------
41
26
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
For the years ended Dec. 31-Dollars in thousands, except per share amounts 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans receivable $229,360 $229,639 $201,630
Mortgage-backed securities 72,252 55,124 65,723
Investment securities 3,951 4,234 5,015
Federal funds and interest-bearing bank balances 4,986 2,734 2,386
Other investment income 4,668 4,525 3,996
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 315,217 296,256 278,750
INTEREST EXPENSE
Deposits-Note N 142,213 139,433 132,741
Short-term borrowings 24,430 14,598 10,389
Long-term borrowings 18,742 17,479 18,986
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 185,385 171,510 162,116
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 129,832 124,746 116,634
Provision for loan losses-Note F - 1,750 1,900
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 129,832 122,996 114,734
OTHER INCOME
Loan servicing fees 1,711 1,369 1,560
Other fee income 16,340 15,926 16,652
ATM operations 12,266 6,295 5,333
Net gain on loan sales 568 663 217
Net gain on securities sales - 969 837
Discount brokerage commissions 6,775 5,176 3,177
Income from real estate development-Note J 4,139 2,517 2,807
Insurance and annuity commissions 3,367 2,805 3,138
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 45,166 35,720 33,721
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and employee benefits 56,015 52,155 48,292
Occupancy, equipment and other office expense 29,688 26,007 23,268
Advertising 5,654 5,065 4,067
Federal deposit insurance 2,761 7,551 8,907
SAIF recapitalization - 21,000 -
Other 6,632 6,040 5,631
- ---------------------------------------------------------------------------------------------------------------------------
General and administrative expense 100,750 117,818 90,165
Gain/(loss) on foreclosed real estate-Note I 301 (1,215) (1,159)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 74,549 39,683 57,131
Income taxes-Note P 25,088 13,426 20,737
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 49,461 26,257 36,394
Extraordinary item:
Loss on early extinguishment of debt, net of tax of $207 (403) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 49,058 $ 26,257 $ 36,394
===========================================================================================================================
INCOME BEFORE EXTRAORDINARY ITEM PER SHARE-NOTES A AND AA
Basic $ 1.46 $ 0.77 $ 1.05
Diluted 1.42 0.74 0.99
===========================================================================================================================
NET INCOME PER SHARE-NOTES A AND AA
Basic $ 1.45 $ 0.77 $ 1.05
Diluted 1.40 0.74 0.99
===========================================================================================================================
DIVIDENDS PER SHARE $ 0.36 $ 0.23 $ 0.16
===========================================================================================================================
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
42
27
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
For the years ended Dec. 31-Dollars in thousands 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 49,058 $ 26,257 $ 36,394
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses - 1,750 1,900
Provision for losses on foreclosed real estate (100) 868 821
Provision for depreciation 7,751 7,134 6,458
Assets originated and acquired for sale (42,880) (39,561) (44,211)
Sale of assets held for sale 38,639 43,277 39,682
Increase in accrued interest receivable (568) (391) (1,887)
(Increase) decrease in prepaid expenses and other net assets (3,354) (1,936) 4,015
Increase (decrease) in other liabilities (4,494) 10,565 6,167
Net amortization of yield adjustments (2,703) 7,434 4,865
Other items, net (12,252) (26,905) (15,217)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,097 28,492 38,987
INVESTING ACTIVITIES
Principal repayments on loans receivable 912,360 598,469 419,232
Loans originated and purchased for investment (1,331,005) (1,091,642) (539,634)
Loans receivable sold 8,057 13,783 6,537
Principal repayments on available for sale mortgage-backed securities 133,830 62,397 21,353
Principal repayments on held to maturity mortgage-backed securities 113,572 151,538 155,418
Purchase of available for sale mortgage-backed securities (5,000) - (84,040)
Purchase of held to maturity mortgage-backed securities - (51,065) -
Sale of available for sale mortgage-backed securities - 27,542 56,887
Maturities of available for sale investment securities 59,200 53,250 8,000
Purchase of available for sale investment securities (51,141) (20,190) (236)
Sale of available for sale investment securities - 10,000 -
Additions to real estate (10,235) (16,294) (10,698)
Real estate sold 16,087 45,609 28,445
Sale (purchase) of Federal Home Loan Bank stock (2,977) 1,093 (6,457)
Purchase of office properties and equipment (12,600) (9,700) (7,066)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (169,852) (225,210) 47,741
FINANCING ACTIVITIES
Proceeds from issuance of certificates of deposit 377,489 448,459 322,446
Payments for maturing certificates of deposit (438,337) (348,021) (328,287)
Net increase in other deposit products 8,221 4,807 4,748
New long-term borrowings 298,418 50,000 195
Repayment of long-term borrowings (74,500) (15,000) (5,285)
Increase (decrease) in short-term borrowings, net 3,358 84,715 (45,895)
Dividends paid to stockholders (12,186) (7,983) (5,532)
Net proceeds from exercise of stock options 10,333 7,283 3,129
Purchase of treasury stock (17,237) (24,906) (4,342)
Increase (decrease) in advance payments by borrowers for taxes and insurance (329) 951 (1,232)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 155,230 200,305 (60,055)
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 14,475 3,587 26,673
Cash and cash equivalents at beginning of year 190,208 186,621 159,948
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 204,683 $ 190,208 $ 186,621
===========================================================================================================================
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
43
28
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements are
comprised of the accounts of St. Paul Bancorp, Inc. (the "Company") and its
wholly-owned subsidiaries, St. Paul Federal Bank For Savings (the "Bank"), St.
Paul Financial Development Corporation ("St. Paul Financial") and Annuity
Network, Inc. ("Annuity Network").
The Bank is a consumer-oriented retail financial institution operating 53
banking offices throughout the Chicago, Illinois metropolitan area.
St. Paul Financial engages in residential and commercial real estate
development and investment in the Chicago metropolitan area. Annuity Network
sells annuity products to the Bank's customers through its branch network.
The financial statements of the Bank include the accounts of its eight
wholly-owned subsidiaries: SPF Insurance Agency, Inc.; St. Paul Securities,
Inc.; Managed Properties, Inc.; MPI Illinois Corporation; Community Finance
Corporation; EFS Service Corporation; EFS/San Diego Service Corporation; and
St. Paul Investment Corporation. St. Paul Investment Corporation is
incorporated in the state of Delaware; all other subsidiaries are incorporated
in the state of Illinois.
SPF Insurance Agency, Inc. is an insurance agency providing a variety of
insurance products for property, automobile, life, disability income, special
multi-peril, commercial automobile, dwelling, fire, liability, bonds, workers'
compensation and group health plans.
The Bank offers discount brokerage services directly to its customers
through Investment Network, Inc., a wholly-owned subsidiary of St. Paul
Securities, Inc. Investment Network, Inc. provides a full line of investment
brokerage services through the Bank's branch network and, as a registered
broker/dealer, is subject to regulation under the Securities Exchange Act of
1934. Investment Network, Inc. also provides investment planning services for
customers through a subsidiary, Investment Network Advisors, Inc.
Managed Properties, Inc. and MPI Illinois Corporation are engaged in the
management of real estate, primarily multifamily and commercial, acquired by
the Bank through foreclosure.
Community Finance Corporation holds equity investments in companies that
acquire limited partnership interests in low income building development
projects that comply with the provisions of the Community Reinvestment Act.
EFS Service Corporation has participated, from time to time, in real
estate joint venture activities.
EFS/San Diego Service Corporation owns assets leased to others.
St. Paul Investment Corporation and its subsidiary, St. Paul Asset
Management Company, acquire and manage certain real estate related assets for
the Bank.
In addition, the Bank formed two new subsidiaries in 1997 that did not
begin operations until January 1998. ATM Connection, Inc. owns and operates the
automated teller machine network of the Bank. Serve Corps Mortgage Corporation
operates as a 1-4 family mortgage loan broker.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents in the Consolidated
Statements of Financial Condition and Consolidated Statements of Cash Flows
include cash and amounts due from depository institutions, federal funds sold,
interest-bearing bank balances and cash equivalent securities with original
maturities of three months or less.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES ("MBS"):
The Company classifies investment securities and MBS as either held to
maturity, trading or available for sale. The carrying amount of a security is
dependent upon its classification, and the accounting for securities in each of
the three categories is as follows:
1) Held to Maturity: Securities classified as held to maturity are recorded at
cost, net of unamortized premiums and discounts. Premiums and discounts are
amortized using the interest method over the contractual life of investment
securities or estimated life of MBS. Interest income is charged or credited for
any adjustment to unamortized premiums and discounts when actual MBS repayments
differ from estimates. Declines in value judged to be other than temporary are
included in gain or loss on asset sales based upon a specific identification
method. Management classifies in this category only those securities that it
has the positive intent and ability to hold to maturity.
2) Trading Account: Trading account transactions are carried at fair value,
with unrealized gains and losses included in earnings. The Company did not use
its trading accounts during 1997, 1996 or 1995.
3) Available for Sale: Securities classified as available for sale are recorded
at fair value, with unrealized gains and losses included in accumulated other
comprehensive income in stockholders' equity, net of the related tax. Premiums
and discounts are amortized using the interest method over the contractual life
of investment securities or estimated life of MBS. Interest income is charged
or credited for any adjustment to unamortized premiums and discounts when
actual MBS repayments differ from estimates. Realized gains and losses and
declines in value judged to be other than temporary are included in gain or
loss on asset sales based on a specific identification method.
The Company did not transfer assets between categories in 1997 or 1996. At
Dec. 31, 1995, the Company completed a one-time transfer of securities from the
held to maturity category to the available for sale category in accordance with
A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities issued by the Financial Accounting
Standards Board ("FASB"). The FASB Guide allowed for a one-time
reclassification of securities between categories without calling into question
prior or subsequent portfolio classification. The Bank reclassified $69.6
million of held to maturity investment securities with an unrealized loss of
$7,000 ($4,500 unrealized loss net of tax), and $190.7 million of held to
maturity MBS with an unrealized loss of $3.0 million ($1.9 million unrealized
loss net of tax) to the available for sale category at Dec. 31, 1995.
- --------------------------------------------------------------------------------
44
29
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOANS RECEIVABLE: Loans receivable classified as held to maturity are recorded
at cost and adjusted for unamortized premiums or discounts and net deferred
loan origination fees. Net deferred loan origination fees are comprised of loan
origination fees less certain direct origination costs that are deferred when
loans are originated. Net deferred loan origination fees or costs on originated
loans are amortized using the interest method over the remaining contractual
life of the assets. Interest income is charged or credited for any unamortized
premiums or discounts and net deferred loan origination fees or costs when
loans receivable are repaid prior to their contractual maturities. Premiums and
discounts on loans purchased as part of a pool of loans, and for which
prepayments were probable and reasonably estimated, are amortized using the
interest method over the estimated life of the pool of loans. Interest income
is charged or credited for any adjustment to unamortized premiums and discounts
when actual prepayments on these pools differ from estimates.
Interest income on loans is credited to income when earned. The Bank stops
accruing interest on loans deemed potentially uncollectible as a result of
delinquency or impairment (as defined by Statement of Financial Accounting
Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan).
Whenever the accrual of interest is stopped, previously accrued but uncollected
interest income is reserved. Thereafter, interest is recognized only as cash is
received, unless the loan is reinstated. In some cases, cash payments may be
applied to principal. Income producing property loans are placed on nonaccrual
status when they become 60 days delinquent or become impaired. The accrual of
interest on government insured loans and 1-4 family mortgages with original
loan to value ratios of 80% or less is not discontinued regardless of
delinquency. All other 1-4 family and consumer loans generally are placed on
nonaccrual status when they become 90 days delinquent.
Reserves for uncollectible loan principal are provided for through the
Bank's loan loss allowance. See discussion following.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is comprised of
specific and general valuation allowances. The Company establishes specific
valuation allowances ("SVA") on income producing real estate loans considered
impaired. A loan is considered impaired (and an SVA is established for an
amount equal to the impairment) when the carrying amount of the loan exceeds
the present value of the expected future cash flows, discounted at the loan's
original effective interest rate, or based upon the fair value of the
underlying collateral.
General valuation allowances are based on an evaluation of the various
risk components that are inherent in each of the credit portfolios, including
off-balance sheet items. The risk components that are evaluated include the
level of nonperforming 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.
Additions to general and specific valuation allowances are reflected in
current operations. Management may transfer reserves between the general and
specific valuation allowances as considered necessary. Charge-offs of general
and specific valuation allowances are made when loan principal is considered
uncollectible. Recoveries are credited to the accumulated provision for loan
losses when realized.
The adequacy of the allowance for loan losses is approved on a quarterly
basis by the Loan Loss Reserve Committee of the Bank's Board of Directors. The
allowance for loan losses reflects Management's best estimate of the reserves
needed to provide for impairment of income producing real estate loans, as well
as other perceived credit risks of the Bank. However, actual results could
differ from this estimate and future additions to the allowance may be
necessary based on unforeseen changes in economic conditions. In addition,
federal regulators periodically review the Bank's allowance for loan losses.
Such regulators have the authority to require the Bank to recognize additions
to the allowance at the time of their examination.
LOANS HELD FOR SALE: Loans classified as "held for sale" are comprised of 1-4
family real estate loans originated for resale in the secondary market and
certain education loans. Loans are identified as held for sale before or soon
after origination or purchase.
Loans held for sale are accounted for at the lower of cost or market, with
each periodic lower of cost or market adjustment included in earnings. The
lower of cost or market value is determined on an individual loan basis. The
fair value of loans held for sale is based on actual sales contracts and bids
published by the secondary market.
REAL ESTATE OWNED ("REO") AND REO IN-SUBSTANCE FORECLOSURES ("REOISF"): REO and
REOISF initially are recorded at the lower of net book value or fair value,
less estimated costs to sell. 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. The Bank had no REOISF at Dec. 31, 1997 or 1996.
Subsequent to foreclosure, the allowance for foreclosed real estate losses
is used to establish loss provisions on individual REO properties as declines
in market value occur and to provide a general allowance for losses associated
with risks inherent in the REO portfolio. In evaluating the adequacy of the
allowance for foreclosed real estate losses, Management considers the market
value of specific real estate assets in relationship to their book values, as
well as the potential for further market value declines.
LOAN SERVICING FEES AND RELATED RECEIVABLES: The Bank retains and services
certain mortgage loans that have been originated and sold to investors. Fees
earned for servicing loans owned by investors are reported as income when the
related mortgage loan payments are collected. Loan servicing costs are charged
to expense as incurred.
When mortgage loans are sold, the gain or loss on the transaction is
adjusted to recognize an interest-only strip receivable. In general, this
receivable represents the present value of the servicing fee rate that exceeds
the contractually specified servicing fee rate over the estimated life of the
underlying mortgage loans. The interest-only strip receivable is amortized as
an adjustment to future loan servicing fee income using the interest method
over the remaining contractual term, adjusted for estimated mortgage loan
prepayments.
On Jan. 1, 1997, the Bank adopted SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which,
among other items, provides guidance for establish-
- --------------------------------------------------------------------------------
45
30
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ing, amortizing and valuing mortgage servicing rights. See Impact of Recently
Issued Accounting Standards following for further details. SFAS No. 125
superseded SFAS No. 122, Accounting for Mortgage Servicing Rights, and did not
materially alter the accounting for mortgage servicing rights from SFAS No.
122.
For loans that the Bank originates, and sells or securitizes with
servicing retained, and where the resulting MBS are classified by the Bank as
available for sale, SFAS No. 125 requires that the carrying amount of the asset
be allocated between mortgage servicing rights and the loan receivable asset
based upon the relative fair values of those assets at the time of sale or
securitization. Mortgage servicing rights are assets or liabilities created
from the beneficial interests of servicing mortgage loans that have been sold
to investors. Beneficial interests of servicing mortgage loans include
contractual servicing fees, late charges and other ancillary income. When these
beneficial interests are greater than the adequate compensation needed by the
servicer to perform the servicing, the mortgage servicing rights are recorded
as assets. If the beneficial interests fall short of adequate compensation, the
mortgage servicing rights are recorded as liabilities. The amount recognized as
originated or purchased mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing income. See Note M-Prepaid
Expenses and Other Assets for further details. Mortgage servicing rights must
be stratified and evaluated for impairment. Stratums are based on one or more
of the predominant risk characteristics of the underlying mortgage loans. Also
see Note X-Fair Value of Financial Instruments for further details of the fair
value of mortgage servicing rights.
OFFICE PROPERTIES AND EQUIPMENT: Office properties and equipment are carried at
cost. Depreciation and amortization are computed principally using the
straight-line method over estimated useful lives of the assets.
EMPLOYEE BENEFITS: Net pension costs are based on the provisions of SFAS No.
87, Employers' Accounting for Pensions. The actuarially determined pension
benefits are based on the projected unit credit method. The projected future
costs of providing post-retirement benefits, such as health care and life
insurance, and post-employment benefits (other than retirement) are also
recognized as an expense as employees render service.
The Company has established an Employee Stock Ownership Plan ("ESOP") for
its employees. The Company applies the provisions of the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 93-6,
Employers' Accounting for Employee Stock Ownership Plans. SOP 93-6 requires
that the recognition of compensation expense for ESOP shares acquired after
1992 and not committed to be released before the beginning of 1994 be measured
based on the fair value of those shares when committed to be released to
employees, rather than based on their original cost.
As of Dec. 31, 1997, the ESOP had 364,963 shares acquired after Dec. 31,
1992 that have not been allocated to ESOP participants. In 1997, 3,194 shares
acquired after Dec. 31, 1992 were released, and approximately 34,758 shares are
scheduled to be released in 1998. The release of these shares in 1997 at the
fair market value increased compensation expense by $84,000. The impact on net
income in 1998 and in future periods of the release of these shares will depend
on future prices of St. Paul Bancorp stock. In addition, under SOP 93-6, these
unallocated shares are not considered outstanding and were excluded from the
earnings per share ("EPS") calculation beginning in 1994. Also, under SOP 93-6,
dividends on the unearned ESOP shares were reported as a reduction of accrued
interest on the ESOP borrowing rather than as a reduction of retained earnings.
The ESOP borrowing is reported as a liability on the Company's Statement of
Financial Condition; this liability will be reduced as the ESOP repays the
borrowing. The unearned ESOP shares are reported as a reduction of
stockholders' equity; this contra-equity account will be reduced as the
unearned shares are released to the participants.
Shares acquired by the ESOP prior to 1994 are accounted for in
accordance with the AICPA SOP 76-3, Accounting Practices for Certain Employee
Stock Ownership Plans. Compensation expense was charged for the contributions
made by the Bank to service the ESOP borrowing and other contributions approved
by the Company. The ESOP borrowing is reported as a liability and a reduction
in stockholders' equity on the Company's Statement of Financial Condition. Both
the liability and contra-equity accounts are reduced as the borrowing is
repaid. In 1997, the remaining shares accounted for under SOP 76-3 were
released to participants, and beginning in 1998, all shares will be accounted
for under SOP 93-6.
The Company maintains stock option plans for the benefit of directors,
officers and employees of the Company and its subsidiaries. The Company
accounts for stock options in accordance with Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Under APB No.
25, compensation expense is recorded for the difference, if any, between the
exercise price of the stock-based award and the market price of the underlying
stock at the date of grant. Because the Company grants stock options at an
exercise price that equals the market value of the Company stock on the date of
grant, no compensation expense is recorded.
The Company continues to use APB No. 25 for stock options and provides the
required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based
Compensation. See Note R-Stock Option Plans for further details.
INCOME TAXES: The Company files a consolidated tax return with its wholly-owned
subsidiaries. The intercompany settlement of taxes is based on a tax sharing
agreement that generally allocates taxes to each entity based upon a separate
return basis. The Company provides for income taxes based upon the provisions
of SFAS No. 109, Accounting for Income Taxes. The provision for income tax
expense is determined using the liability method. Under this method, deferred
tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Deferred taxes arise because certain
transactions affect the determination of taxable income for financial reporting
purposes in periods different from the period in which the transactions affect
taxable income for tax return purposes. Current tax expense is provided based
upon the actual tax liability incurred for tax return purposes.
- --------------------------------------------------------------------------------
46
31
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses certain derivative financial
instruments in its operations. These financial instruments include interest
rate exchange agreements and forward loan sales commitments and are used as
risk management tools to hedge certain assets and liabilities. Interest rate
exchange agreements involve the receipt of floating rate amounts in exchange
for fixed rate payments over the life of the agreements, without exchange of
the underlying notional amount. These agreements are accounted for on an
accrual basis. The differential to be paid or received is accrued as interest
rates change and recognized as an adjustment to interest income or interest
expense related to the hedged asset or liability. The related amount payable to
or receivable from counterparties is included in other liabilities or assets.
The recognition of any gain or loss on termination of these agreements will be
dependent on the disposition of the related hedged asset or liability. The fair
values of these agreements are not recognized in the primary financial
statements. See Note T-Financial Instruments with Off-Balance Sheet Credit Risk
for further details of the interest rate exchange agreements. Market losses of
forward loan sale commitments are included in the Statements of Income. The
fair value of all derivative financial instruments are disclosed in Note X-Fair
Value of Financial Instruments in accordance with SFAS No. 119, Disclosures
About Derivative Financial Instruments and Fair Value of Financial Instruments.
EARNINGS PER SHARE: On Dec. 31, 1997, the Company adopted SFAS No. 128,
Earnings per Share. Under SFAS No. 128, the Company changed the method used to
compute earnings per share and restated all prior periods. The Company now
reports basic and diluted earnings per share in the place of the previously
reported primary and fully diluted earnings per share. The computation of basic
earnings per share excludes the dilutive effect of common stock equivalents.
Stock options issued to employees and directors represent the only common stock
equivalent of the Company. Diluted earnings per share reflect the potential
dilutive effect of stock options, computed using the treasury stock method and
the average market price of the Company's common stock over the period. Diluted
earnings per share approximates the previously reported primary earnings per
share.
In accordance with SOP 93-6 and beginning in 1994, unallocated ESOP shares
were not considered outstanding for the calculation of earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, Disclosures About Fair Value
of Financial Instruments, as amended by SFAS No. 119, Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based upon estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including discount rates and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and may not be realizable in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
For this reason and others, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: In 1997, the Company adopted
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement provides accounting and
reporting standards for the sale, securitization, and servicing of receivables
and other financial assets and the extinguishment of liabilities. The adoption
of this Statement did not affect operations in a material way. The
implementation of some of the provisions of this Statement have been delayed
until 1998 as required by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This Statement consolidates existing guidance on
disclosures about the Company's capital structure into one Statement. Because
the Company already makes the disclosures required by this Statement, the
adoption of this Statement had no impact on the financial statements.
Also in 1997, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. The provisions of this Statement become effective in 1998; however,
earlier adoption was allowed. This Statement establishes standards for the
reporting and display of comprehensive income and its components in the full
set of financial statements. This Statement affects the display of
comprehensive income in the financial statements and does not address
recognition or measurement of comprehensive income and its components. The
adoption of this Statement required the reclassification of prior comparable
periods.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the reporting of financial information from operating segments in annual and
interim financial statements. This Statement requires that financial
information be reported on the basis that it is reported internally for
evaluating segment performance and deciding how to allocate resources to
segments. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will have
no material impact on the financial statements. The Company will adopt SFAS No.
131 when the Statement becomes effective in 1998.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the 1997 presentation. All share and per share amounts have been restated
for a three-for-two stock split distributed to shareholders on July 14, 1997
and a five-for-four stock split distributed to shareholders on Jan. 14, 1997.
- --------------------------------------------------------------------------------
47
32
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE B
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
The following tables present the amortized cost and fair values of cash and
cash equivalents as of Dec. 31, 1997 and 1996.
Dollars in thousands Dec. 31, 1997
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
BY TYPE:
Cash and amounts due from
depository institutions 89,429 $ - $ - $ 89,429
Fed funds sold and interest-
bearing bank balances 59,094 - - 59,094
Short-term cash
equivalent securities:
U.S. Treasury securities 51,948 24 - 51,972
Commercial paper 4,188 - - 4,188
- --------------------------------------------------------------------------------
Total cash and cash
equivalents $204,659 $24 $ - $204,683
================================================================================
Dollars in thousands Dec. 31, 1996
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
BY TYPE:
Cash and amounts due from
depository institutions $ 98,137 $ - $ - $ 98,137
Fed funds sold and interest-
bearing bank balances 75,572 - - 75,572
Short-term cash
equivalent securities:
U.S. Treasury securities 14,455 - 4 14,451
Commercial paper 2,048 - - 2,048
- --------------------------------------------------------------------------------
Total cash and cash
equivalents $190,212 $ - $ 4 $190,208
================================================================================
Included in "cash and amounts due from depository institutions" at Dec.
31, 1997 was a $34.6 million reserve requirement maintained with the Federal
Reserve Bank of Chicago.
NOTE C
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
The following tables present the amortized cost and fair values of marketable
debt and equity investment securities at Dec. 31, 1997 and 1996. All these
securities are classified as available for sale.
Dollars in thousands Dec. 31, 1997
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Treasury securities $30,146 $ 40 $ 12 $30,174
U.S. agency securities 1,000 - - 1,000
Equity securities 10,000 400 - 10,400
- -----------------------------------------------------------------------------
Total investment securities $41,146 $440 $ 12 $41,574
=============================================================================
Dollars in thousands Dec. 31, 1996
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Treasury securities $39,230 $ - $150 $39,080
U.S. agency securities 10,010 13 - 10,023
- -----------------------------------------------------------------------------
Total investment securities $49,240 $ 13 $150 $49,103
=============================================================================
The following table summarizes, by amortized cost and fair value, the
maturity distribution of investment securities as of Dec. 31, 1997 based upon
contractual maturities. This table does not include marketable-equity
securities, with an amortized cost and fair value of $10.0 million and $10.4
million, respectively, which have no stated maturity date.
Dollars in thousands MATURITY SCHEDULE AS OF DEC. 31, 1997
- -----------------------------------------------------------------------------
1 Year 1 Year to
or Less 5 Years Total
- -----------------------------------------------------------------------------
Amortized cost $20,160 $10,986 $31,146
Fair value $20,149 $11,025 $31,174
Weighted average yield 5.17% 5.98% 5.45%
=============================================================================
No sales of investment securities occurred in 1997 or 1995. During 1996,
$10.0 million of investment securities were sold, resulting in a gross gain of
$63,000 and a tax liability of $21,000.
U.S. Treasury securities are used as collateral for tax deposits and ESOP
borrowings. The amortized cost of U.S. Treasury securities used as collateral
at Dec. 31, 1997 and 1996 was $1.2 million and $10.2 million, respectively.
NOTE D
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
The following tables present the amortized cost and fair values of MBS at Dec.
31, 1997 and 1996, including securities issued by Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC"), as
well as Collateralized Mortgage Obligations ("CMOs"). The amortized costs at
December 31, 1997 and 1996 included $2.1 million and $3.6 million,
respectively, of net purchase premiums.
Dollars in thousands Dec. 31, 1997
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------
AVAILABLE FOR SALE:
FNMA $ 385,201 $ 5,906 $ 977 $ 390,130
FHLMC 81,275 - 1,391 79,884
Privately issued 15,108 40 991 14,157
CMOs 7,237 15 18 7,234
- -----------------------------------------------------------------------------
488,821 5,961 3,377 491,405
HELD TO MATURITY:
Privately issued 318,503 4,700 2,157 321,046
CMOs 78,618 785 - 79,403
FNMA 29,337 93 7 29,423
- -----------------------------------------------------------------------------
426,458 5,578 2,164 429,872
- -----------------------------------------------------------------------------
Total MBS $ 915,279 $11,539 $ 5,541 $ 921,277
=============================================================================
Dollars in thousands Dec. 31, 1997
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------
Available for sale:
FNMA $ 484,728 $ 9,166 $ 2,276 $ 491,618
FHLMC 106,038 - 2,040 103,998
Privately issued 23,331 182 1,233 22,280
CMOs 2,766 19 12 2,773
- -----------------------------------------------------------------------------
616,863 9,367 5,561 620,669
HELD TO MATURITY:
Privately issued 410,828 341 3,100 408,069
CMOs 92,058 - 1,947 90,111
FNMA 39,427 30 135 39,322
- -----------------------------------------------------------------------------
542,313 371 5,182 537,502
- -----------------------------------------------------------------------------
Total MBS $1,159,176 $ 9,738 $10,743 $1,158,171
=============================================================================
- --------------------------------------------------------------------------------
48
33
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table summarizes, by amortized cost and fair value, the
contractual maturities of MBS held as of Dec. 31, 1997:
Dollars in thousands
- --------------------------------------------------------------------------------------------
MATURITY SCHEDULE AS OF DEC. 31, 1997
- --------------------------------------------------------------------------------------------
1 Year 1 Year to 5 Years to More Than
or Less 5 Years 10 Years 10 Years Total
- --------------------------------------------------------------------------------------------
AMORTIZED COST:
Available for sale $ 7,753 $37,172 $ 64,149 $379,747 $488,821
Held to maturity 8,322 39,782 68,283 310,071 426,458
- --------------------------------------------------------------------------------------------
$16,075 $76,954 $132,432 $689,818 $915,279
============================================================================================
FAIR VALUE:
Available for sale $ 7,775 $37,283 $ 64,344 $382,003 $491,405
Held to maturity 8,443 40,354 69,253 311,822 429,872
- --------------------------------------------------------------------------------------------
$16,218 $77,637 $133,597 $693,825 $921,277
============================================================================================
Weighted
average yield 6.88% 6.88% 6.88% 6.87% 6.87%
============================================================================================
The amortized cost of MBS used to collateralize certain deposits,
securities sold under agreements to repurchase, recourse arrangements and
various other borrowings was $398.2 million at Dec. 31, 1997 and $95.4 million
at Dec. 31, 1996.
MBS totalling $292.2 million and $391.9 million at Dec. 31, 1997 and 1996,
respectively, represented loans originated, securitized and serviced by the
Bank.
During 1997, no available for sale MBS were sold. During 1996, $27.5
million of available for sale MBS were sold, resulting in a gross gain of
$855,000 and a tax liability of $289,000. During 1995, $56.9 million of
available for sale MBS were sold, resulting in a gross gain of $907,000, a
gross loss of $70,000 and a tax liability of $304,000. No held to maturity MBS
were sold during 1997, 1996 or 1995.
NOTE E
- --------------------------------------------------------------------------
LOANS RECEIVABLE
Loans receivable as of Dec. 31, 1997 and 1996 are summarized as follows:
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------
REAL ESTATE LOANS:
1-4 family units $2,243,746 $1,751,545
Multifamily units 914,357 991,278
Commercial 64,071 54,985
Land and land development - 1,633
- --------------------------------------------------------------------------
3,222,174 2,799,441
- --------------------------------------------------------------------------
CONSUMER LOANS:
Automobile 10,716 16,017
Personal 1,180 1,193
Secured by deposits 1,015 1,169
Home improvement 136 282
Education 44 210
- --------------------------------------------------------------------------
13,091 18,871
- --------------------------------------------------------------------------
Contract amount of loans receivable 3,235,265 2,818,312
ADD (DEDUCT):
Net unearned premiums (discounts) 5,196 (79)
Net deferred loan fees (623) (152)
- --------------------------------------------------------------------------
Loans receivable 3,239,838 2,818,081
- --------------------------------------------------------------------------
Less: accumulated provision for
loan losses-Note F (34,395) (35,965)
- --------------------------------------------------------------------------
Net loans receivable $3,205,443 $2,782,116
==========================================================================
Combined weighted average
yield of loans receivable 7.49% 7.66%
==========================================================================
The Company classifies loans in its portfolio as impaired in accordance
with SFAS No. 114, as amended by SFAS No. 118. The following schedules provide
a rollforward of the total recorded investment in impaired loans, the recorded
investment in impaired loans for which there is no specific allowance for
credit losses and the recorded investment in impaired loans for which there is
a related specific allowance during 1997 and 1996. Most of the Company's
impaired loans are income producing property loans.
The Amount of the Recorded Investment The Amount of the Recorded Investment
The Total Recorded Investment in for Which There is No Related for Which There is a Related
Impaired Loans "Specific" Allowance for Credit Loss "Specific" Allowance for Credit Loss
- --------------------------------------------- ---------------------------------------------- --------------------------------------
Total Total Total
Performing Nonperforming Impaired Performing Nonperforming Impaired Performing Nonperforming Impaired
Dollars in thousands Loans Loans Loans Loans Loans Loans Loans Loans Loans
- ------------------------------------------------------------- ----------------------------------- --------------------------------
Balance at Dec. 31, 1995 $ 31,065 $ 4,176 $ 35,241 $ 28,073 $ 4,010 $ 32,083 $ 2,992 $ 166 $ 3,158
New Impairments 48,093 17,415 65,508 43,022 15,448 58,470 5,071 1,967 7,038
Transfers to REO - (19,458) (19,458) - (19,458) (19,458) - - -
Charge-offs (2,070) (2,133) (4,203) - - - (2,070) (2,133) (4,203)
Improvement in Valuation (10,661) - (10,661) (10,494) - (10,494) (167) - (167)
Repayments (5,007) - (5,007) (4,440) - (4,440) (567) - (567)
- ------------------------------------------------------------- ----------------------------------- --------------------------------
Balance at Dec. 31, 1996 61,420 - 61,420 56,161 - 56,161 5,259 - 5,259
New Impairments 1,069 - 1,069 718 - 718 351 - 351
Transfers to REO - (1,920) (1,920) - (1,920) (1,920) - - -
Transfers to nonperforming (10,579) 10,579 - (9,803) 9,803 - (776) 776 -
Charge-offs (1,568) - (1,568) 57 - 57 (1,625) - (1,625)
Improvement in Valuation (18,981) (7,710) (26,691) (18,060) (7,710) (25,770) (921) - (921)
Repayments (10,392) (949) (11,341) (9,583) (173) (9,756) (809) (776) (1,585)
- ------------------------------------------------------------- ----------------------------------- --------------------------------
BALANCE AT DEC. 31, 1997 $20,969 $ - $20,969 $19,490 $ - $19,490 $1,479 $ - $1,479
============================================================= =================================== ================================
- --------------------------------------------------------------------------------
49
34
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
The following table presents the average recorded investment in impaired
loans during the years ending Dec. 31, 1997, 1996 and 1995 and the amount of
interest income recorded on a cash basis during that same period. All interest
income recorded on impaired loans was from cash received.
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------------------
Interest Interest Interest
Income Income Income
Average Recorded Average Recorded Average Recorded
Recorded on a Recorded on a Recorded on a
Investment Cash Basis Investment Cash Basis Investment Cash Basis
- --------------------------------------------------------------------------------------------
Performing
loans $34,538 $2,525 $48,204 $3,535 $35,817 $3,013
Nonperforming
loans 2,643 - 1,330 - 1,518 22
- --------------------------------------------------------------------------------------------
Total $37,181 $2,525 $49,534 $3,535 $37,335 $3,035
============================================================================================
At Dec. 31, 1997, the Bank had $8.8 million of nonperforming loans that
were not subject to the provisions of SFAS No. 114 because they were considered
part of large, homogeneous loan portfolios.
As of Dec. 31, 1997, the Bank had $857,000 of trouble debt restructured
loans ("TDRs"). All loans reported as TDRs at Dec. 31, 1997 were performing in
accordance with the terms of the debt restructurings. Interest income of
$25,000 was recorded on TDRs during 1997 that equaled the amount of cash
payments received. At Dec. 31, 1996, the Bank reported no troubled debt
restructured loans.
NOTE F
- -------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Dollars in thousands
- ----------------------------------------------------------------------------------
Real Estate Consumer Total
Loans Loans Loans
- ----------------------------------------------------------------------------------
Balance at Dec. 31, 1994 $ 41,484 $ 712 $ 42,196
Provision for losses 1,900 - 1,900
Charge-offs (7,754) (125) (7,879)
Recoveries 2,346 56 2,402
Transfers 48 (48) -
- ----------------------------------------------------------------------------------
Balance at Dec. 31, 1995 38,024 595 38,619
Provision for losses 1,750 - 1,750
Charge-offs (5,044) (69) (5,113)
Recoveries 650 59 709
Transfers 116 (116) -
- ----------------------------------------------------------------------------------
Balance at Dec. 31, 1996 35,496 469 35,965
Provision for losses - - -
Charge-offs (2,661) (120) (2,781)
Recoveries 1,197 14 1,211
Transfers (6) 6 -
- ----------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1997 $34,026 $ 369 $34,395
==================================================================================
See Note A-Summary of Significant Accounting Policies for a description of
the Company's accounting policy for the allowance for loan losses.
NOTE G
- ---------------------------------------------------------------
LOANS HELD FOR SALE AND LOANS SERVICED FOR OTHERS
Loans held for sale as of Dec. 31, 1997 and 1996 are as follows:
Dollars in thousands 1997 1996
- -----------------------------------------------------------------------------------------
Cost Fair Value Cost Fair Value
- -----------------------------------------------------------------------------------------
1-4 family real estate loans $ 9,266 $ 9,329 $ 2,836 $ 2,865
Education loans 7,762 7,762 9,156 9,156
- ----------------------------------------------------------------------------------------
Loans held for sale $17,028 $17,091 $11,992 $12,021
========================================================================================
The following are related mortgage servicing portfolio statistics at Dec.
31, 1997, 1996 and 1995:
Dollars in thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Total mortgage servicing portfolio $2,679,505 $2,893,201 $2,960,382
Loans serviced for others 715,962 862,422 528,488
Loans serviced and held in MBS portfolio 292,228 391,919 31,635
- --------------------------------------------------------------------------------------------------------
NOTE H
- --------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable as of Dec. 31, 1997 and 1996 consisted of
the following:
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------------------------------
Accrued interest receivable:
Investments $ 1,157 $ 1,501
MBS 5,817 7,341
Loans receivable 19,339 16,903
- -------------------------------------------------------------------------------------------------------
Total accrued interest receivable $26,313 $25,745
=======================================================================================================
NOTE I
- ----------------------------------------------------------------------
FORECLOSED REAL ESTATE
The components of foreclosed real estate at Dec. 31, 1997 and 1996 are
as follows:
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------------------------------
REO $1,515 $2,918
Less allowance for REO losses (157) (284)
- -------------------------------------------------------------------------------------------------------
Total foreclosed real estate $1,358 $2,634
=======================================================================================================
The following schedule provides a rollforward of the allowance for REO
losses:
Dollars in thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Balance at Jan. 1 $ 284 $ 1,974 $ 2,019
Provision for losses (100) 868 821
Charge-offs (130) (2,662) (1,143)
Recoveries 103 104 277
- -------------------------------------------------------------------------------------------------------
Balance at Dec. 31 $ 157 $ 284 $ 1,974
=======================================================================================================
The following schedule provides details of the results of operations on
foreclosed real estate for the years ended Dec. 31, 1997, 1996 and 1995:
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Operating income on foreclosed real estate $ 133 $ 1,079 $ 1,491
Operating expense on foreclosed real estate 335 1,472 2,022
- --------------------------------------------------------------------------------------------------------
Net operating loss on foreclosed real estate (202) (393) (531)
Gain on sales of foreclosed real estate 403 46 193
Provision for losses on REO 100 (868) (821)
- --------------------------------------------------------------------------------------------------------
Gain (loss) on foreclosed real estate $ 301 $(1,215) $(1,159)
========================================================================================================
50
35
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- ------------------------------------------------------------------------------
NOTE J
- ---------------------------------------------------------------
REAL ESTATE HELD FOR DEVELOPMENT OR INVESTMENT
Income from real estate development or investment operations is
summarized as follows:
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Sales of real estate $14,164 $12,956 $15,539
Cost of sales 10,025 10,439 12,732
- ----------------------------------------------------------------------------------------------------
Income from real estate development 4,139 2,517 2,807
Other income 94 42 119
General and administrative expense 1,310 1,502 1,396
Interest income, net of interest expense 916 123 956
- ----------------------------------------------------------------------------------------------------
Income before income taxes $ 3,839 $ 1,180 $ 2,486
====================================================================================================
Interest capitalized to the balance of real estate held for development or
investment amounted to $1.0 million, $567,000 and $720,000 during 1997, 1996
and 1995, respectively.
NOTE K
- -------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK STOCK
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is required
to maintain a specified level of investment in FHLB stock. The capital stock is
issued at $100 par, and the required amount of ownership is generally
calculated as a percentage of aggregate outstanding mortgages or borrowings.
The investment in FHLB stock is carried on the Consolidated Statements of
Financial Condition at cost.
Dividends earned on FHLB stock were $2.5 million, $2.4 million and $2.3
million in 1997, 1996 and 1995, respectively. Dividend income is included with
other investment income on the Consolidated Statements of Income.
FHLB stock is used as collateral for FHLB advances.
NOTE L
- ------------------------------------------------------------------------------
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1997 and 1996 are summarized as
follows:
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------
COST:
Land $ 11,127 $ 8,435
Buildings and improvements 44,008 38,536
Furniture, fixtures and equipment 42,621 39,786
Leasehold improvements 3,524 3,207
- -------------------------------------------------------------------------
101,280 89,964
Less allowances for depreciation and amortization 49,145 42,678
- -------------------------------------------------------------------------
Total office properties and equipment $ 52,135 $47,286
=========================================================================
The Bank has operating leases on certain office properties. Rent expense
incurred in connection with these leases was $2.6 million, $2.7 million and
$2.3 million in 1997, 1996 and 1995, respectively.
Minimum future operating lease commitments are summarized as
follows:
Dollars in thousands Year ending Dec. 31
- --------------------------------------------------------------
1998 $ 1,619
1999 931
2000 786
2001 672
2002 489
Later years 5,955
- -------------------------------------------------------
Total $10,452
=======================================================
NOTE M
- ---------------------------------------------------------------
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets at Dec. 31, 1997 and 1996 are
summarized as follows:
Dollars in thousands 1997 1996
- -------------------------------------------------------------------------------------------------------
Deferred tax asset (net)-Note P $11,763 $8,777
Mortgage servicing rights 3,045 3,547
Excess of purchase price over fair value
of assets acquired 1,127 1,248
Prepaid FDIC insurance premiums 511 530
Excess servicing fee receivable 286 376
Other prepaid assets and deferred charges 20,732 19,632
- -------------------------------------------------------------------------------------------------------
Total prepaid expenses and other assets $37,464 $34,110
=======================================================================================================
The amortization of the excess of purchase price over fair value of assets
acquired (i.e., goodwill) amounted to $121,000 in 1997 and 1996 and $203,000 in
1995.
During 1997, the Company adopted SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. See Note
A-Summary of Significant Accounting Policies for further details. The following
table provides a rollforward of mortgage servicing rights for the years ended
Dec. 31, 1997 and 1996:
Dollars in thousands 1997 1996
- ------------------------------------------------------------------------
Balance at Jan. 1 $3,547 $ 94
Additions 326 3,528
Amortization (735) (75)
Valuation Allowance (93) -
- ------------------------------------------------------------------------
Balance at Dec. 31 $3,045 $3,547
========================================================================
For the purpose of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Bank stratifies these rights based on two
predominant risk characteristics-property type (i.e., 1-4 family vs. income
producing property) and interest rate type (i.e., fixed vs. adjustable).
Impairment is recognized through a valuation allowance related to each
individual stratum. During 1997, valuation allowance activity included $146,000
of additions charged to operations due to impairment and $53,000 of reductions
of impairment credited to operations. This activity related entirely to the 1-4
family adjustable rate stratum and was caused by higher than anticipated loan
prepayments. There was no valuation allowance activity during 1996. The fair
value of mortgage servicing rights was $3.2 million and $3.7 million at Dec.
31, 1997 and 1996, respectively. See Note X-Fair Value of Financial
Instruments.
- --------------------------------------------------------------------------------
51
36
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- ------------------------------------------------------------------------------
NOTE N
- ---------------------------------------------------------------------
DEPOSITS
Deposit balances at Dec. 31, 1997 and 1996 are summarized as follows:
Dollars in thousands 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average Interest Rate
as of Dec. 31 Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
CHECKING, SAVINGS AND MONEY MARKET ACCOUNTS:
Interest-bearing checking 1.40% 1.74% $ 227,879 6.9% $ 236,003 7.1%
Noninterest-bearing checking - - 154,747 4.7 134,858 4.1
Other noninterest-bearing accounts - - 39,275 1.2 37,573 1.1
Savings accounts 2.31 2.43 674,058 20.5 680,633 20.4
Money market accounts 3.77 3.60 219,336 6.7 217,999 6.5
- ------------------------------------------------------------------------------------------------------------------------------
Checking, Savings and Money Market Accounts 2.06 2.18 1,315,295 40.0 1,307,066 39.2
CERTIFICATES OF DEPOSIT: (a)
3 months and under 4.28 4.00 24,040 0.7 25,146 0.8
4 months 4.00 4.00 2,912 0.1 4,811 0.1
5 months 5.27 5.10 11,456 0.3 22,152 0.7
6 months 5.25 5.13 214,474 6.6 242,860 7.3
7 months 5.78 5.50 145,691 4.4 127,106 3.8
9 months 5.36 5.24 14,145 0.4 22,587 0.7
11 months 5.69 5.95 250 * 749,311 22.5
12 months 5.31 5.19 200,199 6.1 193,892 5.8
13 months 5.88 5.87 725,065 22.2 21,128 0.6
15 months 5.83 5.27 79,227 2.4 5,143 0.1
18 months 5.66 5.61 72,935 2.2 80,133 2.4
24 months 5.77 5.73 65,407 2.0 55,358 1.7
30 months 5.21 5.31 53,737 1.6 84,875 2.5
36 months 5.77 5.23 54,053 1.6 61,059 1.8
42 months 5.60 5.49 2,587 0.1 3,030 0.1
48 months 5.81 5.62 10,905 0.3 10,133 0.3
60 months 5.57 5.55 205,336 6.4 228,970 6.9
84-120 months 6.09 6.08 59,934 1.8 61,316 1.8
Jumbo accounts 3.01 4.74 478 * 3,339 0.1
Other 9.47 9.21 26,302 0.8 27,640 0.8
- ------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit 5.74 5.68 1,969,133 60.0 2,029,989 60.8
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits (b) 4.26% 4.31% $3,284,428 100.0% $3,337,055 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
Accrued interest $ 4,793 $ 20,720
- ------------------------------------------------------------------------------------------------------------------------------
Total deposit-related liabilities $3,289,221 $3,357,775
==============================================================================================================================
* Less than 0.1%.
(a) Based upon original maturities.
(b) Includes $326.1 million and $299.4 million of deposits in
denominations of $100,000 or more at Dec. 31, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
Interest expense by category of deposit is summarized as follows:
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Checking accounts $ 3,781 $ 4,098 $ 4,218
Savings accounts 16,570 16,750 17,502
Money market accounts 8,031 6,938 6,703
Certificates of deposit 113,831 111,647 104,318
- ---------------------------------------------------------------------------------------------------------------------
$142,213 $139,433 $132,741
=====================================================================================================================
The following table presents the scheduled maturity of certificates of
deposit in each of the next five years and thereafter:
Dollars in thousands
- ----------------------------------------------------------------------------
Scheduled Weighted
Maturity Average Rate
- ----------------------------------------------------------------------------
YEAR ENDING DEC. 31,
1998 $1,573,686 5.63%
1999 208,066 5.76
2000 64,181 6.36
2001 38,722 6.27
2002 38,027 6.69
2003 and thereafter 46,451 7.62
- ----------------------------------------------------------------------------
$1,969,133 5.74%
============================================================================
NOTE O
- ----------------------------------------------------------------
BORROWINGS
Borrowings consisted of the following at Dec. 31, 1997 and 1996:
Dollars in thousands 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Amount Average Amount Average
Borrowed Interest Rate Borrowed Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
SHORT-TERM:
FHLB advances $ 40,000 5.92% $315,314 5.76%
Securities sold under
agreements to repurchase 330,000 5.81 50,000 5.49
Capital lease obligations - - 1,353 34.95
ESOP borrowings 203 8.50 187 8.25
- ---------------------------------------------------------------------------------------------------------------------
370,203 5.82 366,854 5.82
LONG-TERM:
FHLB advances 301,085 5.82 141,085 6.32
Senior notes (net of unamortized
discount in 1997-$1,531) 98,469 7.43 - -
Subordinated notes (net of
unamortized discount in
1996-$687) - - 33,813 8.79
Mortgage-backed notes 16,400 8.54 16,400 8.54
ESOP borrowings 2,901 8.50 3,092 8.25
- ---------------------------------------------------------------------------------------------------------------------
418,855 6.33 194,390 6.96
- ---------------------------------------------------------------------------------------------------------------------
Total borrowings $789,058 6.09% $561,244 6.22%
=====================================================================================================================
- -------------------------------------------------------------------------------
52
37
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table presents the maturity distribution of borrowings
at Dec. 31, 1997:
Dollars in thousands YEAR-END 1997 BORROWINGS BY MATURITY
- ----------------------------------------------------------------------------------------------------------------
After
1998 1999 2000 2001 2002 2002 Total
- ----------------------------------------------------------------------------------------------------------------
SHORT-TERM:
FHLB advances $ 40,000 $ - $ - $ - $ - $ - $ 40,000
Securities sold under agreements to repurchase 330,000 - - - - - 330,000
ESOP borrowings 203 - - - - - 203
- ----------------------------------------------------------------------------------------------------------------
370,203 - - - - - 370,203
LONG-TERM:
FHLB advances - 150,000 50,000 248 100,000 837 301,085
Senior notes - - - - - 98,469 98,469
Mortgage-backed notes - 16,400 - - - - 16,400
ESOP borrowings - 218 205 253 273 1,952 2,901
- ----------------------------------------------------------------------------------------------------------------
- 166,618 50,205 501 100,273 101,258 418,855
- ----------------------------------------------------------------------------------------------------------------
Total borrowings $370,203 $166,618 $50,205 $501 $100,273 $101,258 $789,058
================================================================================================================
Weighted average rate 5.82% 6.16% 6.51% 7.84% 5.37% 7.41% 6.09%
================================================================================================================
FHLB ADVANCES: As a member of the FHLB System, the FHLB of Chicago is allowed
to extend credit to the Bank through advances and letters of credit of up to
20% of the Bank's total assets. The Bank maintains qualifying loans in its
portfolio of at least 170% of outstanding advances as collateral for notes
payable to the FHLB of Chicago. The FHLB stock is also pledged as collateral.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The Bank enters into sales of
securities sold under agreements to repurchase with nationally recognized
securities dealers.
Securities sold under agreements to repurchase can have varying
maturities. In exchange for the loan, the Bank pledges the designated
collateral to the securities dealer. At Dec. 31, 1997, the collateral securing
these borrowings had a carrying amount of $368.1 million and a fair value of
$372.5 million. As of Dec. 31, 1997, the Bank had approximately $1.0 billion of
unused credit lines available to borrow under agreements to repurchase.
SENIOR NOTES: In February 1997, the Company issued $100 million of unsecured
7.125% Senior Notes. The notes were used to redeem the $34.5 million of
outstanding 8.25% subordinated notes and for general corporate purposes. The
notes will mature on Feb. 15, 2004 and may not be redeemed prior to maturity.
SUBORDINATED NOTES: In February 1993, the Company issued $34.5 million of 8.25%
subordinated notes scheduled to mature on Jan. 31, 2000. Under a call
provision, the notes were redeemed, at par, in March 1997. The write-off of
unamortized issuance costs produced the $403,000 extraordinary loss in 1997,
net of $207,000 of income taxes. The extraordinary item loss per share was
$0.01 for both basic and diluted earnings per share.
MORTGAGE-BACKED NOTES: The Bank had $16.4 million of mortgage-backed notes
outstanding as of Dec. 31, 1997 and 1996. The mortgage-backed notes are secured
by MBS held by an independent trustee. Collateral agreements require
maintaining an aggregate market value of not less than the amount necessary to
affect a maturity collateral substitution if necessary. At Dec. 31, 1997, the
collateral securing these notes had a carrying amount and fair value of
approximately $20.7 million and $20.3 million, respectively. At Dec. 31, 1996,
the collateral securing these notes had a carrying amount and fair value of
approximately $24.1 million and $23.6 million, respectively. As of Dec. 31,
1997, these notes had a "AAA" rating from Moody's Investors Service. The Bank
may issue up to an additional $400.0 million of such notes with varying terms
through an existing underwriting agreement, subject to market conditions and
collateral availability.
ESOP BORROWINGS: A noncontributory, leveraged employee stock ownership plan was
established by the Company in April 1987. The ESOP obtained, through another
financial institution, a $14.0 million line of credit, and at Dec. 31, 1997,
$3.1 million was outstanding under this line. See Note A-Summary of Significant
Accounting Policies for further details.
The line of credit is guaranteed by the Company, and amounts drawn under
the arrangement are secured by shares of Company stock owned by the ESOP and a
portion of the investment securities owned by the Company.
- --------------------------------------------------------------------------------
53
38
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At Dec. 31, 1997 and 1996, Company stock securing the borrowings had an
original cost of $2.9 and $3.1 million and fair values of $9.6 and $6.3
million, respectively. At Dec. 31, 1997 and 1996, the investment securities
securing the borrowings had a carrying amount, which approximated their fair
value, of $164,000 and $198,000, respectively.
CAPITAL LEASE OBLIGATIONS: In 1991, the Bank entered into a capital lease for
the use of a branch facility. The Bank exercised its option to purchase the
underlying property in January 1997 and extinguished this obligation.
LINE OF CREDIT: The Company has obtained a $20.0 million revolving unsecured
line of credit from another financial institution. The Company can elect the
interest rate on this borrowing to be either the prime rate or 75 basis points
over the 3-month LIBOR rate. No funds had been borrowed as of Dec. 31, 1997 or
1996.
NOTE P
- --------------------------------------------------------------------------------
INCOME TAXES
The following schedule summarizes the components of income tax expense for
1997, 1996 and 1995. The amounts reported as current and deferred income tax
expense and deferred income tax assets and liabilities for 1996 have been
restated to conform to the 1996 tax return, which was filed several months
after the end of the fiscal year. Total income tax expense is not affected by
the reclassification of current and deferred taxes.
For the Years Ended Dec. 31,
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX EXPENSE:
Current provision $28,088 $10,859 $20,358
Deferred expense (benefit) (2,661) 2,416 (1,349)
- --------------------------------------------------------------------------------
25,427 13,275 19,009
- --------------------------------------------------------------------------------
STATE INCOME TAX EXPENSE:
Current provision (252) (257) 1,947
Deferred expense (benefit) (87) 408 (219)
- --------------------------------------------------------------------------------
(339) 151 1,728
- --------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE:
Current provision 27,836 10,602 22,305
Deferred expense (benefit) (2,748) 2,824 (1,568)
- --------------------------------------------------------------------------------
Income taxes before extraordinary item $25,088 $13,426 $20,737
================================================================================
A reconciliation from expected federal income tax expense to consolidated
effective income tax expense before extraordinary item for the years ended Dec.
31, 1997, 1996 and 1995 is as follows:
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Federal income tax expense at
statutory rate (35%) $26,092 $13,889 $19,996
State tax expense (benefit),
net of federal taxes (220) 98 1,123
Other (784) (561) (382)
- --------------------------------------------------------------------------------
Income taxes $25,088 $13,426 $20,737
- --------------------------------------------------------------------------------
Effective income tax rate 33.7% 33.8% 36.3%
- --------------------------------------------------------------------------------
The sources of the differences in timing between items affecting the
recognition of income and expense for tax and financial statement purposes and
their resulting effect on income tax expense for the years ended Dec. 31, 1997,
1996 and 1995 are as follows:
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
General loan loss allowance $(1,315) $2,471 $ 1,028
Excess of tax accumulated provision
for losses over base year amount - - 118
Yield adjustments on interest-earning
assets and interest-bearing liabilities 284 50 (167)
Tax depreciation in excess of
book depreciation - (212) (424)
Prepaid expenses 12 (163) (1,091)
Accrued compensation and benefits (551) (543) (364)
Stock dividends on FHLB stock 21 (45) 231
Other, net (1,199) 1,266 (899)
- --------------------------------------------------------------------------------
Total $(2,748) $2,824 $(1,568)
- --------------------------------------------------------------------------------
The following schedule summarizes current and deferred income tax
liabilities and assets as of Dec. 31, 1997 and 1996, as restated to conform
with tax returns filed for the respective years.
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
INCOME TAX LIABILITIES AND (ASSETS):
Income taxes currently (receivable)/payable included
in "Other Assets" or "Other Liabilities" $ 160 $ (1,923)
- --------------------------------------------------------------------------------
Deferred income tax assets $(18,136) $(16,347)
Deferred income tax liabilities 6,373 7,570
- --------------------------------------------------------------------------------
Net deferred income tax assets included in
"Prepaid expenses and other assets" $(11,763) $ (8,777)
- --------------------------------------------------------------------------------
The sources of the deferred income tax assets and liabilities at Dec. 31, 1997
and 1996 are as follows:
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
General loan loss allowance $(13,049) $(11,734)
Accrued compensation and benefits (4,333) (3,782)
Other (754) (831)
- --------------------------------------------------------------------------------
Total deferred assets (18,136) (16,347)
Stock dividends on FHLB stock 1,446 1,425
Unrealized gain on available for sale securities 1,149 1,387
Tax depreciation in excess of book depreciation 719 719
Prepaid expenses 596 584
Yield adjustments on interest-earning assets
and interest-bearing liabilities 935 651
Excess tax accumulated provision for losses over
base year amount 207 207
Other 1,321 2,597
- --------------------------------------------------------------------------------
Total deferred liabilities 6,373 7,570
- --------------------------------------------------------------------------------
Net deferred tax asset $(11,763) $ (8,777)
- --------------------------------------------------------------------------------
Retained earnings at Dec. 31, 1997 and 1996 included approximately $49.2
million of income for which no deferred federal income tax liability has been
recognized. This amount represents earnings appropriated to bad debt reserves
and deducted for federal income tax purposes and is not available for payment
of cash dividends or other distributions to shareholders, including
distributions on redemption, dissolution or liquidation of the Bank without
incurring a tax liability. If triggered, the tax liability related to the
appropriated earnings would have been $18.6 million at both Dec. 31, 1997 and
1996.
- --------------------------------------------------------------------------------
54
39
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
NOTE Q
STOCKHOLDERS' EQUITY
HOLDING COMPANY: The Company's Certificate of Incorporation authorizes up to 40
million shares of common stock and up to 10 million shares of preferred stock.
Such preferred stock may rank prior to the common stock as to dividend rights,
liquidation preferences or both, and may have full or limited voting rights.
In 1992, the Company's Board of Directors adopted a Shareholder Rights
Plan that is designed to strengthen the Board's ability to act for the
stockholders in the event of an unsolicited bid to acquire control of the
Company. Each outstanding share of common stock currently is attached to one
Right under the Plan. If the Rights become exercisable, each Right initially
would entitle the holder (except the acquiring person or entity referred to
below) to purchase from the Company 0.356% of a share of Series A junior
participating preferred stock, par value $0.01 per share, at a price of $80.00,
subject to adjustment as provided in the Plan. If a person or entity becomes a
10% beneficial owner of the Company's common stock (other than through the
acquisition of newly issued shares directly from the Company), each holder of a
Right would be entitled to receive, in lieu of the preferred stock, at the
then-current exercise price of the Right, common stock (or, in certain
circumstances, cash, property or other securities of the Company) having a
value equal to two times the exercise price.
In general, the Rights become exercisable if another person or entity
without Board approval acquires 10% or more of the Company's outstanding common
stock, makes a tender offer for that amount of stock or files a regulatory
application for approval of a change in control of the Company. The acquiring
person or entity would not be entitled to exercise the Rights. These Rights
expire at the earliest of Nov. 13, 2002, redemption of the Rights by the
Company at a price of $0.01 per Right, or exchange of the Rights in accordance
with the Plan. The Rights will cause substantial dilution to a person or entity
attempting to acquire the Company without conditioning the offer on the Rights
being redeemed or a substantial number of Rights being acquired. At Dec. 31,
1997 and 1996, there were 134,578 and 136,662 shares of preferred stock
reserved for future exercise of the Rights, respectively.
As of Dec. 31, 1997 the Company had acquired 5,210,647 shares of its
outstanding common stock under share repurchase plans. Of the total amount
repurchased, 3.75 million of the shares were retired in 1997. The Company also
issued 221,439 shares previously reacquired in connection with the exercise of
stock options by officers and directors.
BANK: The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by the regulators that, if undertaken, could have a
direct material effect on the Bank's (and the Company's) financial statements.
Under capital adequacy guidelines and regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items calculated under regulatory accounting practices. The Bank's
capital amounts and classification also are subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets. Tier
I capital equals the capital of the Bank less certain intangible assets and the
net assets of non-includable subsidiaries. Total capital equals Tier I capital
plus the Bank's general allowance for loan losses, up to certain limits. As of
Dec. 31, 1997, Management believes that the Bank meets all capital adequacy
requirements to which it is subject.
As of Dec. 31, 1997 the Bank meets the requirements of the Office of
Thrift Supervision ("OTS") to be categorized as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based capital ratios,
Tier I risk-based ratios, and Tier I leverage ratios as set forth in the table
below. In addition to the Tier I leverage ratio, the Bank must maintain a ratio
of tangible capital to regulatory assets of 1.50%. As of Dec. 31, 1997 and
1996, the Bank's tangible capital ratio of 8.61% and 8.80%, respectively,
exceeded the minimum required ratio. The Bank's actual amounts and ratios are
also presented in the following table:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------
As of Dec. 31, 1997:
Total Capital (to Risk Weighted Assets) $413,080 17.12% >=$193,073 >=8.00% >=$241,341 >=10.00%
Tier I Capital (to Risk Weighted Assets) 382,879 15.85 >= 96,645 >=4.00 >= 144,967 >= 6.00
Tier I Capital (core) (to Regulatory Assets) 382,879 8.61 >= 177,939 >=4.00 >= 222,424 >= 5.00
As of Dec. 31, 1996:
Total Capital (to Risk Weighted Assets) $409,266 17.27% >=$189,562 >=8.00% >=$236,953 >=10.00%
Tier I Capital (to Risk Weighted Assets) 379,645 16.02 >= 94,787 >=4.00 >= 142,181 >= 6.00
Tier I Capital (core) (to Regulatory Assets) 379,645 8.80 >= 172,647 >=4.00 >= 215,809 >= 5.00
- -----------------------------------------------------------------------------------------------------------
55
40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following schedule reconciles stockholders' equity of the Company to
each of the components of regulatory capital of the Bank at Dec. 31, 1997 and
1996:
In thousands 1997 1996
- --------------------------------------------------------------------------
Stockholders' equity of the Company $417,912 $388,110
Less: capitalization of the Company
and non-Bank subsidiaries (27,904) (3,016)
- --------------------------------------------------------------------------
Stockholders' equity of the Bank 390,008 385,094
Less: unrealized gain on available for sale
investment securities, net of tax (1,623) (2,280)
Less: investment in non-includable subsidiaries (1,495) (1,567)
Less: intangible assets and other
non-includable assets (4,011) (1,602)
- --------------------------------------------------------------------------
Tangible and core capital 382,879 379,645
Plus: allowable general valuation allowances 30,201 29,621
- --------------------------------------------------------------------------
Risk-based capital $413,080 $409,266
==========================================================================
Regulatory rules currently impose limitations on all capital distributions
by savings institutions, including dividends, stock repurchase and cash-out
mergers. In 1997, the Bank paid dividends of 100% of net income to the Company.
The Bank intends to maintain the same level of dividends in 1998.
NOTE R
STOCK OPTION PLANS
The Company maintains two stock option programs for the benefit of employees,
officers and directors. The first program (the "Option Plan") is for the
benefit of directors, officers and other key employees of the Company and its
subsidiaries. A total of 6,740,625 shares of authorized but unissued common
stock was reserved for issuance under plans approved by shareholders. Under the
Option Plan, the Company may grant non-qualified stock options, stock
appreciation rights, restricted stock, performance shares and performance units
to key employees and nonemployee directors. As of Dec. 31, 1997, the Company
has issued only non-qualified stock options under this plan. During 1997,
200,813 non-qualified stock options were issued under this plan. The Option
Plan authorizes the Stock Option Committee of the Board of Directors to
administer the plan and make recommendations to award stock-based compensation
to key officers, directors and employees. Stock-based compensation is granted
at the discretion of the Stock Option Committee. Stock options are granted at
an option price equal to the fair market value of the Company's common stock on
the date of grant and have a 10-year term. Options granted to employees under
this plan are exercisable in respect of 50% of the number of shares on the
first anniversary of the date of grant and are exercisable in respect of an
additional 12.5% on each of the second, third, fourth and fifth anniversaries
of the date of grant. However, the options are 100% exercisable for any
employee who has completed five years of employment with the Company. Options
granted to directors become exercisable on the first anniversary of the date of
the grant. The options also become exercisable upon any merger or consolidation
of the Company in which the Company is not the surviving entity.
The second program (the "Equity Connection Plan") is for the benefit of
all employees of the Company and its subsidiaries. The Equity Connection Plan
was initiated in 1997, when a total of 412,500 shares of authorized but
unissued common stock was reserved for issuance. Under this plan the Company
may grant non-qualified stock options, stock appreciation rights, restricted
stock, performance shares and performance units to all full-time and part-time
employees. During 1997, the Company issued 395,700 non-qualified stock options
under this plan. The Equity Connection Plan authorizes the Stock Option
Committee of the Board of Directors to administer the plan and make
recommendations to award stock-based compensation to all employees of the
Company. Stock options are granted at an option price equal to the fair market
value of the Company's common stock on the date of grant and have a 10-year
term. Options granted under this plan are exercisable in respect of 50% of the
number of shares on the first anniversary of the date of grant and are
exercisable in respect of an additional 25% on each of the second and third
anniversaries of the date of grant. The options also become exercisable upon
any merger or consolidation of the Company in which the Company is not the
surviving entity.
The Company has elected to continue to apply Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock options, rather than the
alternative fair value accounting provided for under SFAS Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123, which was adopted during
1996, requires the use of option valuation models for measuring the
compensation cost of employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.3%, 6.9% and 6.0%; dividend yields of 1.5%, 1.7% and 1.3%; volatility factors
of the expected market price of the Company's common stock of .34, .37 and .38;
and a weighted-average expected life of the option of 5.0 years, 7.0 years and
7.0 years. The weighted-average fair value of options granted during 1997, 1996
and 1995 was $7.49, $5.26 and $5.25, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Compensation
costs that would have been charged against income under SFAS No. 123 would have
been $1.8 million, $3.6 million and $4.3 million during 1997, 1996 and 1995,
respectively. The amount recognized as compensation expense for 1997, 1996 and
1995 pro forma disclosures may not be representative of the pro forma net
income for future years, because options can vest over several years and
additional awards are generally made each year. The Company's pro forma
information is as follows:
Dollars in thousands, except per share amounts 1997 1996 1995
- ------------------------------------------------------------------------------
Pro forma net income $47,957 $23,948 $33,714
Pro forma earnings per share:
Basic $ 1.42 $ 0.71 $ 0.97
Diluted $ 1.37 $ 0.67 $ 0.92
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
56
41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A summary of the Company's stock option activity, and related information for
the years ended Dec. 31 follows:
1997 1996 1995
Weighted-Average Weighted-Average Weighted-Average
1997 Option Price 1996 Option Price 1995 Option Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at Jan. 1 3,773,252 $ 8.31 4,010,744 $ 6.69 3,475,152 $ 5.12
Granted 596,513 21.65 693,000 12.28 934,875 11.93
Exercised (1,024,376) 5.22 (911,361) 4.21 (383,814) 5.15
Canceled/forfeited (35,670) 19.63 (19,131) 7.75 (15,469) 9.78
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at Dec. 31 3,309,719 $11.55 3,773,252 $ 8.31 4,010,744 $ 6.69
====================================================================================================================================
Options exercisable at Dec. 31 2,808,903 $ 9.82 3,643,793 $ 8.17 3,840,275 -
Shares available for future grant at Dec. 31 335,537 498,873 1,178,483
- ------------------------------------------------------------------------------------------------------------------------------------
A summary of the Company's stock options outstanding and exercisable by stock
option price ranges at December 31, 1997 follows:
Weighted-Average Weighted-Average Weighted-Average
Exercise Price of Contractual Life of Exercise Price of
Exercise Price Range Options Outstanding Options Outstanding Options Outstanding Options Exercisable Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3.38 to $ 7.82 1,134,945 $ 5.97 4.21 1,134,945 $ 5.97
$ 7.83 to $12.77 1,604,361 $11.90 7.72 1,583,958 $11.89
$12.78 to $21.83 570,413 $21.65 9.46 90,000 $21.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,309,719 2,808,903
====================================================================================================================================
NOTE S
EMPLOYEE BENEFIT PLANS
PENSION PLANS: The Bank sponsors a defined benefit pension plan ("the Plan")
covering substantially all employees of the Company. Benefits are based on
years of service and the employee's highest 60 consecutive months of
compensation. Contributions to the Plan are designed to fund service costs on a
current basis, to fund over 40 years the liability for benefits arising from
qualifying service prior to Jan. 1, 1976, and to fund subsequent amendments
over 30 years.
Additionally, the Bank sponsors a supplemental retirement plan ("the
Supplemental Plan"). The Supplemental Plan is a non-qualified defined benefit
plan established to provide retirement benefits (as determined by provisions of
the Supplemental Plan) based on years of service and the employee's highest 36
consecutive months of compensation without regard to the limitations under
Internal Revenue Code Sections 415 and 401(a)(17). The Bank also sponsors a
non-qualifying, defined benefit retirement plan for the Company's directors
("the Directors' Plan"). Payments due under the Supplemental Plan and the
Directors' Plan are made from the Bank's general assets.
Total pension cost for 1997, 1996 and 1995 was $3.8 million, $3.7 million
and $3.0 million, respectively. Pension cost was comprised of the following
components:
Dollars in thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
THE PLAN:
Service cost benefits earned
during the period $2,111 $1,950 $1,491
Interest cost on projected
benefit obligation 1,960 1,791 1,602
Return on plan assets (6,017) (2,728) (4,250)
Net amortization and deferral 4,428 1,330 3,018
- -------------------------------------------------------------------------------------------------------------------------
Pension cost $2,482 $2,343 $1,861
=========================================================================================================================
THE SUPPLEMENTAL PLAN:
Service cost benefits earned
during the period $ 315 $ 331 $ 232
Interest cost on projected
benefit obligation 476 447 362
Net amortization and deferral 248 252 162
- -------------------------------------------------------------------------------------------------------------------------
Pension cost $1,039 $1,030 $ 756
=========================================================================================================================
THE DIRECTORS' PLAN:
Service cost benefits earned
during the period $ 79 $ 97 $ 113
Interest cost on projected
benefit obligation 102 98 97
Net amortization and deferral 118 144 144
- -------------------------------------------------------------------------------------------------------------------------
Pension cost $ 299 $ 339 $ 354
=========================================================================================================================
TOTAL:
Service cost benefits earned
during the period $2,505 $2,378 $1,836
Interest cost on projected
benefit obligation 2,538 2,336 2,061
Return on plan assets (6,017) (2,728) (4,250)
Net amortization and deferral 4,794 1,726 3,324
- -------------------------------------------------------------------------------------------------------------------------
Total pension cost $3,820 $3,712 $2,971
=========================================================================================================================
- --------------------------------------------------------------------------------
57
42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Statements of Financial Condition at
Dec. 31:
Dollars in thousands 1997
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Directors'
Plan Plan Plan Plan
- -----------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value $ 25,764 $ - $ - $20,233
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated Benefit Obligation (ABO):
Vested $ 17,210 $ 5,449 $ 1,492 $15,436
Non-vested 2,282 677 26 2,041
=============================================================================================================================
$ 19,492 $ 6,126 $ 1,518 $17,477
=============================================================================================================================
Overfunded (unfunded) ABO $ 6,272 $ (6,126) $(1,518) $ 2,756
=============================================================================================================================
Projected Benefit Obligation (PBO) $ 31,029 $ 10,827 $ 1,518 $26,623
=============================================================================================================================
Unfunded PBO $ (5,265) $(10,827) $(1,518) $(6,390)
=============================================================================================================================
Unfunded PBO comprised of:
Accrued pension cost $ (3,131) $ (6,126) $(1,518) $(3,069)
Unrecognized net gain (loss) (2,912) (1,334) 206 (4,230)
Unrecognized prior service costs 497 (4,727) (253) 558
Unrecognized net obligation (asset) at Jan. 1, 1987, net of amortization 281 (92) - 351
- -----------------------------------------------------------------------------------------------------------------------------
Adjustment required to recognize minimum liability $ - $ 1,452 $ 47 $ -
=============================================================================================================================
Dollars in thousands 1996
- ----------------------------------------------------------------------------------------------------
Supplemental Directors'
Plan Plan
- ----------------------------------------------------------------------------------------------------
Plan assets at fair value $ - $ -
- ----------------------------------------------------------------------------------------------------
Accumulated Benefit Obligation (ABO):
Vested $ 2,566 $ 1,508
Non-vested 434 33
- ----------------------------------------------------------------------------------------------------
$ 3,000 $ 1,541
====================================================================================================
Overfunded (unfunded) ABO $ (3,000) $ (1,541)
====================================================================================================
Projected Benefit Obligation (PBO) $ 6,198 $ 1,541
====================================================================================================
Unfunded PBO $ (6,198) $ (1,541)
====================================================================================================
Unfunded PBO comprised of:
Accrued pension cost $ (3,642) $ (1,541)
Unrecognized net gain (loss) (1,080) 98
Unrecognized prior service costs (1,359) (396)
Unrecognized net obligation (asset) at Jan. 1, 1987, net of amortization (117) -
- ----------------------------------------------------------------------------------------------------
Adjustment required to recognize minimum liability $ - $ 298
====================================================================================================
The following actuarial assumptions were used in calculating net pension
cost and benefit obligations:
1997 1996 1995
- ---------------------------------------------------------------------------
Discount rate 7.00% 7.50% 7.25%
Long-term rate of return on assets 8.50 8.50 8.50
Rate of increase in future
compensation levels 5.00 5.00 5.00
At Dec. 31, 1997, the Plan's assets consisted of cash equivalents,
corporate and government bonds, and various equity securities. Included in the
equity securities is $8.8 million (or 334,158 shares) of Company stock. Total
dividends received by the Plan on Company stock totaled $120,297.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company has established an ESOP designed to
invest in the common stock of the Company for the benefit of employees of the
Company. All employees who have completed at least one year of credited service
at the Bank are eligible to participate in the ESOP. The ESOP is subject to the
Employee Retirement Income Security Act of 1974 and is intended to constitute a
qualified stock bonus plan for income tax purposes.
The ESOP is authorized to borrow money to finance the acquisition of
Company stock and to pledge the stock acquired to secure payment of the loan.
The Bank does not provide financing for the ESOP. The ESOP maintains a $14
million line of credit with another financial institution, and as of Dec. 31,
1997, $3.1 million was outstanding on this line of credit. The ESOP began
making quarterly principal and interest payments during the third quarter of
1996. Previously, interest-only payments were made on this borrowing.
Outstanding ESOP borrowings are guaranteed by the Company and are included in
other borrowings and stockholders' equity in the Consolidated Statements of
Financial Condition. The ESOP borrowings are also partially secured by
investment securities owned by the Company.
In addition to the acquisition of Company stock through proceeds from
borrowings, the ESOP can elect to purchase additional shares if ESOP
contributions are in excess of debt service requirements.
Leveraged shares of Company stock are held by the ESOP trustee as
collateral on the loan. As principal and interest on the loan are paid, shares
held as collateral are released. The ESOP loan is being repaid from Bank
contributions. Dividends on the unallocated shares of Company stock are used
either to repay the ESOP loan or purchase additional shares of Company stock
for the ESOP. Dividends on allocated shares are used to purchase additional
Company stock for the ESOP.
Contributions to the ESOP are made at the sole discretion of the Board of
Trustees of the ESOP but may not exceed 15% of the aggregate compensation of
all participants. Since the ESOP's inception, contributions have been
sufficient to service the ESOP debt and, in certain years, have allowed the
ESOP to acquire additional shares of Company stock or reduce the outstanding
loan amount.
The following table presents the ESOP contributions and loan activity:
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Contributions to ESOP:
Compensation expense $ 621 $ 442 $ 577
Interest expense associated with shares
accounted for under SOP 93-6 237 239 257
Dividends received on unallocated
shares acquired before SOP 93-6 1 15 27
Less: Compensation expense on SOP 93-6
shares not contributed to Plan (84) - -
- ----------------------------------------------------------------------------------------------
Total contributions to ESOP $ 775 $ 696 $ 861
Less: Interest expense (265) (272) (346)
Contribution used to purchase
additional shares (335) (335) -
- ----------------------------------------------------------------------------------------------
Amortization on ESOP borrowing $ 175 $ 89 $ 515
==============================================================================================
- --------------------------------------------------------------------------------
58
43
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table summarizes shares of Company stock held by the ESOP:
Dec. 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Beginning allocated shares 1,389,846 1,359,462 1,368,659
Shares allocated due to:
Debt service 36,654 29,734 105,700
Contributions and dividends used
to purchase additional shares 50,398 43,913 12,726
Withdrawals (125,928) (43,263) (127,623)
- ---------------------------------------------------------------------------------------------
Shares allocated to participants 1,350,970 1,389,846 1,359,462
Unallocated shares:
Grandfathered under SOP 93-6 - 33,461 63,194
Unearned ESOP shares 364,963 368,157 368,157
- ---------------------------------------------------------------------------------------------
Total 1,715,933 1,791,464 1,790,813
=============================================================================================
Fair value of unearned ESOP shares $9,580,279 $5,767,781 $5,006,925
- ---------------------------------------------------------------------------------------------
NOTE T
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK
LOANS SOLD WITH RECOURSE: At Dec. 31, 1997 and 1996, the Bank serviced $29.6
million and $46.6 million, respectively, of income producing property loans
sold with recourse. The Bank's credit exposure with respect to these loans sold
with recourse at Dec. 31, 1997 totaled $8.1 million and was collateralized by
$7.2 million of MBS. In comparison, the Bank's credit exposure for these loans
at Dec. 31, 1996 totaled $9.0 million and was collateralized by $8.5 million of
MBS.
The income producing property loans were originated prior to 1990 by the
Bank based upon its normal underwriting standards and continue to be serviced
and analyzed by the Bank. The maximum loss related to income producing property
loans sold with recourse that would be recognized by the Bank in the event of a
complete default by the borrowers and worthlessness of the underlying
collateral at Dec. 31, 1997 and 1996 was $8.1 million and $9.0 million,
respectively. Income producing property loans repurchased under recourse
provisions during 1997 and 1996 totaled $6.5 million and $5.4 million,
respectively.
The following schedule presents the geographical distribution of the real
estate collateral of income producing property loans sold with recourse as of
Dec. 31, 1997 and 1996:
Dollars in thousands 1997 1996
- ----------------------------------------------------------------------------
Amount Percentage Amount Percentage
- ----------------------------------------------------------------------------
Minnesota $14,914 50.4% $18,648 40.1%
California 10,070 34.0 16,098 34.6
Washington 3,211 10.9 8,306 17.8
Other 1,390 4.7 3,501 7.5
- ----------------------------------------------------------------------------
$29,585 100.0% $46,553 100.0%
============================================================================
At Dec. 31, 1997, the Bank serviced $22.6 million of 1-4 family loans sold
with recourse. The 1-4 family loans were originated by the Bank based upon its
normal underwriting standards and continue to be monitored by the Bank. The
maximum loss that would be recognized by the Bank in the event of a complete
default by the borrowers and the worthlessness of the underlying collateral at
Dec. 31, 1997 was $22.6 million. There were no additional 1-4 family loans sold
with recourse and no 1-4 family loans repurchased under recourse provisions
during 1997. At Dec. 31, 1997, the Bank also had $292.2 million of MBS that if
sold from its portfolio would have recourse to the Bank.
At Dec. 31, 1996, the Bank serviced $28.6 million of 1-4 family loans sold
with recourse. The maximum loss that would be recognized by the Bank in the
event of a complete default by the borrowers and the worthlessness of the
underlying collateral at Dec. 31, 1996 was $28.6 million. There were no
additional 1-4 family loans sold with recourse and no 1-4 family loans
repurchased under recourse provisions during 1996. At Dec. 31, 1996, the Bank
also had $389.0 million of MBS that if sold from its portfolio would have
recourse to the Bank.
LOAN ORIGINATION COMMITMENTS: At Dec. 31, 1997, the Bank had $19.7 million in
outstanding loan commitments to originate 1-4 family mortgage loans, as well as
$17.6 million of commitments to originate income producing property and land
and land development loans. These consisted of adjustable rate loan commitments
of $27.1 million and fixed rate loan commitments of $10.2 million. Most of
these commitments expire after 60 days.
At Dec. 31, 1996, the Bank had $18.5 million in outstanding loan
commitments to originate 1-4 family mortgage loans, as well as $12.5 million of
commitments to originate income producing property and land and land
development loans. These consisted of adjustable rate loan commitments of $27.1
million and fixed rate loan commitments of $3.9 million.
The Bank enters into loan commitments after a determination is made
regarding the borrower's ability to repay the loan and the adequacy of the
property as collateral. The Bank attempts to fulfill loan commitments as long
as no violations of conditions established in the contract occur. Historically,
approximately 90% of its loan commitments have been funded.
FORWARD LOAN SALE COMMITMENTS: As of Dec. 31, 1997, the Bank had forward loan
sale commitments of $19.2 million, including $10.7 million of forward contracts
related to loan origination commitments. As of Dec. 31, 1996, the Bank had
forward loan sale commitments of $6.3 million, including $3.9 million of
forward contracts related to loan origination commitments. All market value
losses on forward loan sale commitments have been reflected in the consolidated
financial statements.
UNUSED CREDIT LINES: The Bank had outstanding unused home equity lines of
credit of $99.6 million and $85.3 million as of Dec. 31, 1997 and 1996,
respectively. Home equity lines of credit represent junior mortgages on 1-4
family homes, and have fixed expiration dates. Because many of the line of
credit commitments will expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The maximum loss
that would be recognized by the Bank as of Dec. 31, 1997 and 1996, in the event
that borrowers used 100% of their outstanding credit limits and, subsequently,
a complete default by the borrowers and worthlessness of underlying collateral
occurred, would be $99.6 million and $85.3 million, respectively.
- --------------------------------------------------------------------------------
59
44
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTERS OF CREDIT: At Dec. 31, 1997 and 1996, the Company had issued $8.5
million and $7.3 million, respectively, of standby letters of credit. The
Company has issued letters of credit to various counties and villages as a
performance guarantee of land development and improvements. Most of the letters
of credit at Dec. 31, 1997 and 1996 have been issued on behalf of St. Paul
Financial. The credit risk involved in issuing letters of credit is essentially
the same as that involved in lending. As of Dec. 31, 1997 and 1996, the maximum
loss that would be recognized by the Company in the event of a complete default
by the performing party and worthlessness of the underlying collateral would be
$8.5 million and $7.3 million, respectively.
INTEREST RATE EXCHANGE AGREEMENTS: The Bank used interest rate exchange
agreements in 1997 and 1996 to help reduce certain interest rate exposures. At
Dec. 31, 1997 and 1996, the Bank had $99.8 million and $93.6 million,
respectively, in notional amount interest rate exchange agreements outstanding
on which the Bank pays a fixed interest rate and receives a floating interest
rate, based on a referenced index, from the counterparty. These exchange
agreements are held for purposes other than trading.
The following table provides a rollforward of the notional amount of interest
rate exchange agreements:
Dollars in thousands 1997 1996
- -------------------------------------------------------------------
Balance at beginning of year $ 93,560 $122,533
Additions 25,000 -
Maturities - (7,500)
Amortization (18,794) (21,473)
- -------------------------------------------------------------------
Balance at end of year $ 99,766 $ 93,560
===================================================================
Included in interest expense in 1997, 1996, and 1995 was $487,000,
$939,000 and $692,000, respectively, on interest rate exchange agreements. In
1997, interest income was reduced by $51,000 related to hedging of fixed-rate
loans.
The following table presents a summary of interest rate exchange
agreements at Dec. 31, 1997 (dollars in thousands):
Original Current Fixed
Notional Notional Payment
Amount Amount Rate Variable Receipt Rate Maturity Date Purpose
- ----------------------------------------------------------------------------------------------------------------------
$ 50,526* $29,576 6.34% 6-month LIBOR (5.8125%) 03/24/99 Hedge matched funding used to acquire MBS
49,100* 26,150 6.63% 6-month LIBOR (5.8125%) 03/24/99 Hedge matched funding used to acquire MBS
34,685* 19,040 6.54% 6-month LIBOR (5.84375%) 04/01/99 Hedge matched funding used to acquire MBS
25,000 25,000 6.44% 6-month LIBOR (5.84375%) 07/23/02 Hedge fixed-rate loan originations
- ----------------------------------------------------------------------------------------------------------------------
$159,311 $99,766
======================================================================================================================
*Notional amount amortizes semi-annually.
- ----------------------------------------------------------------------------------------------------------------------
NOTE U
- ------------------------------------
Legal Proceedings
Although the Company is a defendant in various legal proceedings arising in the
ordinary course of its business, there are no legal proceedings that, in the
opinion of counsel, may result in a material loss to the Company.
- --------------------------------------------------------------------------------
60
45
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE V
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
The following schedule presents the geographical distribution of the Company's
collateral on real estate loans receivable as of Dec. 31, 1997 and 1996:
1997
- ------------------------------------------------------------------------------------------------------------------------
1-4 Family Real Estate Loans All Other Real Estate Loans Total
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
California $ 147,337 6.6% $ 497,146 50.8% $ 644,483 20.0%
Colorado 52,533 2.3 34,107 3.5 86,640 2.7
Illinois 925,845 41.3 193,582 19.8 1,119,427 34.7
Maryland 62,603 2.8 27,732 2.8 90,335 2.8
Missouri 140,653 6.3 - - 140,653 4.4
New York 66,907 3.0 1,966 0.2 68,873 2.1
Virginia 79,143 3.5 4,675 0.5 83,818 2.6
Washington 24,348 1.1 89,377 9.1 113,725 3.5
Wisconsin 46,479 2.1 25,753 2.6 72,232 2.2
Other 697,898 31.0 104,090 10.7 801,988 25.0
- ------------------------------------------------------------------------------------------------------------------------
Total $2,243,746 100.0% $978,428 100.0% $3,222,174 100.0%
========================================================================================================================
1996
- ------------------------------------------------------------------------------------------------------------------------
1-4 Family Real Estate Loans All Other Real Estate Loans Total
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
California $ 102,814 5.9% $ 522,345 49.8% $ 625,159 22.3%
Colorado 15,139 0.9 36,300 3.5 51,439 1.8
Illinois 825,408 47.1 174,608 16.7 1,000,016 35.7
Maryland 27,936 1.6 24,606 2.3 52,542 1.9
Missouri 205,751 11.7 - -- 205,751 7.4
New York 78,567 4.5 2,002 0.2 80,569 2.9
Virginia 66,241 3.8 4,725 0.5 70,966 2.5
Washington 8,906 0.5 105,696 10.1 114,602 4.1
Wisconsin 53,832 3.1 41,129 3.9 94,961 3.4
Other 366,951 20.9 136,485 13.0 503,436 18.0
- ------------------------------------------------------------------------------------------------------------------------
Total $1,751,545 100.0% $1,047,896 100.0% $2,799,441 100.0%
========================================================================================================================
See Note T-Financial Instruments With Off-Balance Sheet Credit Risk for
geographical concentration of income producing property loans sold
with recourse.
NOTE W
- --------------------------------------------------------------------------------
PARENT COMPANY-ONLY FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
Dec. 31,
- --------------------------------------------------------------------------------
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 53,512 $ 17,822
Investment securities 10,564 198
Mortgage-backed securities 5,000 -
Investment in St. Paul Federal Bank 390,008 385,094
Investment in other subsidiaries 10,441 10,436
Advances to St. Paul Federal Bank 28,730 -
Advances to other subsidiaries 21,700 8,750
Prepaid expenses and other assets 457 336
- --------------------------------------------------------------------------------
Total assets $520,412 $422,636
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Borrowings $ 98,469 $ 33,813
Other liabilities 4,031 713
- --------------------------------------------------------------------------------
Total liabilities 102,500 34,526
Common stock 354 384
Paid-in capital 114,648 148,265
Retained earnings 324,937 288,065
Unrealized gain on securities, net of tax 1,887 2,278
Borrowings by employee stock ownership plan (221) (396)
Unearned employee stock ownership plan shares (2,858) (2,883)
Treasury stock (20,835) (47,603)
- --------------------------------------------------------------------------------
Total stockholders' equity 417,912 388,110
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $520,412 $422,636
================================================================================
STATEMENTS OF INCOME
Dollars in thousands, except per
share amounts 1997 1996 1995
- ------------------------------------------------------------------------------
Equity in earnings of
St. Paul Federal Bank $48,415 $26,573 $35,820
Equity in earnings of
other subsidiaries 2,180 807 1,501
St. Paul Bancorp loss (1,537) (1,123) (927)
- ------------------------------------------------------------------------------
Net income $49,058 $26,257 $36,394
==============================================================================
Income before extraordinary item per share:
Basic $1.46 $0.77 $1.05
Diluted 1.42 0.74 0.99
==============================================================================
Net income per share:
Basic $1.45 $0.77 $1.05
Diluted 1.40 0.74 0.99
==============================================================================
- --------------------------------------------------------------------------------
61
46
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $49,058 $ 26,257 $ 36,394
Earnings of St. Paul Federal Bank
not providing cash (48,415) (26,573) (35,820)
Earnings of other subsidiaries
not providing cash (2,180) (807) (1,501)
Other sources/(uses), net (1,239) (5,065) (1,109)
- --------------------------------------------------------------------------------
Net cash used in operating activities (2,776) (6,188) (2,036)
INVESTING ACTIVITIES:
Maturities of available for sale
investment securities 10,200 250 1,000
Purchase of available for sale
investment securities (20,157) (201) (236)
Purchase of available for sale
mortgage-backed securities (5,000) - -
Dividends received from
St. Paul Federal Bank 48,100 14,000 17,750
Dividends received from
other subsidiaries 2,175 1,700 400
Advances to St. Paul Federal Bank (28,730) - -
Net repayments from (advances to)
other subsidiaries (12,950) (5,250) 7,875
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (6,362) 10,499 26,789
FINANCING ACTIVITIES:
New long-term borrowings 98,418 - -
Repayment of long-term borrowings (34,500) - -
Purchase of treasury stock (17,237) (24,906) (4,342)
Dividends paid (12,186) (7,983) (5,532)
Net proceeds from issuance of stock 10,333 7,283 3,129
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 44,828 (25,606) (6,745)
- --------------------------------------------------------------------------------
Total cash provided (used) 35,690 (21,295) 18,008
Cash and cash equivalents
at beginning of year 17,822 39,117 21,109
- --------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $53,512 $17,822 $ 39,117
================================================================================
The parent company's current primary activity is that of a unitary, non-
diversified savings and loan holding company.
- --------------------------------------------------------------------------------
NOTE X
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at Dec. 31, 1997 and 1996. SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
Dec. 31
- ----------------------------------------------------------------------------------------
Dollars in thousands 1997 1996
- ----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------
Cash and cash equivalents $ 204,683 $ 204,683 $ 190,208 $ 190,208
Investment securities:
Available for sale 41,574 41,574 49,103 49,103
Mortgage-backed securities:
Available for sale 491,405 491,405 620,669 620,669
Held to maturity 426,458 429,872 542,313 537,502
- ----------------------------------------------------------------------------------------
917,863 921,277 1,162,982 1,158,171
Loans receivable:
1-4 family units 2,243,746 2,266,263 1,751,545 1,766,516
Multifamily units 914,357 928,770 991,278 1,003,475
Commercial 64,071 64,341 54,985 54,841
Land and land
development - - 1,633 1,575
Consumer loans 13,091 12,783 18,871 18,174
Loans held for sale 17,028 17,091 11,992 12,021
Net deferred (fees)/costs 4,573 - (231) -
Allowance for loan losses (34,395) - (35,965) -
- ----------------------------------------------------------------------------------------
3,222,471 3,289,248 2,794,108 2,856,602
Accrued interest receivable 26,313 26,313 25,745 25,745
FHLB stock 38,188 38,188 35,211 35,211
Other financial assets 3,331 3,682 3,923 4,357
- ----------------------------------------------------------------------------------------
Total financial assets $4,454,423 $4,524,965 $4,261,280 $4,319,397
========================================================================================
Deposits:
Checking, savings
and money market
accounts $1,315,295 $1,315,295 $1,307,066 $1,307,066
Certificates of deposit 1,969,133 1,971,594 2,029,989 2,034,276
- ----------------------------------------------------------------------------------------
3,284,428 3,286,889 3,337,055 3,341,342
Borrowings:
FHLB advances 341,085 336,225 456,399 456,343
Securities sold under
agreements to
repurchase 330,000 329,994 50,000 49,997
Senior notes 98,469 103,000 - -
Subordinated notes - - 33,813 33,728
Mortgage-backed notes 16,400 16,974 16,400 17,017
ESOP borrowings 3,104 3,104 3,279 3,279
- ----------------------------------------------------------------------------------------
789,058 789,297 559,891 560,364
Accrued interest payable 12,624 12,624 24,099 24,099
Other financial liabilities - 1,062 - 1,054
- ----------------------------------------------------------------------------------------
Total financial liabilities $4,086,110 $4,089,872 $3,921,045 $3,926,859
========================================================================================
- --------------------------------------------------------------------------------
62
47
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following are the major methods and assumptions used in estimating the
fair value of financial instruments.
CASH AND CASH EQUIVALENTS: The fair value of cash and amounts due from
depository institutions approximates their carrying amount. The fair value of
short-term investments was determined based on bid prices published in
financial newspapers or bid quotations received from securities dealers.
INVESTMENT SECURITIES: The fair value of marketable-debt and marketable-equity
securities was determined based on bid prices published in financial newspapers
or bid quotations received from securities dealers.
MORTGAGE-BACKED SECURITIES: The fair values of MBS were determined based on bid
quotations received from securities dealers.
LOANS RECEIVABLE: The fair value of 1-4 family mortgages was based upon future
cash flows discounted at a rate that reflects an estimate of current market
rates for the underlying mortgage loans and, in certain instances, quotes
received from the secondary market.
The fair value of income producing property, land and consumer loans was
calculated based on an estimate of the timing of future cash flows, discounted
at a rate that reflects an estimate of current market rates for these types of
loans. The discount rate for the Bank's classified loans was adjusted for the
inherent credit risk in those assets. The estimate of the timing of cash flows
was based on the same prepayment assumptions used for regulatory interest rate
risk reporting. Most of the Bank's income producing property and land loans are
adjustable rate mortgages.
ACCRUED INTEREST RECEIVABLE: The carrying amount of accrued interest receivable
is a reasonable estimate of its fair value because its maturity is short-term
and potentially uncollectible amounts have been reserved.
FEDERAL HOME LOAN BANK STOCK: The fair value of FHLB stock equals its book
value because the shares can be resold to the FHLB or other member banks at its
par value of $100 per share.
DEPOSITS: The fair value of deposits with no stated maturity, such as savings,
checking and money market accounts, is considered to be equal to the amount
payable on demand. The fair value of certificates of deposits was computed as
the present value of future cash outflows, based on contractual maturities,
discounted at rates equivalent to those offered by the Bank at Dec. 31, 1997
and 1996 for certificates of deposit with similar maturities.
BORROWINGS: The fair value of FHLB advances was determined based upon a
discounted cash flow analysis using a discount rate commensurate with rates
currently offered by the FHLB for similar remaining maturities. The fair values
of the repurchase agreements, senior notes, subordinated notes and the
mortgage-backed note were based upon quotes received from securities dealers.
The fair value of the ESOP borrowing approximates its carrying amount because
the borrowings reprice frequently at market interest rates.
ACCRUED INTEREST PAYABLE: The carrying amount of accrued interest payable is a
reasonable estimate of its fair value because its maturity is short-term.
OTHER FINANCIAL ASSETS AND LIABILITIES: Other financial assets and liabilities
include the excess servicing fee receivable, mortgage servicing rights, loan
origination and sales commitments, letters of credit and other credit-related
guarantees, recourse provisions on loans sold with recourse and interest rate
exchange agreements.
The fair value of excess servicing fee receivable was determined based
upon the present value of anticipated loan servicing cash flows, discounted at
a market rate of interest for assets with similar risk.
The fair value of mortgage servicing rights was determined by calculating
the present value of estimated future cash flows using a discount rate,
prepayment rate and servicing costs commensurate with the risks involved.
The fair value of commitments to originate mortgage loans was estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the borrowers. For fixed rate loan commitments, fair value also considers
the difference between current interest rates and the committed rates.
The fair value of forward loan sale commitments represents the loss the
Bank would incur to enter into an offsetting agreement and was determined from
quotes received from securities dealers.
The fair value of the letters of credit and the guarantee of indebtedness
of others represents the amount the Company would have to pay a third party to
assume the related liability.
It is not practicable to estimate the fair value of the Company's
liability with respect to loans sold with recourse because of the significance
of the cost to obtain external quotes. The fair value of the liability for
loans sold with recourse would represent the amount the Bank would have to pay
a third party to assume the recourse obligation.
The fair value of interest rate exchange agreements was obtained from
dealer quotes and represents the estimated amount the Bank would receive or pay
to terminate the contract, taking into account current interest rates and the
creditworthiness of the counterparties.
63
48
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- -------------------------------------------------------------------------------
NOTE Y
- -------------------------------------------------------------------------------
SELECTED QUARTERLY INFORMATION (UNAUDITED)
STATEMENTS OF INCOME For the Quarters Ended
- ----------------------------------------------------------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands,
except per share amounts 1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $78,864 $76,083 $80,787 $74,864 $78,724 $74,052 $76,842 $71,257
Interest expense 47,891 44,183 47,593 43,467 45,330 42,283 44,571 41,577
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 30,973 31,900 33,194 31,397 33,394 31,769 32,271 29,680
Provision for loan losses - 250 - 500 - 500 - 500
Net gain on assets sold 244 209 142 132 65 116 117 1,175
Other income 12,355 8,851 10,948 8,785 10,928 8,402 10,367 8,050
SAIF recapitalization - - - 21,000 - - - -
Other G&A expense 25,428 24,318 25,585 24,768 25,568 24,280 24,169 23,452
Gain (loss) on REO 443 30 (59) (89) (39) (20) (44) (1,136)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before income
taxes and extraordinary item 18,587 16,422 18,640 (6,043) 18,780 15,487 18,542 13,817
Income taxes 6,134 5,566 6,266 (2,501) 6,383 5,298 6,305 5,063
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
extraordinary item 12,453 10,856 12,374 (3,542) 12,397 10,189 12,237 8,754
Extraordinary loss, net of tax - - - - - - 403 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $12,453 $10,856 $12,374 $ (3,542) $12,397 $10,189 $11,834 $ 8,754
===================================================================================================================================
Income before extraordinary
item per share:
Basic $ 0.37 $ 0.32 $ 0.37 $ (0.11) $ 0.37 $ 0.30 $ 0.36 $ 0.25
Diluted 0.36 0.31 0.35 (0.11) 0.36 0.29 0.34 0.24
===================================================================================================================================
Net income per share:
Basic $ 0.37 $ 0.32 $ 0.37 $ (0.11) $ 0.37 $ 0.30 $ 0.35 $ 0.25
Diluted 0.36 0.31 0.35 (0.11) 0.36 0.29 0.33 0.24
===================================================================================================================================
Cash dividends per share $ 0.100 $ 0.064 $ 0.100 $ 0.064 $ 0.080 $ 0.053 $ 0.080 $ 0.053
===================================================================================================================================
AVERAGE BALANCE SHEET For the Quarters Ended
- ---------------------------------------------------------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,590,993 $4,310,802 $4,562,456 $4,281,667 $4,448,628 $4,239,579 $4,417,054 $4,131,707
MBS 960,636 798,700 1,029,606 832,458 1,088,326 888,740 1,140,367 963,474
Loans receivable 3,204,168 3,124,222 3,121,693 3,072,933 2,972,994 2,995,272 2,826,965 2,745,493
Deposits 3,275,701 3,308,166 3,297,271 3,273,263 3,345,921 3,269,986 3,372,972 3,251,290
Borrowings 824,923 536,277 777,248 547,947 618,684 509,810 561,037 423,313
Stockholders' equity 414,246 380,937 403,682 385,932 391,880 378,712 393,420 387,499
One year GAP to total assets (3.84%) (1.62%) (5.77%) (1.82%) (3.09%) 0.33% (0.92%) 6.38%
===================================================================================================================================
NOTE Z
- -------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------------
Interest credited on deposits $145,256 $120,361 $115,537
Interest paid on deposits 12,307 11,808 11,639
- ------------------------------------------------------------------------------------
Total interest paid on deposits $157,563 $132,169 $127,176
====================================================================================
Loans exchanged for
mortgage-backed securities $ - $380,929 $ -
Interest paid on borrowings 38,573 31,185 30,158
Income taxes paid, net 20,562 12,690 20,991
Real estate acquired through foreclosure 3,955 23,214 8,505
Loans originated in connection with real
estate acquired through foreclosure 2,677 23,446 11,885
- ------------------------------------------------------------------------------------
NOTE AA
- ----------------------------------------------------------------------------
EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted earnings
per share for the years ended Dec. 31, 1997, 1996 and 1995:
1997 1996 1995
- --------------------------------------------------------------------------------
Income before extraordinary item $49,461 $26,257 $36,394
===============================================================================
Denominator for basic earnings per
share-weighted average shares 33,797,844 33,922,146 34,609,393
Effect of diluted securities:
Stock options issued to
employees and directors 1,149,373 1,780,518 1,974,062
- -------------------------------------------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 34,947,217 35,702,664 36,583,455
===============================================================================
Income before extraordinary
item per share:
Basic $ 1.46 $ 0.77 $ 1.05
===============================================================================
Diluted $ 1.42 $ 0.74 $ 0.99
===============================================================================
===============================================================================
- -------------------------------------------------------------------------------
64
49
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE BB
SUBSEQUENT EVENTS
In March 1998, the Company announced an agreement to merge with Beverly
Bancorporation, Inc. ("Beverly"), the bank holding company of Beverly National
Bank and Beverly Trust Company. Beverly, with total assets of $669 million,
currently operates 13 branches in the south and southwest suburbs of Chicago.
The Company will issue 1.063 shares of its common stock for each outstanding
common share of Beverly, subject to adjustment under certain circumstances. The
Company intends to account for the transaction as a pooling of interests. The
agreement is subject to regulatory and shareholder approvals.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS AND STOCKHOLDERS
ST. PAUL BANCORP, INC.
We have audited the accompanying consolidated statements of financial condition
of St. Paul Bancorp, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of St. Paul
Bancorp, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 14, 1998,
except for Note BB, as to which the date is March 16, 1998
- --------------------------------------------------------------------------------
65
50
- --------------------------------------------------------------------------------
ANNUAL REPORT ON FORM 10-K St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Sections 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended Dec. 31, 1997.
Commission File Number 0-15580
ST. PAUL BANCORP, INC.
Incorporated in the State of Delaware
IRS Employer Identification #36-3504665
Address: 6700 West North Avenue
Chicago, Illinois 60707-3937
Telephone: (773) 622-5000
Securities registered to Section 12(g) of the Act: Common Stock, Par Value
$0.01; Preferred Stock Purchase Rights.
As of Jan. 31, 1998, St. Paul Bancorp, Inc. had 34,257,983 shares of
common stock outstanding. The aggregate market value of common stock held by
non-affiliates as of Jan. 31, 1998 was $734,490,935.(1)
St. Paul Bancorp, Inc. has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and has been subject to such filing requirements for the
past 90 days.
No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained in the Company's definitive proxy statement incorporated by
reference herein.
This Annual Report and Form 10-K incorporates into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission. Only those sections of the Annual Report referenced in the
following cross-reference index are incorporated in the Form 10-K.
- --------------------------------------------------------------------------------------
CROSS-REFERENCE Page
- --------------------------------------------------------------------------------------
PART I
Item 1 Business
General 20-21, 44, 67-68
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest Rates and
Interest Differential 26-27
Investment Portfolio 38, 48-49
Loan Portfolio 32-35, 38, 45, 49-50, 61
Summary of Loan Loss Experience 34-35, 45, 50
Deposits 26, 37, 52
Return on Equity and Assets 18-19
Short-Term Borrowings 39, 52-54
Item 2 Properties 67
Item 3 Legal Proceedings none
Item 4 Submission of Matters to a Vote of Security Holders none
Part II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 21, 23, 25, 34, 55-57, 65-68, 72
Item 6 Selected Financial Data 18-19
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-39
Item 8 Financial Statements and Supplemental Data 40-65
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures none
Part III
Item 10 Directors and Executive Officers of the Registrant 70*
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners
and Management *
Item 13 Certain Relationships and Related Transactions *
Part IV
Item 14 Exhibits, Financial Statements Schedules and
Reports on Form 8-K 68-69
(1) Solely for the purpose of this calculation, all executive officers and
directors of the registrant are considered to be affiliated. Also included are
the shares held by various employee benefit plans where trustees are directors
of St. Paul Bancorp, Inc.
* St. Paul Bancorp's definitive proxy statement for the 1998 Annual Meeting
of Shareholders is incorporated herein by reference, other than the sections
entitled Report of the Organizational Planning and Stock Option Committees on
Executive Compensation and Comparative Performance Graph.
- --------------------------------------------------------------------------------
66
51
- --------------------------------------------------------------------------------
ANNUAL REPORT ON FORM 10-K (CONTINUED) St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPETITION
St. Paul Bancorp experiences substantial competition in attracting and
retaining deposit accounts, making mortgage and other loans, and selling
investment products. Competition for deposit accounts comes primarily from
other federally insured financial institutions, such as saving institutions,
commercial banks and credit unions; money market funds; and other investment
alternatives. Competition for origination of loan products comes primarily from
mortgage brokers, other savings institutions, mortgage banking firms,
commercial banks, insurance companies and finance companies. Competition for
investment product sales comes primarily from other brokerage operations,
insurance companies and mutual funds. Many of St. Paul's competitors are
unregulated and are not subject to the same restrictions as the Bank.
St. Paul's market area is experiencing increased competition from the
acquisition of local financial institutions by larger commercial banking and
savings institutions.
PROPERTIES
All the office properties and most of the equipment appearing in the
Consolidated Statements of Financial Condition and Note L-Office Properties and
Equipment are owned by the Bank. As of Dec. 31, 1997, the Bank had 53 banking
offices located throughout the greater Chicago metropolitan area. Seventeen of
the branches were located in Dominick's(R) and Cub(R) food stores in the Chicago
area. All branch locations, except for three drive-up facilities, are
full-service offices that provide a full range of banking services. Of the 53
banking offices, 31 were owned and 22 were leased as of Dec. 31, 1997. Also,
the Bank owned five administrative buildings and leases administrative office
space in an office complex near the Bank's home office. During 1997, the Bank
purchased a 70,000-square-foot facility in a surrounding suburb of Chicago
which will act as an operations center. Management plans to consolidate at
least two of the leased facilities into this operations center. The Bank also
exercised its option, during 1997, under a capital lease arrangement to
purchase a branch facility. At Dec. 31, 1997, the aggregate net book value of
St. Paul Federal's banking and administrative offices owned and the leasehold
improvements at the offices leased was $34.7 million. Management believes all
these properties are in good condition.
In addition to its land, buildings and leasehold improvements, the Bank
had an aggregate net investment in equipment of $17.4 million at Dec. 31, 1997.
Included in the equipment owned by the Bank are mainframe, hardware, teller
platforms, desktop computers, ATMs and furnishings.
REGULATIONS
The Company, as a savings and loan holding company, and the Bank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator. The
Bank also is subject to regulations, supervision and examination by the Federal
Deposit Insurance Corporation (the "FDIC") and as to certain matters by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
See Management's Discussion and Analysis and Notes to Consolidated Financial
Statements as to the impact of certain laws, rules and regulations on the
operations of the Company and the Bank. Set forth below is a description of
certain recent regulatory developments.
Legislation was enacted in September 1996 to address the
undercapitalization of the Savings Association Insurance Fund (the "SAIF"), of
which the Bank is a member (the "1996 Legislation"). The 1996 legislation also
contemplates the merger of the SAIF with the Bank Insurance Fund (the "BIF"),
which generally insures deposits in national and state-chartered banks. The
combined deposit insurance fund, which will be formed no earlier than Jan. 1,
1999, will insure deposits at all FDIC-insured depository institutions. As a
condition to the combined insurance fund, however, no insured depository
institution can be chartered as a savings association. Several proposals for
abolishing the federal thrift charter were introduced in Congress during 1997
in bills addressing financial services modernization, including a proposal from
the Treasury Department developed pursuant to requirements of the 1996
Legislation. While no legislation was passed in 1997, it is anticipated that
the issue will be taken up again by Congress in 1998. If legislation is passed
abolishing the federal thrift charter, the Bank may be required to convert its
federal charter to either a national bank or a new federal type of bank charter
or state depository institution charter. Future legislation also may result in
the Company becoming regulated as a bank holding company by the Federal Reserve
Board, rather than a savings and loan holding company regulated by the OTS.
Regulation by the Federal Reserve Board could subject the Company to capital
requirements that are not currently applicable to the Company as a holding
company under OTS regulation and may result in statutory limitations on the
type of business activities in which the Company may engage at the holding
company level, which business activities currently are not restricted. The
Company and the Bank are unable to predict whether such legislation will be
enacted.
Various proposals were introduced in Congress in 1997 to permit the
payment of interest on required reserve balances, and to permit savings
institutions and other regulated financial institutions to pay interest on
business demand accounts. While this legislation appears to have strong support
from many constituencies, the Company and the Bank are unable to predict
whether such legislation will be enacted.
During 1997, OTS continued its comprehensive review of its regulations to
eliminate duplicative, unduly burdensome and unnecessary regulations concerning
liqudity requirements, capital distributions, deposit accounts and application
processing.
- --------------------------------------------------------------------------------
67
52
- --------------------------------------------------------------------------------
ANNUAL REPORT ON FORM 10-K (CONTINUED) St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBITS (C)
FINANCIAL STATEMENTS FILED Page
------------------------------------------------
St. Paul Bancorp, Inc.
Consolidated Financial Statements 40
Notes to Consolidated Financial Statements 44
Report of Independent Auditors 65
Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are omitted, since the required information is
included in the footnotes or is not applicable.
No reports on Form 8-K were filed during the last quarter of 1997.
The following Exhibit Index lists the Exhibits to this Annual Report on
Form 10-K.
EXHIBIT NUMBER 3
- ------------------------------------------------------------------------
Certificate of Incorporation and Bylaws
i Certificate of Incorporation (a).
ii Bylaws of Registrant, as amended (a).
iii Amendments to Bylaws of Registrant dated as of Dec. 18, 1989,
July 18, 1992, Sept. 27, 1993, Oct. 25, 1993 and Feb. 28, 1994,
respectively (a).
- ------------------------------------------------------------------------------
EXHIBIT NUMBER 10
- ------------------------------------------------------------------------------
Material Contracts
i Stock Option Plan, as amended (a)(b).
ii Amendment to Stock Option Plan dated May 13, 1992 (a)(b).
iii Amendment to Stock Option Plan dated May 4, 1994 (a)(b).
iv 1995 Incentive Plan (a)(b).
v Employment Agreements, dated Dec. 19, 1994, among St. Paul
Bancorp, Inc., St. Paul Federal Bank For Savings and Joseph C.
Scully and Patrick J. Agnew, respectively (a)(b).
vi Amendments to Employment Agreements, dated as of May 22, 1995,
among St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings and
Joseph C. Scully and Patrick J. Agnew, respectively (a)(b).
vii Amendments to Employment Agreements, dated as of Aug. 28, 1995,
among St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings and
Joseph C. Scully and Patrick J. Agnew, respectively (a)(b).
viii Amendments to Employment Agreements, dated as of Dec. 31, 1995,
among St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings and
Joseph C. Scully and Patrick J. Agnew, respectively (a)(b).
ix Severance Agreements, dated as of Dec. 21, 1992, among St. Paul
Bancorp, Inc., St. Paul Federal Bank For Savings and Robert N.
Parke, Thomas J. Rinella, Donald G. Ross and Clifford M. Sladnick,
respectively (a)(b).
x Amendments to Severance Agreements, dated as of Dec. 19, 1994,
among St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings
and Robert N. Parke, Thomas J. Rinella, Donald G. Ross and
Clifford M. Sladnick, respectively (a)(b).
xi Amendments to Severance Agreements, dated as of May 22, 1995,
among St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings
and Robert N. Parke, Thomas J. Rinella, Donald G. Ross and
Clifford M. Sladnick, respectively (a)(b).
xii Amendments to Severance Agreements, dated as of Aug. 28, 1995,
among St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings
and Robert N. Parke, Thomas J. Rinella, Donald G. Ross and
Clifford M. Sladnick, respectively (a)(b).
xiii St. Paul Federal Bank For Savings Deferred Compensation Trust
Agreement, dated April 21, 1987 (a)(b).
- --------------------------------------------------------------------------------
68
53
- --------------------------------------------------------------------------------
ANNUAL REPORT ON FORM 10-K (CONTINUED) St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
xiv First Amendment to Agreement in Trust, dated Dec. 31, 1989, by
and between St. Paul Federal Bank For Savings and Alan J. Fredian,
Michael R. Notaro and Faustin A. Pipal, as trustees (a)(b).
xv St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc.
Nonqualified Retirement Plan for Directors, as amended and
restated as of March 28, 1994 (a)(b).
xvi First Amendment to St. Paul Federal Bank For Savings and St. Paul
Bancorp, Inc. Nonqualified Retirement Plan for Directors, dated
as of Dec. 31, 1995 (a)(b).
xvii St. Paul Federal Bank For Savings Supplemental Retirement Plan
and Excess Benefit Plan as amended and restated (b).
xviii St. Paul Federal Bank For Savings Supplemental Retirement Trust
as amended and restated (b).
xix St. Paul Bancorp, Inc. and St. Paul Federal Bank For Savings
Employee Severance Compensation Plan, executed Dec. 20, 1993
(a)(b).
xx Term Loan Agreement, dated as of Nov. 21, 1991, among St. Paul
Federal Bank For Savings Employee Stock Ownership Trust, St.
Paul Bancorp, Inc. and Nationar (a).
xxi First Amendment to Term Loan Agreement, dated as of June 30,
1993 (but effective as of May 5, 1993), by and among St. Paul
Federal Bank For Savings Employee Stock Ownership Trust, St.
Paul Bancorp, Inc. and Nationar (a).
xxii Letter, dated Jan. 19, 1996, among St. Paul Federal Bank For
Savings Employee Stock Ownership Trust, St. Paul Bancorp, Inc.
and Northwest Savings Bank, as successor in interest to Nationar (a).
xxiii Shareholders Right Plan, dated Oct. 26, 1992 (a).
xxiv Indenture and First Supplemental Indenture, dated Feb. 11, 1997,
between St. Paul Bancorp, Inc. and Harris Trust and Savings
Bank (a).
xxv Indenture dated as of July 1, 1989, between St. Paul Federal Bank
For Savings and Bankers Trust Company, Trustee (a).
xxvi Revolving Loan Agreement, dated as of Sept. 15, 1995, between
St. Paul Bancorp, Inc. and LaSalle National Bank (a).
xxvii First Amendment to Revolving Loan Agreement, dated as of Oct. 15,
1996, between St. Paul Bancorp, Inc. and LaSalle National Bank (a).
EXHIBIT NUMBER 13
- --------------------------------------------------
1997 Annual Report to Shareholders
EXHIBIT NUMBER 21
- --------------------------------------------------
Subsidiaries of Registrant
EXHIBIT NUMBER 23
- --------------------------------------------------
Consent of Ernst & Young LLP
EXHIBIT NUMBER 27
- --------------------------------------------------
Financial Data Schedule
(a) Exhibit has heretofore been filed with the Securities and Exchange
Commission and is incorporated herein by reference.
(b) Management contract or compensation plan or arrangement required to be
filed as an exhibit.
(c) Copies of the Exhibits will be furnished upon request and payment of the
Company's expenses in furnishing the Financial Statement Schedule and
Exhibits.
- --------------------------------------------------------------------------------
69
54
- --------------------------------------------------------------------------------
SIGNATURES ST. PAUL BANCORP OFFICERS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on March
27, 1998 on its behalf by the undersigned thereunto duly authorized.
St. Paul Bancorp, Inc.
Joseph C. Scully
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 27, 1998 by the following persons on
behalf of the registrant and in the capacities indicated.
Joseph C. Scully John W. Croghan
Chairman and Chief Executive Officer Director
Patrick J. Agnew Alan J. Fredian
President and Chief Operating Officer Director
Robert N. Parke Paul C. Gearen
Senior Vice President and Treasurer Director
(principal financial officer)
Kenneth J. James
Paul J. Devitt Director
First Vice President and Controller
(principal accounting officer) Jean C. Murray, O.P.
Director
William A. Anderson
Director John J. Viera
Director
DIRECTORS
- ---------------------------------------------------------------
Joseph C. Scully
Chairman and Chief Executive Officer, St. Paul Bancorp, Inc.
and St. Paul Federal-A B C D* E F
Patrick J. Agnew
President and Chief Operating Officer, St. Paul Bancorp, Inc.
and St. Paul Federal-A B C D E F
William A. Anderson
Retired Partner, Ernst & Young LLP-A B D G*
John W. Croghan
President, Lincoln Partners-investment counseling-A* G I
Alan J. Fredian
Retired Professor, Institute of Human Resources and Industrial
Relations, Loyola University-D E* H* I*
Paul C. Gearen
President, Nicolson, Porter and List, Inc.-corporate real estate-C
Kenneth J. James
Chairman, James Investment Co.-real estate development-B* C*
Jean C. Murray, O.P.
Retired President, Dominican University (formerly Rosary
College)-E F
John J. Viera
Retired Vice President, Commonwealth Edison Company-
public utility-D F* G H I
Joseph C. Scully, 57, has been Chairman since 1989 and Chief Executive Officer
since 1982. He joined the Company in 1963 and has also served as President,
Senior Vice President, Corporate Secretary and Vice President.
Patrick J. Agnew, 55, has been President and Chief Operating Officer since
1989. Previous positions include Executive Vice President, Senior Vice
President and General Counsel for the Company. Before joining St. Paul in 1979,
he was a partner in the law firm of Righeimer, Martin and Cinquino.
James R. Lutsch, 50, was named Senior Vice President and Director of
Information Services in 1986. He joined St. Paul in 1972 and has also served
as a Vice President and as a Manager in the Bank's systems department.
Robert N. Parke, 53, was named Senior Vice President and Chief Financial
Officer in 1981. Previous positions include Treasurer. Before joining St. Paul
in 1977, he was a certified public accountant with Ernst & Young LLP.
Robert N. Pfeiffer, 49, was named Senior Vice President and Director of Human
Resources in 1990 and Director of Customer Operations in 1996. Previous
positions include First Vice President, Vice President, Branch Manager and
Manager of SPF Insurance Agency, Inc., the Bank's insurance subsidiary.
Thomas J. Rinella, 53, Senior Vice President, was named Director of Community
Lending in 1987. Previous positions include Marketing Director, Human Resources
Director, Loan Department Manager and Systems Analyst with the Bank.
Donald G. Ross, 49, was named Senior Vice President, Director of Retail Banking
in 1986. Previous positions include First Vice President, Vice President and
Assistant Vice President with the Bank.
Clifford M. Sladnick, 41, was named Senior Vice President, General Counsel and
Corporate Secretary in 1991. Before joining St. Paul in 1990, he was a partner
with the law firm of McDermott, Will & Emery. He is also a certified public
accountant.
(A) Member of the Investment Committee of the Bank
(B) Member of the Loan Loss Reserve Committee of the Bank
(C) Member of the Loan Committee of the Bank
(D) Member of the Executive Committees of the Company and the Bank
(E) Member of the Profit Sharing, Pension and ESOP Trust Committee of the Bank
(F) Member of the Corporate Responsibility Committee of the Bank
(G) Member of the Audit and Accounting Committees of the Company and the Bank
(H) Member of the Organizational Planning Committees of the Company and the
Bank
(I) Member of the Stock Option Committee of the Company
* Committee Chairman
- --------------------------------------------------------------------------------
70
55
- --------------------------------------------------------------------------------
INVESTOR INFORMATION St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CORPORATE OFFICES
6700 West North Avenue
Chicago, Illinois 60707-3937
Telephone: (773) 622-5000
St. Paul News Hotline: (773) 889-SPBC (7722)
COMMON STOCK
St. Paul Bancorp common stock is listed under the symbol "SPBC" on the NASDAQ
Stock MarketSM. Newspaper stock tables often list the stock as "StPaulB" or
"StPaulBncp."
As of Dec. 31, 1997, St. Paul Bancorp had 34,204,659* shares of common
stock outstanding. At that date, there were 6,336 shareholders of record.
As of the close of business on Feb. 12, 1998, St. Paul Bancorp's stock
price was $25.25.
STOCK PRICE INFORMATION
The table below shows the quarterly price range of SPBC common stock and
dividends paid over the past two years. The St. Paul Bancorp, Inc. Board of
Directors voted on December 16, 1996 and again on June 20, 1997 to increase the
quarterly dividend per share. The dividend was increased by 25 percent on both
occasions.
STOCK PRICES*
- -----------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------
1996 12 3/4 - 13 3/4 12 3/16 - 13 1/4 1 1 7/8-14 13 3/4 - 16 5/16
1997 15 3/16 - 19 5/16 17 1/2 - 23 1/16 21 13/16-25 22 1/2 - 29
- -----------------------------------------------------------------------------------
DIVIDENDS PER SHARE PAID*
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
First Quarter $0.080 $0.053
Second Quarter $0.080 $0.053
Third Quarter $0.100 $0.064
Fourth Quarter $0.100 $0.064
- -----------------------------------------------------------------------------------
* Restated for a five-for-four stock split distributed on January 14, 1997 and
a three-for-two stock split distributed on July 14, 1997.
DIVIDEND PAYMENT DATES
St. Paul Bancorp pays dividends in mid-February, May, August and November, with
record dates at the end of the preceding month. Specific dates are announced
in the Company's quarterly earnings releases.
DIVIDEND REINVESTMENT PLAN
Shareholders of record may authorize that their dividend payments be used to
purchase additional St. Paul Bancorp stock. Withdrawal is optional at any time.
The plan's cash investment option allows voluntary contributions of up to
$2,000 per month. For an information booklet and authorization form, please
contact the transfer agent or the Company's Investor Relations Department.
STOCKHOLDER INQUIRIES
The Company's annual report on Form 10-K is on file with the Securities and
Exchange Commission and is included in this report. To obtain additional
information on St. Paul Bancorp free of charge, call the St. Paul News Hotline
at (773) 889-SPBC (7722) or the Company's Investor Relations Department at
(773) 804-2283. You may also ask to be added to the mailing list for quarterly
earnings releases. The Bank maintains a Web site at www.stpaulbank.com.
Other inquiries may be directed to Investor Relations Director Robert E.
Williams, (773) 804-2284, or Chief Financial Officer Robert N. Parke, (773)
804-2360.
Inquiries about stockholder records, stock transfers, ownership changes,
address changes, dividend payments or the dividend reinvestment plan should be
directed to:
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. c/o Boston Equiserve
P.O. Box 8040
Boston, MA 02266-8040
(800) 730-4001
Fax(781) 828-8813
www.equiserve.com
ANNUAL MEETING
You are cordially invited to St. Paul Bancorp's annual meeting of stockholders,
to be held at 10 a.m. Wednesday, May 6, 1998 at Drury Lane Oakbrook, 100 Drury
Lane, Oakbrook Terrace, IL. Mark your proxy card if you wish to attend. The
record date for voting at the meeting is Tuesday, March 17, 1998.
Independent Auditors
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606-6301
Corporate Counsel
Clifford M. Sladnick
Senior Vice President and General Counsel
St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
72
56
LIST OF LOCATIONS
Home Office
6700 West North Avenue
Chicago, IL 60707-3937
(773) 622-5000
BRANCHES
Chicago (7)
Addison
Berkeley
Berwyn
Blue Island
Buffalo Grove
Carol Stream
Downers Grove
Elmhurst (2)
Elmwood Park (2)
Evanston (2)
Franklin Park
Hanover Park
Harwood Heights
Lombard
Morton Grove
Mount Prospect
Oak Lawn
Oak Park (2)
Rolling Meadows
Skokie
Villa Park
Westchester
Wood Dale
Woodridge
IN-STORE BRANCHES
Chicago (3)
Arlington Heights
Aurora (2)
Bridgeview
Cicero
Crestwood
Elgin
Glendale Heights
McHenry
Melrose Park
Niles
Orland Park
Round Lake Beach
Waukegan
MONEY CONNECTION CENTERS
Clark and Diversey (Chicago)
Clark and Division (Chicago)
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