1
EXHIBIT 13
BUSINESS HIGHLIGHTS / FINANCIAL REVIEW St. Paul Bancorp, Inc.
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[GRAPH]
ASSETS AT YEAR-END 1998 LOAN PORTFOLIO
[GRAPH] [GRAPH]
LOAN PORTFOLIO AT YEAR-END 1998 NONPEROFRMING ASSETS
[GRAPH] [GRAPH]
DEPOSITS AT YEAR-END 1998 NET LOAN CHARGE-OFFS
[GRAPH] [GRAPH]
CONTENTS
18 Five-Year Summary FINANCIAL STATEMENTS AND NOTES
MANAGEMENT'S DISCUSSION AND ANALYSIS 40 Consolidated Financial Statements
19 Overview 44 Notes to Consolidated Financial Statements
21 Statement of Financial Condition 69 Report of Independent Auditors
24 Cash Flow Activity 10-K
27 Results of Operations 70 Annual Report on Form 10-K
34 Credit RiskManagement 74 Officers and Directors
37 Interest Rate Risk 76 Investor Information
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FIVE-YEAR SUMMARY St. Paul Bancorp, Inc.
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At or for the years ended Dec. 31--
Dollars in thousands, except per share amounts 1998 (a) 1997 1996 (b) 1995 1994
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SUMMARY OF FINANCIAL CONDITION
ASSETS:
Cash and cash equivalents......................... $ 439,320 $ 238,133 $ 220,806 $ 239,331 $ 195,020
Investment securities............................. 213,882 187,576 203,598 277,543 286,648
Mortgage-backed securities/
securities due from brokers...................... 602,102 955,290 1,214,814 998,264 1,153,377
Loans receivable-net of allowance................. 4,477,581 3,626,533 3,150,718 2,992,526 2,855,428
Other assets...................................... 301,231 218,312 197,278 200,218 202,403
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Total assets.................................. $ 6,034,116 $ 5,225,844 $ 4,987,214 $ 4,707,882 $ 4,692,876
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits.......................................... $ 3,894,971 $ 3,871,400 $ 3,897,201 $ 3,758,941 $ 3,737,348
Borrowings........................................ 1,520,679 792,994 563,786 458,719 504,341
Other liabilities................................. 108,542 75,119 76,171 65,064 58,982
Stockholders' equity.............................. 509,924 486,331 450,056 425,158 392,205
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Total liabilities and stockholders' equity.... $ 6,034,116 $ 5,225,844 $ 4,987,214 $ 4,707,882 $ 4,692,876
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SUMMARY OF OPERATIONS
Interest income................................... $ 370,963 $ 359,863 $ 338,384 $ 318,720 $ 288,468
Interest expense.................................. 212,809 205,645 190,998 179,300 148,018
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Net interest income........................... 158,154 154,218 147,386 139,420 140,450
Provision for loan losses......................... 1,860 360 1,905 2,059 5,461
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Net interest income after provision
for loan losses.............................. 156,294 153,858 145,481 137,361 134,989
Other income...................................... 57,047 56,308 44,848 41,591 37,788
Cost reduction plan charge........................ 25,000 -- -- -- --
Merger-related charge............................. 9,025 -- -- -- --
SAIF recapitalization............................. -- -- 21,000 -- --
Other general and administrative expense.......... 135,906 125,884 119,294 111,607 108,171
Gain (loss) on foreclosed real estate............. 4 386 (607) (1,133) (2,015)
Income taxes...................................... 14,709 28,206 16,382 23,614 21,663
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Income before extraordinary item.............. 28,705 56,462 33,046 42,598 40,928
Extraordinary loss, net of income taxes........... -- 403 -- -- --
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Net income.................................... $ 28,705 $ 56,059 $ 33,046 $ 42,598 $ 40,928
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Basic earnings per share before
extraordinary item (c)........................... $ 0.71 $ 1.41 $ 0.85 $ 1.06 $ 0.99
Diluted earnings per share before
extraordinary item (c)........................... 0.69 1.37 0.81 1.01 0.94
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Basic earnings per share (c)...................... $ 0.71 $ 1.40 $ 0.85 $ 1.06 $ 0.99
Diluted earnings per share (c).................... 0.69 1.36 0.81 1.01 0.94
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SELECTED FINANCIAL AND OTHER DATA
Weighted average basic shares
outstanding (c).................................. 40,296,222 39,905,921 39,059,590 40,277,889 41,375,283
Weighted average diluted shares
outstanding (c).................................. 41,511,580 41,292,684 41,020,068 42,336,300 43,567,705
Dividends per share (c)........................... $ 0.50 $ 0.36 $ 0.23 $ 0.16 $ 0.16
Dividend payout ratio (d)......................... 72.46% 26.28% 28.40% 15.84% 17.02%
Nonperforming assets to total assets.............. 0.33% 0.25% 0.29% 0.68% 0.65%
Return on average assets.......................... 0.52% 1.09% 0.68% 0.92% 0.92%
Average equity as a percentage of
average assets (a) (b)........................... 9.08% 9.08% 8.88% 8.99% 8.86%
Return on average stockholders'
equity (net worth) (a) (b)....................... 5.71% 11.99% 7.67% 10.25% 10.36%
Number of office locations........................ 65 66 64 63 62
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(a) In 1998, without the $11.5 million merger-related charge and the $25.0
million cost reduction plan charge, net income would have been $54.6
million, or $1.32 per diluted share outstanding. In addition, return on
average assets would have been 0.99% and return on average stockholders'
equity would have been 10.85%.
(b) In 1996, without the $21.0 million non-recurring charge to recapitalize the
SAIF, net income would have been $46.9 million, or $1.14 per diluted share
outstanding. In addition, return on average assets and return on average
equity would have been 0.97% and 10.89%, respectively.
(c) All share and per share amounts have been restated for all stock splits and
stock dividends.
(d) Based upon diluted earnings per share.
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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 December 31, 1998, the Company had
total assets of over $6.0 billion.
On July 1, 1998, the Company merged with Beverly Bancorporation, Inc.
("Beverly"), the bank holding company of Beverly National Bank and Beverly Trust
Company. Beverly National Bank, with total assets of $705 million at June 30,
1998, operated 12 branches primarily in the south and southwestern suburbs of
Chicago. Beverly Trust Company provided a variety of trust and fund management
services for individuals and corporations, including asset management of
personal living trusts and corporate employee benefit plans, and the
administration of land trusts. Through the Beverly merger, in addition to trust
and fund management services, the Company acquired a commercial loan portfolio
and a commercial lending department, as well as commercial checking services.
The Company issued 1.063 shares of its common stock in exchange for each
outstanding common share of Beverly. In total, the Company issued approximately
6.1 million new shares of common stock and reserved an additional 558,000 shares
of common stock in exchange for the outstanding stock options issued to Beverly
officers and directors. The combined shares issued and stock options outstanding
resulted in an initial transaction value of approximately $151.0 million.
The merger was accounted for as a pooling-of-interests transaction.
Accordingly, the Company has restated all financial information and analyses to
incorporate Beverly's results on a historical basis.
In connection with the merger, the Company recorded, in the third quarter of
1998 a merger-related charge of $11.5 million before income taxes. This charge
included one-time transaction costs, contract termination penalties, severance
and additional provisions for loan losses to conform Beverly's allowance for
loan loss to the Company's methodology. Management expects to reduce annual
Beverly expenses by $4.8 million or 19 percent of Beverly's general and
administrative expenses. In addition, by introducing the Bank's products, such
as brokerage and annuity products, to the Beverly customers, and Beverly
products, such as trust operations and commercial banking, to St. Paul
customers, other income is expected to be enhanced by at least $1.0 million. See
Results of Operations-Comparison of Years Ended December 31, 1998 and 1997 and
Note B -- Non-Recurring Charges for further details.
In August 1998, the Company announced a cost reduction plan and certain
information technology replacements to lower expenses and improve information
systems. In connection with this program, the Company recorded a $25 million
one-time pre-tax charge against earnings. The largest part of the charge related
to changes in compensation and benefit plans. The Company's supplemental
executive and directors' pension plans were modified and future accruals have
been frozen and converted to single sum account balance(1). In addition, the
Company's leveraged employee stock ownership plan was terminated(2). The Company
also offered an early retirement opportunity to certain employees, made other
workforce reductions and suspended the earnings based incentive bonus for 1999.
In aggregate, these cost reduction actions are expected to result in pre-tax
annual cost savings of approximately $9.0 million. A portion of the charge was
also related to certain information technology initiatives. The Company
converted its core transaction processing systems to the EDS Miser system. The
conversion included replacing the deposit, loan servicing and general ledger
transaction processing systems and the teller platform system, as well as
converting transaction processing systems that supported the old Beverly Bank
locations to the Miser system. In addition, the Bank converted its 1-4 family
loan servicing system to the Alltel loan servicing system during the fourth
quarter of 1998. See Results Of Operations Comparison of Years Ended December
31, 1998 and 1997 and Note B -- Non-Recurring Charges for further details.
At December 31, 1998, the Bank's branch network consisted of 65 locations,
including the 12 Beverly locations. The network included freestanding branches,
banking offices located in grocery supermarkets and two "Money Connection
Centers." The Bank closed one of its in-store locations in the second quarter of
1998, due to the closing of the grocery store in which the branch was located.
The Bank will also close four other in-store banking offices in 1999 when the
grocery stores in which they are located also close. Management expects to
relocate one of these branches and combine the operations of the other three
with nearby branches. The Bank's two Money Connection Centers were opened in
late 1997 and early 1998. These locations were designed to occupy a smaller
space by combining self-service banking options with branch personnel to deliver
a full line of banking services.
The Bank also operates one of the largest networks of automated teller
machines ("ATMs") in the Chicagoland area with 550 machines. This network
includes 251 ATMs located in White Hen Pantry convenience stores and additional
ATMs in grocery stores, gas stations and other convenience stores. See Results
Of Operations - Comparison Of Years Ended December 31, 1998 and 1997 for further
discussion of ATM operations.
Both the Company and the Bank operated other wholly owned financial services
companies in 1998, including Investment Network, Inc., Annuity Network, Inc.,
SPF Insurance Agency, Inc., St. Paul Financial Development Corporation ("SPFD")
and St. Paul Trust Company. At December 31, 1998, customers maintained $722
million of investments through Investment Network, Inc. and $347 million of
annuity contracts through Annuity Network, Inc. SPFD is a residential and
commercial land development company focused in the greater Chicagoland area,
providing both equity and debt financing for real estate development projects.
At December 31, 1998, SPFD had $21.0 million in real estate equity and financing
investments. St. Paul Trust Company (formerly known as Beverly Trust Company)
provides a variety of trust and fund management services to customers and at
December 31, 1998 had $349 million of assets under management. In addition, in
January 1998, ATM Connection, Inc. began operations as a new subsidiary of the
Bank. This subsidiary owns and operates the ATM network of the Bank. See Note A
- -- Summary of Significant Accounting Policies for descriptions of all affiliates
and subsidiaries.
(1) A Rabbi Trust has been established for the benefit of plan participants
while the amounts remain as general obilgations of the Company.
(2) Subject to receipt of favorable determination letter from the Internal
Revenue Service
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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In January 1998, the Bank acquired a privately held residential mortgage
broker serving Chicago and its surrounding suburbs. This broker now operates as
a separate subsidiary of the Bank under the name Serve Corps Mortgage
Corporation ("Serve Corps"). Serve Corps originates 1-4 family residential
mortgages primarily for sale, with servicing released, to third-party investors.
The Bank also purchases loans for its portfolio from Serve Corps. The
acquisition of this mortgage brokerage operation helped increase overall 1-4
family loan origination volume and enhanced other income through gains on loans
sold to third-party investors. Some lending responsibilities previously
performed by the Bank were transferred to Serve Corps' operations. During 1998,
Serve Corps originated $412.3 million of 1-4 family loans, including $144.6
million of loans originated for the Bank's portfolio.
In general, the business of the Bank is to reinvest deposits collected from
branch facilities into interest-yielding assets, such as loans secured by
mortgages on real estate, securities and, to a lesser extent, consumer and
commercial loans. The Bank's 1-4 family residential mortgage products are
originated through its mortgage brokerage operation, retail banking offices and
telephone banking facility. The Bank eliminated its 1-4 family correspondent
lending unit in the third quarter. The Bank also originates a variety of
consumer loan products, including home equity loans, secured lines of credit,
education, automobile and credit card loans through the retail banking offices.
During 1998, the Bank (including Serve Corps) originated $924.7 million of 1-4
family loans, including home equity/line of credit loans, and $23.3 million of
other consumer loans.
The Bank offers mortgage loans to qualifying borrowers to finance apartment
buildings and commercial real estate, as well as other commercial loan products.
During 1998, the Bank originated $399.5 million of commercial and commercial
real estate loans. The commercial real estate loan portfolio is mainly comprised
of loans secured by multifamily real estate. The Bank acquired a commercial
lending department and commercial and commercial real estate loan portfolio of
approximately $188 million in connection with the Beverly merger. Originations
from this source totaled nearly $60 million in 1998. The Bank plans to expand
this business unit and has set a budget of $100 million for originations in
1999. Most of Beverly's commercial loan portfolio was secured by real estate.
Approximately $55 million of this portfolio included other commercial loans,
such as business lines of credit, term loans, letters of credit, equipment lease
financing, municipal financing, overdrafts, receivable financing, SBA loans and
agricultural loans. The portfolio is located primarily in Illinois and Indiana.
In recent years, the Bank made income property loans only in specific Midwestern
states, such as Illinois, Indiana, Wisconsin, Minnesota and Ohio. In 1997,
however, the Bank resumed its nationwide income property lending program in
selected markets outside the Midwest. The Bank has set an origination budget of
$275 million for 1999 for its income property lending activities. Originations
from this unit were nearly $340 million in 1998. See Credit Risk Management for
further details.
To grow earning assets and offset the heavy loan prepayments in excess of
loan originations, the Bank has actively purchased 1-4 family adjustable rate
whole loans for its portfolio. During 1998, the Bank purchased over $1.6 billion
of 1-4 family adjustable rate loans, with the majority of the purchases
occurring during the last half of the year. The Bank purchases loans to
supplement its originations. Management expects to use additional loan purchases
in 1999 to continue to build assets and offset the anticipated continuation of
the high level of loan repayments. The Bank also invests in mortgage-backed
securities ("MBS"), federal, state, municipal and corporate debt securities and
other equity securities. The Bank assumed a state, municipal and corporate bond
portfolio from Beverly. The Bank classifies investment securities as either
available for sale ("AFS") or held to maturity ("HTM"). Unrealized gains and
losses on AFS securities are recorded as an adjustment to stockholders' equity,
net of related taxes.
The Bank offers a variety of deposit products including checking, savings,
money market accounts and certificates of deposit ("CDs"). The Bank also relies
on borrowings to help finance operations and fund growth of interest earning
assets.
Earnings of the Bank are susceptible to interest rate risk to the extent that
the Bank's deposits and borrowings reprice on a different basis and in different
periods than its securities and loans. Prepayment options embedded in loans and
MBS and varying demand for loan products, due to changes in interest rates,
create additional operating risk for the Bank in matching the repricing of its
assets and liabilities. The Bank tries to structure its balance sheet to reduce
exposure to interest rate risk and to maximize its return on equity,
commensurate with risk levels that do not jeopardize the financial safety and
soundness of the institution. See Interest Rate Risk discussion following for
further information.
Changes in real estate market values also affect the Bank's earnings. As
changes occur in interest rates, the forces of supply and demand for real
estate, and the economic conditions of real estate markets, the risk of actual
losses in the Bank's loan portfolio will also change. Changing economic
conditions, market interest rates and the overall business environment could
also affect the risk of actual loss in the Bank's commercial loan portfolio. See
Credit Risk Management for further details.
SEGMENT REPORTING: The Company operates many different businesses in the
financial services sector, and has organized these businesses into four distinct
segments. The segments are as follows: 1) Consumer Financial Services, which
includes the branch network, other deposit gathering support services of the
Bank, discount brokerage, insurance agency, annuity sales, ATM operations, and
trust and fund management services; 2) Commercial and Multifamily Lending, which
includes commercial and commercial real estate lending of the Bank, real estate
development operations and investments in low-income housing; 3) Community
Lending, which includes 1-4 family loan originations, consumer loan activities
and the servicing of these portfolios; and 4) Money Management, which includes
the wholesale acquisition of 1-4 family loans, investment portfolios, wholesale
financing activities, internal funds transfer pricing allocations, tax
management and the activities of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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In the segment reporting process, balance sheets are constructed for each
segment by allocating the assets, liabilities and equity contained in each
business line within the segment. The development of each segment's balance
sheet includes the effects of allocations of capital using a risk-adjusted
method and the balances allocated from a central funding center in connection
with internal transfer pricing. An internal transfer pricing mechanism is used
to value financial assets and liabilities for each segment. Market yield curves
are used to assign rates to various balance sheet categories, which results in a
funding charge and/or credit to the segment. Because this allocation is an
internal funding system, the resulting charge or credit is eliminated in
interest income/expense.
The financial results for the year ended December 31, 1998 for each segment
are reported in Note BB -- Segment Reporting. Because Beverly did not have any
"segment" information, it was not practicable to provide 1997 comparable segment
results.
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protection of the safe harbor with
respect to all such forward-looking statements. These forward-looking statements
describe future plans or strategies and include the Company's expectations of
future financial results. The Company's ability to predict results or the effect
of future plans or strategies is inherently uncertain. Factors that could affect
actual results include but are not limited to i) general market rates, ii)
changes in market interest rates and the shape of the yield curve, iii) general
economic conditions, iv) real estate markets, v) legislative/regulatory changes,
vi) monetary and fiscal policies of the U.S. Treasury and the Federal Reserve,
vii) changes in the quality or composition of the Company's loan and investment
portfolios, viii) demand for loan products, ix) the level of loan and MBS
repayments, x) deposit flows, xi) competition, xii) demand for financial
services in the Company's markets, xiii) changes in accounting principles,
policies or guidelines, xiv) inability to realize expected merger cost savings
and revenue enhancements within the expected timeframe or otherwise, xv) greater
than expected operational difficulties, customer service problems and
unanticipated cost overruns related to the integration of the business of
Beverly and systems conversions, xvi) inability to realize expected cost savings
associated with the cost reduction plan within the expected timeframe, xvii)
unanticipated costs or expenses, xviii) higher than anticipated costs pertaining
to benefit plan modifications, early retirement program and technology
initiatives, and xix) changes in projections of capital expenditures and costs
associated with correction and testing of systems in connection with the Year
2000 issue. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
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STATEMENT OF FINANCIAL CONDITION
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Total assets of the Company were $6.0 billion at year-end 1998, an $808.3
million or 15.5 percent increase over the prior year-end. An $851.0 million
increase in loans receivable and higher cash and cash equivalents of $201.2
million produced the growth in total assets. On the liability side, borrowings
funded most of the increase in total assets as year-end balances increased
$727.7 million over the prior year-end, while deposit balances were mostly flat.
Cash and cash equivalents totaled $439.3 million at December 31, 1998, an
increase of $201.2 million over December 31, 1997. 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, municipal and corporate bonds, and other marketable-equity
securities, totaled $213.9 million at December 31, 1998, a $26.3 million
increase over the prior year-end. At both December 31, 1998 and 1997, all of the
Company's investment securities were classified as AFS. The Company recorded an
unrealized gain of $2.5 million on AFS investment securities at year-end 1998,
compared to an unrealized gain of $1.6 million at December 31, 1997.
MBS balances, including MBS classified as securities due from brokers,
declined $353.2 million, or 37.0 percent, to $602.1 million at December 31,
1998. Principal repayments received during the year primarily produced the
reduction in MBS balance. The purchase of $30.0 million of MBS partly offset
repayments. See Cash Flow Activity for further detail. The weighted average
yield of the entire MBS portfolio was 6.71 percent at December 31, 1998, down 13
basis points from December 31, 1997. The repayment of higher rate securities
produced the decline in the weighted average rate. At year-end 1998,
approximately one-half of the MBS portfolio was classified as AFS, and the
Company recorded an unrealized loss on its AFS MBS of $740,000, compared to an
unrealized gain of $2.7 million at December 31, 1997.
Loans receivable increased $851.0 million, or 23.5 percent, to $4.5 billion
at December 31, 1998. The increase in loans receivable was due to Management's
strategy to expand interest earning asset levels. Most of this growth was
accomplished through the purchase of over $1.6 billion of 1-4 family whole loans
in 1998. In addition, during 1998, the Company originated $1.1 billion of 1-4
family, commercial, commercial real estate and consumer loans for portfolio.
While the Company increased both loan purchases and originations, heavy
repayments, which were approximately $1.7 billion in 1998, limited the growth in
loans receivable. The low interest rate environment caused a historically high
level of repayments in the Company's loan portfolios. The Bank also increased
its 1-4 family loan origination capacities with the early 1998 acquisition of
Serve Corps. During 1998, the Bank purchased for its own portfolio $144.6
million of loans from Serve Corps. Originations from Serve Corps are either sold
to third-party investors or purchased for the Bank's portfolio. The operations
of Serve Corps produced the increase in loans held for sale, which totaled $65.4
million at December 31, 1998, compared to $19.5 million at the end of 1997. See
Loan Portfolio table for further details of the composition of the loan
portfolios. Also, see Results of Operations - Comparison of Years Ended December
31, 1998 and 1997 - Net Interest Income for
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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further discussion. The weighted average rates on loans receivable declined 43
basis points to 7.14 percent at December 31, 1998, compared to 7.57 percent at
December 31, 1997. The purchase and origination of loans at weighted average
rates less than the portfolio average and the repayment of higher yielding loans
produced the continued decline in the weighted average rate.
Deposit balances totaled $3.89 billion at December 31, 1998, up slightly from
$3.87 billion at December 31, 1997. While period-end balances increased only
slightly, the composition of product balances shifted significantly within
deposits. Period-end CD balances declined by $107.5 million, while the lower
costing checking account balances increased by $87.1 million. This shift in the
composition of deposits along with reductions in the rates paid on checking,
savings and money market accounts also contributed to the decline in the
weighted average rate paid on deposits. The weighted average deposit rate
dropped 38 basis points to 3.78 percent at year-end 1998 from 4.16 percent at
the end of the previous year. The low interest rate environment allowed the Bank
to lower its deposit rates and reduce offering rates on new CDs. The Bank also
did not retain some higher rate CD balances issued in 1997. See Cash Flow
Activity, Results of Operations -- Years Ended December 31, 1998 and 1997 and
Note N -- Deposits for further details.
In 1998, Management relied primarily on borrowing balances to fund asset
growth. Total borrowings increased 91.8 percent to $1.5 billion at December 31,
1998, up from $793.0 million at the previous year-end. Most of the increase
occurred in long-term borrowing balances. Short-term borrowings, which totaled
$395.3 million at December 31, 1998, mainly consist of advances from the Federal
Home Loan Bank ("FHLB") and borrowings under agreements to repurchase securities
sold. Long-term advances, which totaled $1.1 billion at December 31, 1998, were
mainly comprised of FHLB advances and $100 million of senior notes issued by the
Company in February 1997. See Cash Flow Activity, Results of Operations - Years
Ended December 31, 1998 and 1997 and Note O -- Borrowings for further details.
The combined weighted average cost of borrowings declined to 5.37 percent at
December 31, 1998 from 6.22 percent at December 31, 1997. Lower rates on new
long-term borrowing, and a decrease on the rate paid on short-term borrowings
due to the low interest rate environment caused the decline in the weighted
average borrowing rate.
Stockholders' equity reached $509.9 million at December 31, 1998, up $23.6
million from $486.3 million at the previous year-end. Book value per share
increased to $12.52 per share at year-end 1998 from $12.06 per share at December
31, 1997. Net income for 1998 of $28.7 million, $8.1 million of capital supplied
by the exercise of director and officer stock options, and $6.6 million of
capital provided by the release of unearned employee stock ownership plan shares
mainly produced the increase in stockholders' equity. However, the declaration
of $19.6 million of dividends to shareholders partly offset these increases to
stockholders' equity.
In January 1999, the Company announced its intentions to purchase during the
first six months of 1999 up to 2 million shares of its outstanding common stock,
or approximately 5 percent of shares outstanding at year-end 1998. The purchases
will be made from time to time in open market and privately negotiated
transactions(3). In addition, in January 1999, the Company's Board of Directors
approved a 33 percent increase in the regular quarterly dividend to 20 cents per
share from 15 cents. The increase in the quarterly dividend will begin with the
first quarter 1999 dividend payment. The Company had previously increased the
quarterly dividend rate during the third quarter of 1998 to 15 cents per share
from 10 cents per share. See Cash Flow Activity -- Holding Company Liquidity for
further details.
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 December 31, 1998
was $84.3 million, compared to $99.8 million at December 31, 1997. During 1998,
the amortization of $15.5 million of notional amounts produced the decrease in
the notional amount of interest rate exchange agreements. 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 1997, the Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The
implementation of some of the provisions of this Statement was delayed until
1998 as required by SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. These Statements provide accounting and
reporting standards for the sale, securitization and servicing of receivables
and other financial assets and the extinguishment of liabilities. The adoption
of this Statement did not affect operations in a material way. In accordance
with SFAS No. 125, as amended by SFAS No. 127, the Company began to report the
collateral that has been pledged to a third party in connection with a
repurchase agreement and for which the third party may sell or repledge the
collateral and which the Company does not have the right to redeem on short
notice, as "Securities Due from Brokers" on the Consolidated Statements of
Financial Condition. The amount due from brokers consists of the carrying value
of MBS pledged as collateral.
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
reporting of financial information from operating segments in annual and interim
financial statements. This Statement requires that financial information be
reported on the basis that it is reported internally for evaluating segment
performance. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will not
impact the primary financial statements. See Note BB -- Segment Reporting for
further details.
(3) During 1997, the Company executed a stock repurchase program by acquiring
981,825 shares of Company common stock, at a weighted average price of
$16.56.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, Employers' Disclosure about Pensions and Other Post-retirement
Benefits. This Statement revises an employer's financial statement disclosures
for pension and other post-retirement benefit plans. This Statement does not,
however, change the measurement or recognition of those plans, and will
therefore have no effect on operations. This Statement is effective for 1998.
See Note S -- Employee Benefit Plans for further details.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. This Statement provides a standard for the
recognition and measurement of derivatives and hedging activities. Because of
the Company's minimal use of derivatives, Management does not anticipate that
the adoption of the new Statement will have a significant impact on earnings or
the financial position of the Company. However, the Statement is complex and
defines derivatives broadly and will require an extensive accounting analysis to
determine if the Bank's instruments and contracts are subject to the Standard.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Entity -- An Amendment of FASB No. 65. This Statement
requires that after the securitization of mortgage loans, an entity classify
the resulting mortgage-backed securities or other retained interest based on
its ability and intent to sell or hold those securities (i.e., trading,
available for sale or held to maturity). Since the Company does not securitize
the loans it holds for sale this Statement will not have a material impact on
operations. This Statement does not become effective until 1999, but early
adoption is permitted.
In January 1999, the Company adopted SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP provides
guidance on accounting for the costs related to developing, obtaining, modifying
and/or implementing internal use software. The prospective implementation of
this SOP should not have a material impact on the Company.
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 December 31, 1998, the Bank's core and tangible capital ratio of 7.62 percent
and risk-based capital of 15.62 percent exceeded the required capital levels.
Under separate prompt corrective action regulations, the OTS can enforce certain
restrictions on savings institutions classified as undercapitalized. These
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
December 31, 1998, the ratio of total capital to risk-weighted assets of 15.62
percent, Tier I capital to risk-weighted assets of 14.37 percent and Tier I
capital to regulatory assets of 7.62 percent allowed the Bank to be considered
"well capitalized" under the OTS's prompt corrective action regulations(4). See
Note Q -- Stockholders' Equity for further details and a reconciliation of the
Company's stockholders' equity to the regulatory capital of the Bank.
Under the Federal Deposit Insurance Corporation Improvement Act, the OTS
published regulations to ensure that its risk-based capital standards take
adequate account of concentration of credit risk, risk from nontraditional
activities, and actual performance and expected risk of loss on multifamily
mortgages. These rules allow the regulators to impose, on a case-by-case basis,
an additional capital requirement above the current requirements where an
institution has significant concentration of credit risk or risks from
nontraditional activities. The Bank is currently not subject to any additional
capital requirements under these regulations.
The OTS may establish capital requirements in excess of the generally
applicable minimum for a particular savings institution if the OTS determines
the institution's capital was or may become inadequate in view of its particular
circumstances. Individual minimum capital requirements may be appropriate where
the savings institution is receiving special supervisory attention, has a high
degree of exposure to interest rate risk, or poses safety or soundness concerns.
The Bank has no such requirements.
Regulatory rules currently impose limitations on all capital distributions by
savings institutions, including dividends, stock repurchase and cash-out
mergers. Under current OTS capital distribution regulations, as long as the Bank
meets the OTS capital requirements before and after the payment of dividends and
meets the standards for expedited treatment of applications (including having
certain regulatory composite, compliance and Community Reinvestment Act
ratings), the Bank may pay dividends to the Company without prior OTS approval
equal to the net income to date over the calendar year, plus retained net income
over the preceding two years. In addition, the OTS has the discretion to
prohibit any otherwise permitted capital distribution on general safety and
soundness grounds, and must be given 30 days' advance notice of all capital
distributions during which time it may object to any proposed distribution.
During 1998, the Bank paid dividends to the Company equal to 100 percent of
the Bank's prior quarter's net income. However, in the third quarter of 1998 the
Bank recorded a loss due to the one-time merger-related and cost reduction plan
charges and the Bank paid no dividends to the Company during the quarter.
See Note Q -- Stockholders' Equity for a further discussion of regulatory
capital requirements.
(4) All three of the capital ratios have each declined between 100 and 110 basis
points from December 31, 1997 to December 31, 1998. The lower ratios were
caused by an increase in both risk-weighted assets and regulatory assets, as
the level of regulatory capital has remained relatively level over the
period. The higher asset levels were due primarily to the purchasing of 1-4
family loans.
23
8
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
CASH FLOW ACTIVITY
- --------------------------------------------------------------------------------
Cash and cash equivalent balances at December 31, 1998 totaled $439.3 million,
compared to $238.1 million at December 31, 1997. During 1998, the major sources
of funds included new borrowings and loan and MBS repayments. The Company's
major uses of funds included purchases and originations of loans for portfolio.
During 1998, the Company built interest earning asset levels through the
purchase of 1-4 family whole loans and the origination of new loans for
portfolio. Purchases of 1-4 family whole loans in 1998 totaled over $1.6 billion
and new loans originated for portfolio totaled $1.1 billion, resulting in a
significant use of funds during the year (5). Loan repayments of approximately
$1.7 billion provided a significant source of cash during the year. The low
interest rate environment has produced a significant amount of repayment
activity in the Company's loan portfolio, and the levels have increased over
1997 repayments. Management expects the trend of high repayments to continue
into 1999. Management intends to continue to use additional 1-4 family whole
loan purchases to not only supplement loan originations in offsetting these
prepayments but also to increase loan balances. In comparison, 1-4 family whole
loan purchases in 1997 of $798 million generally produced the majority of the
$472.3 million net increase in loans receivables in 1997.
An increase in loans held for sale at December 31, 1998 was also a
significant use of cash during 1998. The addition of Serve Corps accounted for
most of the $45.9 million increase in assets held for sale during the year.
During 1998, Serve Corps originated $412.3 million of loans, including $144.6
million of loans purchased by the Bank. Serve Corps sales of loans during the
year totaled $350.9 million.
New borrowings were a major source of funds during 1998, as Management used
new borrowings to fund the whole loan purchases in an attempt to leverage the
balance sheet and enhance net interest income. The Company increased borrowing
balances by $730.6 million during the year, with most of the increase occurring
in long-term borrowing balances. Of the increase in borrowing balances, $875
million was attributable to new long-term borrowings. In comparison, during
1997, the Company increased net borrowing balances by $228.1 million, largely to
fund whole loan purchases.
MBS repayments also provided a significant source of funds in 1998. MBS
repayments totaled $377.5 million in 1998 compared to $256.9 million during
1997. The Company also purchased $30.0 million of MBS in 1998 compared to $5.0
million in the previous year.
During 1998, the Company had net deposit inflows of $23.6 million, compared
to net deposit outflows during the prior year of $22.7 million. During 1998, net
checking and savings account balances increased, while CD balances declined over
$100 million. The Bank did not retain some of the higher costing CD products
issued in 1997 in an effort to reduce deposit costs.
Other uses of funds during 1998 included an $80.0 million net increase in
investment securities, $25.2 million for the purchase of FHLB stock, $19.6
million of dividends paid to common shareholders and the purchase of $16.1
million of office property and equipment.
Holding Company Liquidity: At December 31, 1998, the Company had $122.7 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 $12.6 million of investment securities. The
Company also maintains a $20.0 million revolving line of credit agreement from
another financial institution. At December 31, 1998, no funds were borrowed
under this line of credit.
Sources of liquidity for St. Paul Bancorp during 1998 included $34.8 million
of dividends from the Bank (6), $28.7 million of repayments of advances to the
Bank, $10.7 million of repayments of advances to SPFD, $8.1 million of proceeds
from the issuance of common shares in connection with the exercise of employee
stock options and $1.4 million in dividends from the Company's other
subsidiaries. Uses of St. Paul Bancorp's liquidity during 1998 included $19.6
million of dividends paid to stockholders and the purchase of $4.5 million of
investment securities. See Note W - Parent Company-Only Financial Information
for further details.
The OTS regulates dividend payments from the Bank to the Company. Management
plans to pay dividends to the Company from the Bank equal to 100 percent of the
Bank's net income during 1999. See Capital and Note Q - Stockholders' Equity for
further details.
In January 1999, the Company's Board of Directors approved a 33 percent
increase in the quarterly dividend rate to $0.20 per share from $0.15 per share.
The new quarterly dividend rate began with the quarterly dividend paid in
February 1999. In January 1999, the Board of Directors also approved a six-month
stock repurchase program. Management is authorized to repurchase up to 2 million
shares of its common stock (or approximately 5 percent of the outstanding common
stock at December 31, 1998). The purchases will be made from time to time in
open market and privately negotiated transactions. The Company will use existing
liquidity and dividends received from its subsidiaries to fund the repurchase
program and dividend increase.
Regulatory Liquidity Requirements: Savings institutions are required to maintain
average daily balances of liquid assets equal to a specified percentage of the
institution's average net withdrawable deposits plus short-term borrowings.
Liquid assets include cash, certain time deposits, federal funds sold and
certain securities. This liquidity requirement may be changed from time to time
by the Director of the OTS to any amount within the range of 4 percent to 10
percent, depending upon economic conditions and the deposit flows of savings
institutions. In November 1997, the OTS revised its liquidity requirement to 4
percent from 5 percent and expanded the asset types that qualify as liquid
assets. The OTS also added a qualitative liquidity requirement so the Bank must
maintain liquidity to ensure safe and sound operations. Because of the expanded
definition of liquid assets, the Bank's liquidity at December 31, 1998 of $706.3
million substantially exceeded the 4 percent requirement of $181.5 million.
Because of the change in regulation, Management's regulatory liquidity
compliance focus has shifted from quantitative measures to qualitative safety
and soundness concerns.
(5) See Credit for further details of new loan purchases.
(6) During 1998, the Company used its excess liquidity to advance funds to the
Bank for use in the Bank's operation. The advances were due upon demand and
earned a rate of interest comparable to what the Company could earn on its
investment portfolio. The advance was repaid at the end of 1998.
9
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, 1998 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance (a) Interest Rate
- --------------------------------------------------------- --------------------------------- ---------------------------------
Investments (b):
Taxable investment
securities .................. $ 467,229 5.04% $ 385,575 $ 21,327 5.53% $ 301,960 $ 17,736 5.87%
Non-taxable investment
securities (c) .............. 44,548 7.13 41,376 2,003 7.45 40,944 2,025 7.61
Equity investment
securities (d) .............. 78,771 6.36 64,392 4,185 6.50 46,185 3,082 6.67
---------------------- -------------------------------- ---------------------------------
Total investments .............. 590,548 5.38 491,343 27,515 5.82 389,089 22,843 6.15
Mortgage-backed
securities/securities
due from brokers ............ 602,102 6.71 781,667 50,620 6.48 1,097,475 74,996 6.83
Loans receivable (e) ........... 4,583,358 7.14 4,018,719 292,828 7.29 3,427,050 262,024 7.65
---------------------- -------------------------------- ---------------------------------
Total interest-earning
assets . .................... $5,776,008 6.92% $5,291,729 $ 370,963 7.03% $4,913,614 $ 359,863 7.35%
===================== ============================== =================================
Deposits:
Interest-bearing
transaction ................ $ 404,456 1.01% $ 392,242 $ 4,397 1.10% $ 307,095 $ 5,640 1.78%
Non-interest-bearing
transaction ................ 282,789 -- 248,167 -- -- 276,442 --
Money market accounts ......... 280,503 3.68 261,986 8,614 3.29 254,200 8,866 3.56
Savings accounts .............. 782,415 2.17 775,879 17,812 2.30 781,777 19,141 2.45
Certificates of deposit ....... 2,144,808 5.40 2,190,620 121,785 5.56 2,267,915 128,463 5.66
---------------------- -------------------------------- ---------------------------------
Total deposits ................ 3,894,971 3.78 3,868,894 152,608 3.94 3,887,429 162,110 4.17
Borrowings (f):
Short-term .................... 395,318 5.56 319,878 18,510 5.79 422,398 24,419 5.78
Long-term ..................... 1,125,361 5.31 740,955 41,691 5.63 281,613 19,116 6.79
---------------------- -------------------------------- ---------------------------------
Total borrowings .............. 1,520,679 5.37 1,060,833 60,201 5.67 704,011 43,535 6.18
---------------------- -------------------------------- ---------------------------------
Total interest-bearing
liabilities ................ $5,415,650 4.23% $4,929,727 $ 212,809 4.32% $4,591,440 $ 205,645 4.48%
===================== =============================== =================================
Excess of interest-earning
assets over interest-
bearing liabilities ........ $ 360,358 $ 362,002 $ 322,174
=============================================================================================
Ratio of interest-earning
assets to interest-
bearing liabilities ........ 1.07x 1.07x 1.07x
=============================================================================================
Interest income ............... $ 158,154 $ 154,218
=============================================================================================
Interest rate spread
(tax equivalent yield) ..... 2.69%
=============================================================================================
"Average" interest
rate spread
(tax equivalent yield) ..... 2.71% 2.87%
=============================================================================================
Net yield on average
earning assets
(tax equivalent yield) ..... 3.01% 3.16%
=============================================================================================
1996
- ----------------------------------------------------------------
Effective
Average Yield/
Balance (a) Interest Rate
- ----------------------------------------------------------------
Investments (b):
Taxable investment
securities ............... $ 367,410 $ 19,022 5.18%
Non-taxable investment
securities (c) ........... 36,641 1,826 7.67
Equity investment
securities (d) ........... 36,126 2,426 6.72
------------------------------
Total investments ........... 440,177 23,274 5.51
Mortgage-backed
securities/securities
due from brokers ......... 908,899 57,548 6.33
Loans receivable (e) ........ 3,317,612 257,562 7.77
------------------------------
Total interest-earning
assets ................... $4,666,688 $ 338,384 7.28%
==============================
Deposits:
Interest-bearing
transaction .............. $ 313,224 $ 5,645 1.80%
Non-interest-bearing
transaction .............. 249,252 -- --
Money market accounts ....... 240,638 7,920 3.29
Savings accounts ............ 798,480 19,592 2.45
Certificates of deposit ..... 2,223,945 124,931 5.62
------------------------------
Total deposits .............. 3,825,539 158,088 4.13
Borrowings (f):
Short-term .................. 267,979 15,239 5.69
Long-term ................... 248,642 17,671 7.11
------------------------------
Total borrowings ............ 516,621 32,910 6.37
------------------------------
Total interest-bearing
liabilities .............. $4,342,160 $ 190,998 4.40%
==============================
Excess of interest-earning
assets over interest-
bearing liabilities $ 324,528
===============================
Ratio of interest-earning
assets to interest-
bearing liabilities ...... 1.07x
===============================
Interest income .............. $ 147,386
===============================
Interest rate spread
(tax equivalent yield) ...
===============================
"Average" interest
rate spread
(tax equivalent yield) ... 2.88%
===============================
Net yield on average
earning assets
(tax equivalent yield) ... 3.18%
===============================
(a) All average balances based on daily balances.
(b) Average balances exclude the effect of unrealized gains or losses on
available for sale investment securities.
(c) Effective yield and weighted average rate on tax-exempt securities are on a
tax equivalent basis assuming a 35% tax rate.
(d) Includes investment in FHLB stock and other equity investments.
(e) Includes loans held for sale and loans placed on a nonaccrual status.
(f) Includes FHLB advances, securities sold under agreements to repurchase and
other borrowings.
- --------------------------------------------------------------------------------
10
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Rate/Volume Analysis
Years ended Dec. 31 - Dollars in thousands
1998 vs. 1997 1997 vs. 1996
increase/(decrease) due to increase/(decrease) due to
- --------------------------------------------------------------------------------------------------------------------------
Total Total
Volume Rate Change Volume Rate Change
- --------------------------------------------------------------------------------------------------------------------------
Change in Interest and Dividend Income:
Loans receivable............................................ $ 43,568 $(12,764) $ 30,804 $ 8,408 $(3,946) $ 4,462
Mortgage-backed securities/securities due from brokers ..... (20,625) (3,751) (24,376) 12,624 4,824 17,448
Taxable investment securities............................... 4,675 (1,084) 3,591 (3,648) 2,362 (1,286)
Non-taxable investment securities .......................... 37 (59) (22) 227 (28) 199
Dividends on equity investment securities .................. 1,185 (82) 1,103 671 (15) 656
------------------------------------------------------------
Total interest income ................................... 28,840 (17,740) 11,100 18,282 3,197 21,479
Change in Interest Expense:
Deposits ................................................... (770) (8,732) (9,502) 2,573 1,449 4,022
Short-term borrowings ...................................... (5,932) 23 (5,909) 8,923 257 9,180
Long-term borrowings ....................................... 26,352 (3,777) 22,575 2,265 (820) 1,445
------------------------------------------------------------
Total interest expense .................................. 19,650 (12,486) 7,164 13,761 886 14,647
------------------------------------------------------------
Net change in net interest and dividend income before
provision for loan losses.................................. $ 9,190 $ (5,254) $ 3,936 $ 4,521 $ 2,311 $ 6,832
============================================================
The above analysis allocates the change in interest and dividend 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 and dividend
income and expense related to rate is based upon the change in yield or rate
paid and the prior period's average balances. Changes due to both rate and
volume have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each. The effect of
nonperforming assets has been included in the rate variance. Average balances
exclude the effect of unrealized gains and losses.
- --------------------------------------------------------------------------------
26
11
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Comparison of Years Ended Dec. 31, 1998 and 1997
GENERAL: The Company recorded net income of $28.7 million during 1998, or $0.69
per diluted share outstanding. Without the one-time merger- related pre-tax
charge of $11.5 million and the $25.0 million cost reduction plan pre-tax
charge, the Company would have recorded net income of $54.6 million or $1.32 per
diluted share outstanding, compared to $56.1 million or $1.36 per diluted share
outstanding in 1997. During 1998, higher general and administrative costs
("G&A"), partly offset by higher net interest income, lower provisions for loan
losses and an increase in other income, produced the decline in net income.
Operating results during 1997 also included a $403,000 extraordinary loss, net
of tax, on the early extinguishment of the Company's $34.5 million of
subordinated notes.
NET INTEREST INCOME: Net interest income totaled $158.2 million during 1998, a
$3.9 million or 2.6 percent increase over the $154.2 million reported in 1997.
Interest income rose $11.1 million to $371.0 million, while interest expense
increased $7.2 million to $212.8 million. During 1998, the Company increased
average interest earning asset levels by $378.1 million to $5.3 billion. This
growth in the interest earning asset levels was achieved primarily through the
purchase of whole loans, funded mostly with new borrowing balances.
The net interest margin ("NIM"), on a tax-equivalent basis, was 3.01 percent
during 1998, compared to 3.16 percent during 1997. During 1998, lower yields
earned on assets put downward pressure on the NIM. The lower yield was caused by
the high level of repayments in the loan and MBS portfolios, as higher rate
assets paid off and were replaced with new, lower yielding balances. In
addition, a greater reliance on borrowings as a source of funds also contributed
to lower NIM. The Bank was able to offset some of the spread contraction as the
cost of deposits fell, but to a lesser degree. Management expects the high level
of repayments to continue into 1999 and anticipates that repayments may continue
to cause some contraction in the NIM.
INTEREST INCOME: Interest income on loans receivable increased nearly 12 percent
to $292.8 million during 1998 from $262.0 million during 1997. The increase in
income was produced by a $591.7 million increase in average balances partly
offset by a 36 basis point decline in the effective loan yield. The increase in
average loan balances, which totaled $4.0 billion during 1998, was produced by
the purchase of over $1.6 billion of loans during 1998 and the origination of
$1.1 billion of loans for portfolio. These originations and purchases were
partly offset by loan repayments. The level of repayments increased during 1998
from 1997 as a result of the low interest rate environment that produced a
significant amount of refinance activity. The heavy repayment also contributed
to the decline in the effective loan yield. As the higher yielding loans were
repaid, the balances were replaced with lower yielding purchases and
originations, causing a decline in the weighted average loan rate.
MBS interest income decreased $24.4 million, or 32.5 percent, during 1998 to
total $50.6 million. A $315.8 million decline in average balances and a 35 basis
point decline in the effective MBS yield generated the lower income from MBS. As
with the loan portfolio, the MBS portfolio has experienced a high level of
repayments during the year.
Interest income from investments increased $4.7 million during the year to
total $27.5 million, compared to $22.8 million during 1997. An increase in
average balances, partly offset by a decline in the effective investment yield,
caused the increase in income. Average investment balances increased $102.3
million during 1998 to $491.3 million. The high level of loan and MBS repayments
experienced during the year caused the increase in average balances as these
repayments were placed in investment balances until deployed into loans. The
declining interest rate environment and the maturity of some higher rate
securities caused the 33 basis point decline in the effective investment yield.
INTEREST EXPENSE: Deposit interest expense declined by $9.5 million to $152.6
million during 1998, compared to $162.1 million during the prior year. A decline
in the effective deposit cost produced most of the decrease in the deposit
interest expense. The effective deposit cost decreased 23 basis points to 3.94
percent. During 1998, Management lowered the rates paid on checking, savings and
money market accounts in response to the declining interest rate environment. In
addition, the Company reduced the offering rates on new CD products and did not
retain some of the higher rate CDs that matured during the year, also
contributing to the lower effective costs. Average deposit balances decreased
slightly to $3.9 billion, down $18.5 million from 1997. While average deposit
balances declined slightly, average CD balances were down by over $77 million. A
$56.9 million increase in checking account balances partly offset this decrease.
Borrowing interest expense jumped $16.7 million to $60.2 million during 1998
from $43.5 million during 1997. The increase was largely due to a $356.8 million
increase in average balances, which totaled $1.1 billion in 1998. The use of
borrowings to fund the interest earning asset growth produced the increase in
average balances. In addition to new borrowings, which were at lower rates,
Management refinanced some of the short-term borrowings with lower costing
long-term borrowings, contributing to the lower average interest cost.
INTEREST RATE SPREAD: The Bank's ability to sustain current net interest income
levels during future periods is largely dependent not only on the level of
interest earning assets but also the size of the interest rate spread. The
interest rate spread, on a tax-equivalent basis, was 2.69 percent at year-end
1998, compared to 2.80 percent at December 31, 1997. Similar to the NIM, the
interest rate spread has been impacted by loan and MBS repayments, as higher
yielding assets were repaid and replaced with lower yielding assets. In
addition, while the whole loan purchases have contributed greatly to the growth
in net interest income, these transactions have substantially compressed the
interest rate spread. Since the spread between the weighted average rate earned
on the new loans and
27
12
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the weighted average rate paid on the new borrowings was narrower than the
overall interest rate spread, these transactions caused the interest rate spread
to contract, even though net interest income increased. These contractions in
the interest rate spread were partly offset by lower rates paid on both deposit
and borrowing balances. The high level of loan and MBS repayments and the lower
yields earned on new loans are expected to continue to put downward pressure on
the interest rate spread in 1999.
External forces, such as the performance of the economy, actions of the Board
of Governors of the Federal Reserve System and market interest rates, can
significantly influence the size of the interest rate spread and are beyond the
control of Management. In response to these forces, Management evaluates market
conditions and deploys strategies that it believes will produce a sustainable
and profitable interest rate spread.
PROVISION FOR LOAN LOSSES: The Company recorded a $1.9 million provision for
loan loss during 1998, including a $2.5 million provision during the third
quarter of 1998 in connection with the Beverly merger to conform the Beverly
portfolio to the Company's loan loss methodology. Without this Beverly
provision, the Company reversed $640,000 of provisions during 1998 compared to
additional loan loss provisions of $360,000 during 1997. See Credit Risk
Management for further discussion of loss provisions and the adequacy of the
accumulated provisions for losses.
OTHER INCOME: Other income during 1998 totaled $57.0 million compared to $56.3
million in the prior year, an increase of $739,000. A $4.3 million increase in
gains on loan sales and a $173,000 increase in trust revenues were partly offset
by a decline in loan servicing fees of $1.6 million, lower revenues from real
estate development operations of $758,000, a $700,000 decrease in gains on
security sales, lower insurance and annuity commissions of $445,000, and a
$360,000 reduction in ATM revenues.
During 1998, the Company recorded $5.8 million of gains on loan sales
compared to $1.5 million during 1997. The increase was produced by the addition
of Serve Corps, the Bank's new mortgage brokerage subsidiary. Serve Corps was
acquired by the Bank in January 1998, and operates as a residential mortgage
loan broker. Loans originated by Serve Corps are either sold to third-party
investors, resulting in the recognition of gains on loan sales, or purchased by
the Bank for portfolio (7). Serve Corps origination volumes benefited from the
low interest rate environment in 1998, and Management expects originations in
1999 to continue to benefit from refinancing activity.
Revenues from trust operations totaled $2.4 million in 1998 compared to $2.2
million during 1997. Trust services had been offered at only the Beverly
branches as this line of business was acquired as part of the Beverly merger.
The cross selling of these services throughout the St. Paul branch network will
provide an opportunity to expand revenues during 1999.
Income from real estate development activities declined to $3.4 million
during the year from $4.1 million during 1997. Most of the decrease in revenues
was due to a bulk land sale of a residential subdivision in 1997 that resulted
in a large gain. Revenues from the real estate development subsidiary can vary
from year to year due to changes in demand for residential and commercial 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 the ability to acquire new development projects
may cause revenue volatility in future years. Real estate development operations
focus on providing equity and debt financing for residential and commercial land
development and no longer conduct residential home building.
Loan servicing fee revenues declined to $266,000 during 1998 from $1.8
million during 1997. Both a decline in the loan servicing portfolio and the
write-downs of the mortgage servicing rights, caused by the heavy repayments,
caused the decline in revenues.
Gains on security sales totaled $465,000 during 1998, compared to $1.2
million during the prior year. Lower sales volumes in 1998 produced this
decrease in other income.
Revenues from insurance and annuity sales declined $445,000 during 1998 to
total $3.1 million. The lower revenues were caused by a decline in annuity sales
volumes, due primarily to the low interest rate environment, which makes
annuities less attractive to investors. Revenues from discount brokerage
operations declined by $80,000 to $6.9 million during 1998. Turbulence in the
equity markets in 1998 impacted revenues as transaction volumes declined sharply
during the downturn in the markets that began in the third quarter. Many other
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. The Bank expects to increase annuity and discount brokerage sales in
1999 through the introduction of these products into the Beverly branches.
Income from ATM operations decreased $360,000 during 1998 to $12.2 million,
down from $12.6 million during the prior year. Declining transaction volumes,
due to saturation of the market with ATM machines and changes in usage patterns
to avoid machines that charge fees, caused the decrease in revenues. The Company
may also eventually lose up to 51 machines currently in a grocery store chain,
as that chain installs branches of another financial institution. To offset the
potential loss of ATMs, Management is considering new locations and changes to
the fee structure. The Company increased the access fee charged to non-customers
who used certain Bank ATMs.
Similar to 1998, Management expects a modest increase in other income in
1999. Most of the growth in 1999 will come from higher checking fees as the Bank
introduces its fee structure into the Beverly branches. In addition, revenues
from annuity, discount brokerage and trust operations are also expected to
increase as these products are sold throughout the St. Paul branch network.
(7) Gains are not recorded for loans transferred to the Bank.
28
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expenses ("G&A")
totaled $169.9 million in 1998, including the $25.0 million charge related to
the Company's cost reduction plan and the $9.025 million charge related to the
Beverly merger. Without these charges, G&A expense would have been $135.9
million in 1998 compared to $125.9 million during 1997, an increase of $10.0
million or 8.0 percent. This increase was produced by higher office property and
equipment, compensation and benefits, and other costs.
As previously discussed, the Company recorded an $11.5 million pre-tax charge
associated with the Beverly merger. Of this charge, $9.025 million was recorded
as G&A expense while the remaining $2.5 million was recorded as an additional
loan loss provision. The charge recorded in G&A included buyer and seller
transaction costs, severance and other human resource costs, contract
termination penalties and other costs. Management expects to save approximately
$4.8 million annually in G&A costs as a result of the merger. Savings will
mainly occur in the compensation and benefits area, as well as lower occupancy
and office expense, professional services and other expenses.
At December 31, 1998, of the total merger-related charge, $2.6 million had
not yet been paid out. The amounts relate primarily to contract termination
costs, severance to be paid to transition employees and other accrued costs,
most of which is expected to be paid within the first six months of 1999. Most
of the contract termination costs and the remaining severance were paid during
the first quarter of 1999. See Note B - Non-Recurring Charges for further
details of the charges and a rollforward of amounts paid and written off.
The Company also recorded a $25.0 million charge associated with a cost
reduction plan and certain information technology initiatives. The cost
reduction plan is expected to save approximately $9.0 million in G&A expenses
annually. Most of the cost reduction plan focused on employee compensation and
benefit plans. Approximately $7.8 million of the charge was associated with
modifications to executives' and directors' pension plans. Under the plan,
future accruals have been frozen, and converted to single sum account balance.
This decision is expected to save approximately $1.3 million annually.
Of the total cost reduction charge, $3.7 million of the charge was related to
the Company's leveraged employee stock ownership plan. The termination of this
plan is estimated to save the Company about $1.1 million annually. An accounting
change in 1993 made maintaining the leveraged plan cost prohibitive beyond 1998.
Another $6.4 million of the charge was related to the early retirement option
offered to certain employees, as well as a reduction in workforce. This program
will allow the Company to reduce staffing levels by approximately 90 people and
compensation and benefit costs by approximately $3.5 million annually. A portion
of the savings related to staff reductions will not take place until the first
quarter of 1999, after the Company completes several technology initiatives.
Management also suspended the incentive bonus paid to officers in order to
save approximately $3.0 million per year. Management will reevaluate this
program beginning in 2000.
Information systems initiatives comprised $5.7 million of the charge, mainly
attributed to the write-offs of computer hardware and software and severance.
Almost all major systems have been upgraded or replaced, including the Bank's
core deposit, loan servicing and general ledger transaction processing systems
(including the systems that supported the old Beverly locations), the teller
platform systems and enhancements to the automated telephone response system.
The Company has entered into a licensing arrangement with EDS whereby EDS will
supply its core transaction process applications to the Bank. These new system
upgrades should allow the Company to adapt more quickly to technological
advances and to assimilate acquisitions, such as Beverly.
Of the total $25.0 million charge, at December 31, 1998, $354,000 of expense
had not yet been paid out. See Note B - Non-Recurring Charges for further
details of the charges and a rollforward of amounts paid and written off.
Most of the increase in G&A, exclusive of the two one-time charges, was
related to higher occupancy, equipment and other office expense, which totaled
$43.6 million during 1998 compared to $38.7 million in 1997, an increase of $4.9
million. These increases were related primarily to higher operating costs
associated with data processing and systems conversions. During the fourth
quarter of 1998, the Company completed the conversion to the Alltel mortgage
servicing system for most of its serviced 1-4 family mortgage loans, and in
February 1999, the Company converted other core transactions processing systems
to the EDS Miser system. The Company experienced higher than anticipated
non-recurring costs associated with these conversions, particularly during the
fourth quarter and continuing into the first quarter of 1999. During the fourth
quarter of 1998, the Company incurred approximately $1.5 million of
non-recurring costs associated with the data conversions and other consulting.
Management expects the non-recurring costs to be at least $1 million during the
first quarter of 1999(8). Data processing expenses also included costs for
testing work in preparation for the year 2000 (see below for additional details
for the Company's preparation for the year 2000). In addition to higher data
processing costs, the Company incurred higher costs associated with the
establishment of its new operations center during the first half of 1998, and
higher telephone costs associated with the installation of a digital telephone
system.
Salaries and employee benefits totaled $69.6 million during 1998 compared to
$68.8 million during the prior year, an increase of $786,000 or 1.1 percent. In
January 1998, the Bank acquired Serve Corps. Without Serve Corps, 1998
compensation and benefits would have been much lower than 1997, as compensation
and benefits at Serve Corps totaled $4.2 million during 1998. Several factors
contributed to the lower compensation and benefit costs. Lower costs from the
suspended officers'
(8) In addition, the conversions may impact other servicing fees earned on
deposit products as the Bank has waived more returned check charges,
overdrafts and non-sufficient fund fees during the transition period to the
new transaction processing system than it would have otherwise.
29
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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incentive program were somewhat offset by higher sales incentives. In addition,
the elimination of certain duplicative positions related to the Beverly merger
and a reduction in force instituted by the Bank in the fourth quarter also
caused a decrease in compensation and employee benefits. Management expects a
decrease in compensation and benefits in 1999 as a result of implementation of
the cost reduction plan discussed above. Cost savings will come from the changes
to the employee stock ownership and pension plans, the suspension of the
incentive bonus paid to officers, early retirement and other reduction in force.
Other expense rose $3.5 million during 1998 to $12.4 million, compared to
$8.9 million during the previous year. Higher professional fees and management
fees, associated with the addition of Serve Corps, mainly produced the higher
expenses during the year.
Higher planned advertising produced the increase in advertising expense
during 1998. Advertising expense was $7.5 million during 1998, compared to $6.5
million during the prior year, an increase of $992,000 or 15.2 percent.
With expected cost savings resulting from the Beverly merger and the cost
reduction plan implemented during late 1998, Management expects total G&A
expense during 1999 to be less than during 1998, adjusted for the two one-time
charges. However, during the first quarter of 1999, Management expects to incur
higher G&A expense associated with the system conversion work and the retention
of certain key employees who accepted the early retirement option. Many of these
individuals will act as consultants to the Bank until the system conversions are
complete.
The Company incurred G&A costs in 1998 and will continue to incur additional
costs in 1999 related to the systems requirements needed to ensure that the Bank
can process transactions subsequent to January 1, 2000. The Year 2000 compliance
issues result from both certain computer programs and certain hardware
recognizing only the last two digits of a year instead of four digits. As a
result, transactions processed beginning in Year 2000 may not be recognized by
the computer systems in the correct period. This issue could result in system
failures and miscalculations causing a disruption of operations, and among other
things, the inability to process transactions. In order to address the Year 2000
issue, the Company established a Year 2000 project in 1996.
Based upon initial assessments, the Company determined that it needed to
modify or replace significant portions of its software and certain hardware so
that those systems would properly process transactions beginning on January 1,
2000. As mentioned previously, the Company did replace some of these systems,
including the core transaction processing system. The Company currently believes
that with these modifications and the replacement of certain software and
hardware components, the Year 2000 compliance issue will be mitigated. However,
if such modifications and replacements do not succeed, or are not made in a
timely fashion, the Year 2000 compliance issue could have a material impact on
the Company. Furthermore, there can be no assurances that the Company's
assessment has uncovered every possible Year 2000 issue that could affect the
Company. Failure by the Company and/or its major vendors, third-party network
service providers or other material service providers or customers to adequately
address their respective Year 2000 issues in a timely manner (insofar as they
relate to the Company's business) could have a material adverse effect on the
Company's business, results of operations and financial condition. Potential
worst case scenarios include the inability to process customer deposit
transactions, ATM service outages, ACH and payroll deposit file transmission
difficulties, inability to service the loan portfolio, disruption of customer
service and inability to produce accurate financial statements. The amount of
the potential liability, if any, that relates to these risks, cannot be
reasonably estimated at this time.
The Company has divided work on the Year 2000 project into four phases:
assessment, correction, testing and implementation. The Company began assessment
of the Year 2000 issue in 1996. Critical risk elements were identified and an
inventory of computer hardware, software applications, Bank vendors and
available internal resources was prepared. From this work, a plan was prepared
and approved by the Bank's Board of Directors in early 1997. The plan focused on
transaction processing applications, mainframe computer systems, mid-range
computer systems, networks, personal computers and operational systems. The
Company also identified key third-party vendors and customers to assess their
respective states of readiness on the Year 2000 issue. The assessment phase of
the Year 2000 plan has been completed. With the Beverly merger, the Company's
Year 2000 plan was expanded to incorporate Beverly.
Work on the correction phase of the Year 2000 project began in 1997 and
continued in 1998. In the third quarter of 1998, Management decided to replace
its core transaction processing systems. While Management believed it could make
its mission critical systems Year 2000 compliant within the required timeframe,
Management nevertheless decided to replace all of its systems for reasons
previously discussed.
The Company converted its residential loans to the Alltel loan servicing
system in the fourth quarter of 1998. Other major business applications and
interfaces were converted to the EDS/Miser system in the first quarter of 1999,
running under a new Unisys operating environment. The teller platform system was
also replaced. Management believes that these new systems are Year 2000
compliant and has received such assurances from its vendors. The Company is
taking steps to confirm the vendors' compliance. The conversions to the new
systems required new mainframe hardware, as well as new interfaces to other
systems and personal computer hardware. The Company is making initial capital
investments of approximately $10.0 million associated with the new replacement
systems and, as part of the cost reduction plan, recognized $5.7 million of
charges in the third quarter of 1998 in connection with these initiatives.
Management expects to complete Year 2000 testing work on the mainframe systems
during the first quarter of 1999. Compliance and testing work on operational
systems and hardware has been completed or will be completed by the end of the
first quarter of 1999. Work on some of the specialized systems, such as the
human resources information system, is not expected to be completed until April
1999.
30
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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The Company has assumed additional operating risks with the substantial
conversions during the first quarter of 1999. These risks include a decrease in
the level of customer service, disruption of operations and financial costs
already noted. Management has taken steps to address the additional risk. A
senior level steering committee was assigned to oversee the conversions. The
committee hired an outside consultant to manage the project and coordinate with
the resources provided by the vendors. Management hopes to complete these
conversions within the required timetable.
Management currently estimates that the costs that the Bank has incurred
through 1998 for work on the Year 2000 project have been approximately $2.7
million. Management also currently estimates that the Company will end up
spending an additional $800,000 to remedy the Year 2000 issue in 1999. The above
estimated expenses only include amounts spent on external consultants,
replacement hardware and software, and other incremental costs. The estimated
amounts do not include the cost of internal resources devoted to the project.
The Company expenses these costs when incurred, and intends to continue to fund
these costs from operations and excess liquidity.
The Company is currently formulating contingency plans for business
resumption in the event of a Year 2000 interruption in certain critical
applications. These plans include, among other things, plans for recovering data
and mobilization of resources to resume core operations.
OPERATIONS OF FORECLOSED REAL ESTATE: The net gain generated from foreclosed
real estate operations was $4,000 during 1998, compared to $386,000 for 1997.
The decrease in the net gain resulted from higher gains recorded during 1997 on
the sale of REO properties. See Credit Risk Management for further discussion of
REO.
INCOME TAXES: The Company's effective annual income tax rate during 1998 was
33.9 percent compared to 33.3 percent during 1997. The increase in the effective
tax rate was associated with certain non-tax deductible charges contained in the
merger and cost reduction plan charges. Without these charges, the effective
income tax rate would have been approximately 31.7 percent. The implementation
of certain tax planning strategies produced the lower effective income tax rate
in 1998, exclusive of the effect of the one-time charges. The Company expects to
post an effective tax rate below 33 percent during 1999.
RESULTS OF OPERATIONS
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COMPARISON OF YEARS ENDED DEC. 31, 1997 AND 1996
GENERAL: Net income during 1997 totaled $56.1 million, or $1.36 per diluted
share outstanding, a 19 percent increase over 1996 net income of $46.9 million
or $1.14 per diluted share outstanding, not including a one-time charge to
recapitalize the Savings Association Insurance Fund ("SAIF"). Including this
one-time $21.0 million charge, net income in 1996 was $33.0 million, or $0.81
per diluted share outstanding. 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
(9). In addition, 1997 results included a $403,000 extraordinary loss on the
early extinguishment of the Company's $34.5 million of subordinated debt.
NET INTEREST INCOME: Net interest income rose 4.6 percent to $154.2 million in
1997, compared to $147.4 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 $246.9 million to total $4.9 billion
during 1997, through the purchase of 1-4 family whole loans. Increased
borrowings and the use of liquidity mainly funded this growth. While net
interest income increased, the net interest margin ("NIM"), on a tax-equivalent
basis, declined 2 basis points to 3.16 percent in 1997 from 3.18 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 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.
Higher income from the loan and MBS portfolios produced most of the increase
in interest income. Income from loans increased by $4.5 million, while MBS
interest income rose by $17.4 million. Higher average balances produced most of
the increase. Average MBS balances benefited from the securitization of $381
million of loans receivable into MBS in December 1996, and loan purchases
produced the increase in average loan balances.
On the liability side, borrowing interest expense increased by $10.6 million,
largely due to higher average borrowing balances. Borrowings were used as a
significant source of funds for whole loan purchases. An increase in average
deposit balances also generated most of the increase in deposit interest
expense, which increased $4.0 million during 1997. During 1996 and the first
half of 1997, the Company increased deposit balances, particularly CD balances,
as a source of funds.
PROVISION FOR LOAN LOSSES: The Company recorded a provision for loan loss of
$360,000 during 1997 compared to $1.9 million during 1996. The reduction in the
provision for loan loss reflected continued positive trends in credit quality,
low level of nonperforming assets and declining balances in the commercial real
estate portfolio.
(9) Excluding the one-time SAIF charge in 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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OTHER INCOME: Other income rose over 25 percent to $56.3 million during 1997,
compared to $44.8 million during the previous year. Most of the increase was due
to higher revenues from ATM operations. Higher contributions from real estate
development and discount brokerage and annuity operations also contributed to
the increase in other income.
Revenues from ATM operations increased over 100 percent to $12.6 million in
1997, up from $6.3 million during 1996. 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. 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. Higher
demand for the Company's discount brokerage products caused the $1.6 million
increase in revenues from discount brokerage products. An 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 $487,000 increase in revenues from insurance and
annuity operations.
G&A EXPENSE: G&A expenses rose 5.5 percent to $125.9 million during 1997
compared to $119.3 million in 1996, excluding the one-time $21.0 million SAIF
charge. Including the SAIF charge, 1996 G&A expense was $140.3 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 $5.2 million, to total $68.8 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 $5.0 million to $38.7 million in
1997. The 1996 expansion of the ATM network, establishment of the Bank's new
operation center, system projects and depreciation on the new capital
investments produced the increase in occupancy, equipment and office expense
during 1997.
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 the Bank, to pay a one-time assessment to bring the SAIF up to desired
capitalization levels. The Bank's share of the special assessment was $21.0
million, which was included in G&A expense during 1996. After this special
assessment, the Bank'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 $4.7 million to $3.0 million in 1997.
OPERATIONS OF FORECLOSED REAL ESTATE: The Company also benefited from improved
credit quality through the reduction in the net loss from the operation of
foreclosed real estate. In 1997, the Company recorded a gain of $386,000 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 $607,000. The
loss was mainly due to an REO provision recorded to reflect a loss on the sale
of a commercial real estate asset in 1996(10).
INCOME TAXES: The provision for income taxes was $28.2 million during 1997
compared to $16.4 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 33.3 percent in 1997
compared to 33.1 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.
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 from replacing the higher costing
subordinated notes with the senior notes are expected to more than offset the
extraordinary loss incurred.
(10) The additional loss on sale in 1996 occurred when the Bank entered into a
sales contract with a buyer to sell a multifamily property at a value lower
than its then-current book value. While the book value was supported by a
then-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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Key Credit Statistics
At or for the years ended Dec. 31-Dollars in thousands
Key Credit Ratios
1998 1997 1996
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Net loan charge-offs to average loans receivable............................................... *% 0.05% 0.12%
Loan loss allowance to total loans ............................................................ 0.89 1.05 1.25
Loan loss allowance to nonperforming loans .................................................... 226.96 343.63 355.74
Loan loss allowance to impaired loans ......................................................... 1,234.50 197.90 71.20
Nonperforming assets to total assets .......................................................... 0.33 0.25 0.29
General valuation allowance to nonperforming assets ........................................... 2 03.83 290.51 241.33
============================
* Less than 0.01%
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Loan Portfolio
1998 1997 1996 1995 1994
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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
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage and Commercial Loans
1-4 family units........... $3,427,918 76% $2,443,135 67% $1,930,957 60% $1,813,533 60% $1,672,433 58%%
Commercial real estate .... 997,588 22 1,105,191 30 1,137,225 36 1,108,197 36 1,121,894 38
Commercial/industrial...... 47,731 1 55,309 1 55,492 2 50,258 2 50,339 2
Land and land development . 910 * 1,467 * 2,834 * 1,940 * 224 *
Consumer................... 43,857 1 60,000 2 61,298 2 60,741 2 56,729 2
----------------------------------------------------------------------------------------
Total loans held for investment $4,518,004 100% $3,665,102 100% $3,187,806 100% $3,034,669 100% $2,901,619 100%
========================================================================================
* Less than 1%
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Geographic Concentration of Nonperforming Assets
1998 1997
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Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
State
California ........................................................................... $266 1.3% $965 7.5%
Florida............................................................................... 617 3.1 - -
Illinois.............................................................................. 15,168 76.2 9,623 75.1
Maryland ............................................................................. - - 638 5.0
Missouri ............................................................................. 535 2.7 508 4.0
New York.............................................................................. 1,073 5.4 - -
Ohio ................................................................................. 588 2.9 296 2.3
Other................................................................................. 1,149 5.8 715 5.6
Consumer loans ....................................................................... 512 2.6 76 0.5
-----------------------------------
Total ............................................................................. $19,908 100.0% $12,821 100.0%
===================================
33
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MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
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CREDIT RISK MANAGEMENT
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At December 31, 1998, the loans receivable portfolio was comprised of 1-4 family
mortgage loans, loans secured by commercial real estate, commercial loans and,
to a lesser extent, consumer loans. See Key Credit Statistics for further
details.
Nonperforming assets totaled $19.9 million at December 31, 1998, up $7.1
million from $12.8 million of nonperforming assets at the previous year-end.
Half of the increase related to 1-4 family assets and the other half related to
commercial real estate loans. While nonperforming assets have increased since
the prior year-end, the level represents only 0.33 percent of total assets. See
Nonperforming Assets 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.
At December 31, 1998, the Bank had a net investment in impaired loans, as
defined by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, of
$3.2 million, compared to $19.5 million at December 31, 1997 (11). At December
31, 1998 all of the impaired loans were performing but considered impaired. As
anticipated by Management, the level of impaired loans has been reduced
significantly over the past two years.
The level of net charge-offs in recent years has declined due to the
continued trend of the low level of nonperforming loans and the reductions in
balances in the Company's commercial real estate portfolio. Net loan charge-offs
during 1998 were only $6,000, compared to $1.8 million during 1997 and $4.1
million during 1996. The gross charge-offs in 1998 totaled $1.1 million and
consisted of $444,000 of charge-offs on 1-4 family loans and $358,000 on
commercial and commercial real estate loans, with the remainder occurring in the
consumer loan portfolio. Recoveries in 1998 of $1.1 million were mainly from the
commercial and commercial real estate portfolio. The ratio of net charge-offs to
average loans receivable declined to less than 0.01 percent in 1998 compared to
0.05 percent during 1997 and 0.12 percent in 1996. See Allowance for Losses
Activity and Key Credit Statistics tables for further detail.
The Company recorded a $1.9 million loss provision during 1998, which
included a $2.5 million provision as part of the Beverly merger-related charge
to conform Beverly's loan portfolio to the Company's loan allowance methodology.
Without this charge, the Company reversed $640,000 of loan loss provisions
during 1998, compared to provisions of $360,000 and $1.9 million during 1997 and
1996, respectively. The general trend of improved credit quality, the decrease
in the size of the Bank's commercial real estate portfolio, declining classified
assets and the low level of nonperforming assets, as well as the decrease in the
net charge-offs, has caused the allowance for loan losses to decrease in recent
years. The future level of loan loss provisions, or reversal of previous
provisions, will be determined based upon a careful review of the risk elements
of the portfolio by Management. 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 general valuation allowance is evaluated based on a careful review of the
various risk components that are inherent in each of the loan portfolios. The
risk components that are evaluated include the level of nonperforming and
classified assets, geographic concentrations of credit, economic conditions,
trends in real estate values and the impact of changing interest rates on
borrower debt service, as well as historical loss experience, peer group
comparisons and regulatory guidance.
The Loan Loss Reserve Committee ("Reserve Committee") of the Bank's Board of
Directors approves the adequacy of the allowance for loan losses on a quarterly
basis. The allowance for loan losses reflects Management's best estimate of the
risk of credit loss perceived in the Bank's portfolios. However, actual results
could differ from this estimate, and future additions or subtractions to the
allowance may be necessary based on unforeseen changes in economic conditions.
In addition, federal regulators periodically review the Bank's allowance for
losses on loans. Such regulators have the authority to require the Bank to
recognize additions to the allowance at the time of their examinations.
In addition to originating loans secured by 1-4 family mortgages and a
variety of consumer loans, the Company originates commercial loans and loans
secured by commercial real estate. The Company's commercial real estate loan
origination efforts during the past several years have focused on the midwestern
states. However, the Company began to originate new commercial real estate loans
in selected markets outside the Midwest. The Bank's current commercial loan
portfolio was mainly acquired through the Beverly merger, and Management expects
to use the experience and expertise of the Beverly personnel retained to build
upon this portfolio. The commercial loan portfolio is concentrated in the area
surrounding the Company's banking offices.
During 1998, the Bank purchased over $1.6 billion of whole loans secured by
1-4 family residences throughout the United States. These transactions were used
to offset heavy prepayments in this portfolio and expand interest earning asset
levels. The Bank applies its own loan origination underwriting standards as part
of the due diligence efforts in connection with the purchase of these loans. All
purchased loans are subject to the Bank's quarterly review of the adequacy of
the general valuation allowance.
Management continues to monitor events in the submarkets in which the Bank
has substantial loan concentrations, particularly California. The Bank's largest
concentration of commercial and commercial real estate loans outside Illinois is
California and Washington. See Note V - Concentration of Credit Risk for further
details.
As of December 31, 1998, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 6.5 percent. Classified assets
include REO and loans considered "substandard," "doubtful" or "loss" under
regulatory accounting purposes and the Bank's loan rating system.
(11) "Impaired loans" are defined by generally accepted accounting principles
when it is probable, based upon current information and events, that the
Bank will be unable to collect all amounts due in accordance with the
original contractual agreement.
34
19
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORECLOSED REAL ESTATE: Foreclosed real estate assets increased slightly to $2.1
million at December 31, 1998 compared to $1.6 million at the prior year-end. At
both December 31, 1998 and 1997, all REO assets were 1-4 family residences. See
Note I - Foreclosed Real Estate and Results of Operations - Comparison of Years
Ended December 31, 1998 and 1997 - Operations of Foreclosed Real Estate for
further detail.
The allowance for REO losses was $155,000 at December 31, 1998, compared to
$157,000 at December 31, 1997. Net charge-offs on prior REO sales produced the
reduction in the allowance for REO losses during the year. No provision for REO
losses were recorded in 1998, and the Company reversed $100,000 of REO
provisions during 1997.
Allowance for Loan Losses Activity
At or for the years ended Dec. 31-Dollars in thousands
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Balance at Jan. 1............................................ $38,569 $39,985 $42,143 $46,191 $50,600
Charge-offs:
Real estate and commercial loans:
1-4 family ............................................... 444 582 316 850 532
Commercial real estate.................................... 348 2,258 4,903 7,448 9,433
Commercial/industrial..................................... 10 61 58 269 125
Land and land development ................................ - - - - 85
Consumer .................................................... 332 390 204 413 1,036
---------------------------------------------
Total charge-offs ........................................... 1,134 3,291 5,481 8,980 11,211
Recoveries:
Real estate loans and commercial loans:
1-4 family ............................................... 152 45 49 121 66
Commercial real estate ................................... 867 1,313 1,096 2,250 646
Commercial/industrial .................................... - - 33 73 263
Land and land development ................................ - - - - -
Consumer .................................................... 109 157 240 429 366
---------------------------------------------
Total recoveries ............................................ 1,128 1,515 1,418 2,873 1,341
---------------------------------------------
Net charge-offs .......................................... 6 1,776 4,063 6,107 9,870
Provisions for losses charged to operations ................. 1,860 360 1,905 2,059 5,461
---------------------------------------------
Balance at December 31 ...................................... $40,423 $38,569 $39,985 $42,143 $46,191
=============================================
Ratio of net charge-offs to average loans:
Real estate and commercial loans:
1-4 family ............................................... 0.01% 0.02% 0.01% 0.02% 0.02%
Commercial real estate ................................... (0.01) 0.02 0.11 0.18 0.32
Commercial/industrial .................................... * * * 0.01 *
Land and land development ................................ - - - - *
Consumer .................................................... * 0.01 * * 0.02
---------------------------------------------
*% 0.05% 0.12% 0.21% 0.36%
=============================================
* Less than 0.01%.
- --------------------------------------------------------------------------------
35
20
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Allocation of the Allowance for Loan Losses
At Dec. 31- Dollars in thousands
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
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 and commercial loans:
1-4 family............... $ 7,890 75.7% $ 6,600 66.5% $ 3,861 60.6% $ 3,968 59.7% $ 3,318 57.5%
Commercial, land and
commercial real estate 31,781 23.3 30,658 31.8 35,365 37.5 37,159 38.3 41,599 40.5
Consumer ................... 752 1.0 1,311 1.7 759 1.9 1,016 2.0 1,274 2.0
------------------------------------------------------------------------------------------
$40,423 100.0% $38,569 100.0% $39,985 100.0% $42,143 100.0% $46,191 100.0%
==========================================================================================
Nonperforming Assets
At Dec. 31-Dollars in thousands
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis (a):
Nonaccrual loans....................................................... $12,121 $ 7,739 $ 5,033 $15,453 $ 8,524
Other loans 90 days past due (b) ...................................... 5,690 3,485 6,207 4,158 3,799
----------------------------------------------
Total nonperforming loans.............................................. 17,811 11,224 11,240 19,611 12,323
REO ................................................................... 2,097 1,597 3,267 12,235 18,237
----------------------------------------------
Total nonperforming assets ............................................... $19,908 $12,821 $14,507 $31,846 $30,560
==============================================
Troubled debt restructuring .............................................. $ 257 $ 857 $ - $ - $ -
==============================================
(a) During 1998, the Bank recorded $608,000 of interest income on loans
accounted for on a nonaccrual basis at Dec. 31, 1998. Interest income for
1998 included $67,000 that would have been earned in 1997 had the loans
been accounted for on an accrual basis. The above table 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. Also see Note F - Loans Receivable for detail of
impaired loans.
(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.
- --------------------------------------------------------------------------------
36
21
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTEREST RATE RISK
- --------------------------------------------------------------------------------
The operations of the Company are subject to risk resulting from interest rate
fluctuations to the extent that there is a difference between the amount of the
Company's interest-earning assets and the amount of interest-bearing liabilities
that are prepaid/withdrawn, mature or reprice in a specified period. Interest
rate risk generally exists because the Bank 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.
In December 1998, the OTS issued guidelines regarding the management of
interest rate risk. The OTS is requiring institutions, such as the Bank, to
establish and maintain Board of Directors' approved limits on ratios involving
the net present value of the institution's existing assets, liabilities and
off-balance sheet contracts (referred to as net portfolio value or "NPV").
Financial simulations calculating the NPV ratios (NPV divided by the present
value of assets) under immediate interest rate shock scenarios of 100, 200 and
300 basis points are required. An institution with more than $1.0 billion in
assets is required to maintain a financial model capable of measuring its own
NPV and interest rate sensitivity. However, the OTS will assess each
institution's overall interest rate risk position based on the NPV results
generated by the OTS model. As part of the Bank's regular examination and rating
by OTS examiners, conclusions regarding the Bank's level of interest rate risk
will depend primarily upon interest rate sensitivity of the Bank's NPV, defined
as the change in NPV ratios based on a flat interest rate environment and a rate
shock of 200 basis points.
The OTS also requires Management to assess the risks and returns associated
with complex securities and financial derivatives. As to significant
transactions, the analysis must reflect the incremental effect of the proposed
transaction on the interest rate risk profile of the institution, including the
expected change in the institution's NPV as a result of changes of 100, 200 and
300 basis points in the yield curve. Complex securities and financial derivative
transactions may require analysis of the wider range of scenarios. In general,
the use of financial derivatives or complex securities with high price
sensitivity should be limited to transaction strategies that lower an
institution's interest rate risk, as measured by NPV.
Management already uses its own complex financial models to capture and
measure the Bank's exposure to interest rate risk. These models measure interest
rate risk by computing the change in net income and market value of the
Company's net assets due to significant increases and decreases in interest
rates. The results of both the Bank and the OTS models are reported quarterly to
the Bank's Board of Directors and reviewed to determine that the risks assumed
are 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.
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 maintains 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 are
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 helps mitigate the impact of rapid changes in interest rates. At
December 31, 1998, using the Company's sensitivity analysis model, a 200 basis
point increase in market interest rates would cause a $46.4 million, or 8.1
percent, decline in the market value of its net portfolio assets, and only a
nominal (less than 1 percent) decrease in net interest income (12). In
comparison, at December 31, 1997, a 200 basis point increase in market interest
rates would have caused a $27.4 million decrease in its net portfolio assets and
a $17.9 million decline in net interest income. The larger decrease in the net
portfolio value caused by a 200 basis point increase in market interest rates
from December 31, 1997 to December 31, 1998 was due primarily to the significant
1-4 family purchases during 1998, mainly for the purchase of loans with initial
fixed interest rates funded with callable debt. 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 on 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 use "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
(12) Management selected the 200 basis point increase in interest rate scenario
because the OTS requires the Bank to measure its interest rate risk based
upon 200 basis point changes in interest rates.
37
22
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
rate risk exposure because of its inherent limitations (13). Internally,
Management relies on its models and financial simulations to evaluate interest
rate risk.
The Bank's estimated one-year GAP was 9.86 percent at December 31, 1998. The
positive one-year GAP indicates that the cumulative one-year interest-rate
sensitive assets exceed the cumulative one-year interest-rate sensitive
liabilities.
Loan Maturity Table*
Based upon contractual maturities at Dec. 31, 1998-Dollars in thousands
2004 and
1999 2000-2003 thereafter Total
- -------------------------------------------------------------------------------------------------------------------------
Mortgage and Commercial Loans
1-4 family units.........................................................$ 54,806 $ 60,296 $3,312,816 $3,427,918
Commercial, commercial real estate, and land and land development ....... 145,690 274,205 626,334 1,046,229
------------------------------------------------
200,496 334,501 3,939,150 4,474,147
Consumer loans .......................................................... 5,659 30,301 7,897 43,857
------------------------------------------------
Total loans receivable ..................................................$206,155 $364,802 $3,947,047 $4,518,004
================================================
* Excludes loans held for sale.
- --------------------------------------------------------------------------------
Loans Due After Dec. 31, 1999*
Based upon contractual maturities at Dec. 31, 1998-Dollars in thousands
Fixed Adjustable
Rate Rate Total
- -------------------------------------------------------------------------------------------------------------------------
Mortgage and Commercial Loans
1-4 family units.....................................................................$1,053,201 $2,319,911 $3,373,112
Commercial, commercial real estate, and land and land development ................... 206,771 693,768 900,539
------------------------------------
1,259,972 3,013,679 4,273,651
Consumer loans ...................................................................... 38,115 83 38,198
------------------------------------
Total loans receivable ..............................................................$1,298,087 $3,013,762 $4,311,849
====================================
* Excludes loans held for sale.
- --------------------------------------------------------------------------------
(13) 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 and 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
December 31, 1998 and 1997 - Net Interest Income for a discussion of
factors affecting the Bank's interest rate spread.
38
23
MANAGEMENT'S DISCUSSION AND ANALYSIS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment Portfolio
At Dec. 31, 1998-Dollars in thousands
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing bank balances............................... $ 83,300 $ 66,845 $ 80,472
Cash equivalent marketable-debt securities:
U.S. Treasury securities......................................................... 221,568 53,807 14,451
Commercial paper................................................................. 5,494 4,188 2,048
Marketable-debt securities of the U.S. government................................... 151,241 122,688 139,820
Obligations of state and political subdivisions..................................... 47,136 35,218 42,365
Corporate debt securities........................................................... 3,038 17,933 19,464
Marketable-equity securities........................................................ 12,467 11,737 962
MBS:
Federal Home Loan Mortgage Corporation (FHLMC)................................... 49,216 80,550 108,944
Federal National Mortgage Corporation (FNMA)..................................... 166,191 419,467 531,045
Privately issued................................................................. 244,822(a) 332,660 433,108
Collateralized Mortgage Obligations (CMOs)....................................... 62,194(a) 122,613 141,717
-----------------------------------
Total MBS........................................................................... 522,423 955,290 1,214,814
Investment in Federal Home Loan Bank stock.......................................... 66,304 40,106 35,211
Investment in Federal Reserve stock................................................. - 1,008 987
-----------------------------------
$1,112,970(b) $1,308,820 $1,550,594
===================================
(a) The following table summarizes securities of issuers in excess of 10% of
stockholders' equity at Dec. 31, 1998.
Issuer
Fair Value Amortized Cost
- ---------------------------------------------------------------------------------------------------------------------------
Countrywide Mortgage-Backed Securities, Inc......................................................... $ 81,579 $ 85,157
Merrill Lynch Mortgage Investors, Inc............................................................... 57,631 59,118
----------------------
Total............................................................................................... $139,210 $144,275
======================
(b) See Note C - Cash and Cash Equivalents, Note D - Investment Securities and
Note E - Mortgage-backed Securities/Securities Due From Brokers for
contractual maturity information.
- --------------------------------------------------------------------------------
Short-Term Borrowings
For the years ended Dec. 31-Dollars in thousands
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
FHLB advances
Average month-end balance ........................................................... $ 195,083 $183,400 $229,900
Average month-end rate............................................................... 5.60% 5.95% 5.81%
Highest month-end balance............................................................ $ 573,000 $305,000 $330,300
Securities sold under agreements to repurchase (a)
Average month-end balance ........................................................... $ 110,833 $249,600 $ 43,800
Average month-end rate............................................................... 5.67% 5.73% 5.57%
Highest month-end balance............................................................ $ 280,000 $330,000 $ 50,000
Mortgage-backed notes
Average month-end balance ........................................................... $ 8,200 - -
Average month-end rate............................................................... 8.54% - -
Highest month-end balance............................................................ $ 16,400 - -
-----------------------------------
Funds purchased and retail repurchase agreements
Average month-end balance ........................................................... $ 3,748 $ 5,278 $ 5,604
Average month-end rate............................................................... 4.91% 4.93% 5.00%
Highest month-end balance............................................................ $ 3,918 $ 12,454 $ 11,461
===================================
(a) At December 31, 1998, the Company had one agreement totaling $75.0 million
with Morgan Stanley, Dean Witter, Discover & Co., which exceeded 10 percent
of the Company's stockholders' equity. The agreement matured on February
16, 1999.
- --------------------------------------------------------------------------------
39
24
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
At Dec. 31-Dollars in thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents-Note C
Cash and amounts due from depository institutions....................................... 128,958 113,293
Federal funds sold and interest-bearing bank balances .................................. 83,300 66,845
Short-term cash equivalent securities .................................................. 227,062 57,995
---------------------------
Total cash and cash equivalents ........................................................ 439,320 238,133
Investment securities-Notes D and O
(Market: Dec. 31, 1998-$214,227; Dec. 31, 1997-$187,765) ............................... 213,882 187,576
Mortgage-backed securities-Notes E and O
(Market: Dec. 31, 1998-$525,774; Dec. 31, 1997-$958,664) ............................... 522,423 955,290
Securities due from brokers-Notes E and O
(Market: Dec. 31, 1998-$79,679)......................................................... 79,679 -
Loans receivable-Notes F, G, O and V
(Net of allowance for loan losses: Dec. 31, 1998-$40,423; Dec. 31, 1997-$38,569) ....... 4,477,581 3,626,533
Loans held for sale, at lower of cost or market-Note H
(Market: Dec. 31, 1998-$66,241; Dec. 31, 1997-$19,567) ................................. 65,354 19,504
Accrued interest receivable ................................................................ 35,048 30,730
Foreclosed real estate-Note I
(Net of allowance for losses: Dec. 31, 1998-$155; Dec. 31, 1997-$157) .................. 1,942 1,480
Real estate held for development or investment-Note J ...................................... 12,552 15,287
Investment in Federal Home Loan Bank stock-Notes K and O ................................... 66,304 41,114
Office properties and equipment-Note L ..................................................... 75,020 69,127
Prepaid expenses and other assets .......................................................... 45,011 41,070
---------------------------
Total assets ........................................................................... $6,034,116 $5,225,844
===========================
LIABILITIES
Deposits-Note N ............................................................................ $3,894,971 $3,871,400
Short-term borrowings-Note O ............................................................... 395,318 373,537
Long-term borrowings-Note O ................................................................ 1,125,361 419,457
Advance payments by borrowers for taxes and insurance ...................................... 14,484 23,790
Other liabilities .......................................................................... 94,058 51,329
---------------------------
Total liabilities ...................................................................... 5,524,192 4,739,513
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-80,000,000 shares;
issued: Dec. 31, 1998-41,592,023 shares; Dec. 31, 1997-41,576,631 shares;
outstanding: Dec. 31, 1998-40,724,824 shares; Dec. 31, 1997-40,337,423 shares) ......... 416 415
Paid-in capital ............................................................................ 158,764 152,353
Retained income, substantially restricted .................................................. 363,931 354,797
Accumulated other comprehensive income:
Unrealized gain on securities, net of taxes-Notes C, D and E
($1,234 at Dec. 31, 1998 and $1,652 at Dec. 31,1997) ................................... 2,138 2,680
Borrowings by employee stock ownership plan-Notes O and S .................................. - (221)
Unearned employee stock ownership plan shares
(364,963 shares at Dec. 31, 1997)-Note S ............................................... - (2,858)
Treasury stock (Dec. 31, 1998-867,199 shares; Dec. 31, 1997-1,239,208 shares) .............. (15,325) (20,835)
---------------------------
Total stockholders' equity ............................................................. 509,924 486,331
---------------------------
Total liabilities and stockholders' equity ............................................. $6,034,116 $5,225,844
===========================
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
Accumulated Borrowings Unearned
Other by Employee Employee
Common Stock Compre- Stock Stock Total
------------ Paid-In Retained hensive Ownership Ownership Treasury Stockholders'
Shares Amount Capital Income Income Plan Plan Shares Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1995 ................ 39,794,718 $421 $162,765 $288,315 $ (278) $(485) $(2,883) $(22,697) $425,158
Comprehensive income:
Net income ............... - - - 33,046 - - - - 33,046
Change in unrealized gain/(loss)
on securities (net of tax of
$1,494)-Notes C, D and E - - - - 2,349 - - - 2,349
--------
Comprehensive income ......... 35,395
Issuance of common stock ..... 1,347,751 14 15,426 - - - - - 15,440
Stock option exercises-Note R 989,737 9 7,824 - - - - - 7,833
Cash dividends ($0.23 per share) - - - (8,953) - - - - (8,953)
Repayments of ESOP
principal-Note O ......... - - - - - 89 - - 89
Treasury stock purchases ..... (1,903,125) - - - - - - (24,906) (24,906)
- ----------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1996 ................ 40,229,081 444 186,015 312,408 2,071 (396) (2,883) (47,603) 450,056
Comprehensive income:
Net income ............... - - - 56,059 - - - - 56,059
Change in unrealized gain
on securities (net of tax of
$393)-Notes C, D and E - - - - 609 - - - 609
--------
Comprehensive income ......... 56,668
Retirement of treasury stock . - (38) (41,177) - - - - 41,215 -
Retirement of fractional shares (1,880) - (34) - - - - - (34)
Stock option exercises-Note R 1,092,047 9 7,490 - - - - 2,790 10,289
Cash dividends ($0.36 per share) - - - (13,670) - - - - (13,670)
Release of SOP 93-6 shares-
Note S ................... - - 59 - - - 25 - 84
Repayments of ESOP
principal-Note O ......... - - - - - 175 - - 175
Treasury stock purchases ..... (981,825) - - - - - - (17,237) (17,237)
- ----------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1997 ................ 40,337,423 415 152,353 354,797 2,680 (221) (2,858) (20,835) 486,331
Comprehensive income:
Net income ............... - - - 28,705 - - - - 28,705
Change in unrealized gain
on securities (net of tax of
$419)-Notes C, D and E - - - - (542) - - - (542)
--------
Comprehensive income ......... 28,163
Stock option exercises-Note R 385,035 - 2,563 - - - - 5,537 8,100
Cash dividends ($0.50 per share) - - - (19,571) - - - - (19,571)
Issuance of common stock ..... 3,366 1 76 - - - - - 77
Release of SOP 93-6 shares-
Note S ................... - - 3,772 - - - 2,858 - 6,630
Repayments of ESOP
principal-Note O ......... - - - - - 221 - - 221
Treasury stock purchases...... (1,000) - - - - - - (27) (27)
- ----------------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1998 ................ 40,724,824 $416 $158,764 $363,931 $ 2,138 $ - $ - $(15,325) $509,924
==============================================================================================
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 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable............................................................. $292,828 $262,024 $257,562
Mortgage-backed securities/securities due from brokers....................... 50,620 74,996 57,548
Taxable investment securities................................................ 21,327 17,736 19,022
Nontaxable investment securities............................................. 2,003 2,025 1,826
Dividends on equity investment securities.................................... 4,185 3,082 2,426
-----------------------------------------
Total interest and dividend income....................................... 370,963 359,863 338,384
INTEREST EXPENSE
Deposits-Note N.............................................................. 152,608 162,110 158,088
Short-term borrowings........................................................ 18,510 24,419 15,239
Long-term borrowings......................................................... 41,691 19,116 17,671
-----------------------------------------
Total interest expense................................................... 212,809 205,645 190,998
-----------------------------------------
Net interest income...................................................... 158,154 154,218 147,386
Provision for loan losses-Note G............................................. 1,860 360 1,905
-----------------------------------------
Net interest income after provision for loan losses...................... 156,294 153,858 145,481
OTHER INCOME
Other fee income............................................................. 22,471 22,300 21,962
ATM operations............................................................... 12,242 12,602 6,294
Discount brokerage commissions............................................... 6,914 6,994 5,435
Income from real estate operations-Note J.................................... 3,381 4,139 2,517
Insurance and annuity commissions............................................ 3,090 3,535 3,048
Trust revenues............................................................... 2,405 2,232 2,008
Gain on loan sales........................................................... 5,813 1,500 965
Gain on securities sales..................................................... 465 1,165 1,043
Loan servicing fees.......................................................... 266 1,841 1,576
-----------------------------------------
Total other income....................................................... 57,047 56,308 44,848
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and employee benefits............................................... 69,592 68,806 63,650
Occupancy, equipment and other office expense................................ 43,576 38,683 33,685
Advertising.................................................................. 7,522 6,530 5,782
Federal deposit insurance.................................................... 2,779 2,965 7,642
Other........................................................................ 12,437 8,900 8,535
Cost reduction charge-Note B ................................................ 25,000 - -
Merger-related charge-Note B ................................................ 9,025 - -
SAIF recapitalization-Note B ................................................ - - 21,000
-----------------------------------------
General and administrative expense....................................... 169,931 125,884 140,294
Gain (loss) on foreclosed real estate-Note I................................. 4 386 (607)
-----------------------------------------
Income before income taxes and extraordinary item........................ 43,414 84,668 49,428
Income taxes-Note P.......................................................... 14,709 28,206 16,382
-----------------------------------------
Income before extraordinary item......................................... 28,705 56,462 33,046
Extraordinary item:
Loss on early extinguishment of debt, net of tax of $207................. - 403 -
-----------------------------------------
Net income............................................................... $ 28,705 $ 56,059 $ 33,046
=========================================
INCOME BEFORE EXTRAORDINARY ITEM PER SHARE-NOTES A AND AA
Basic.................................................................... $0.71 $ 1.41 $ 0.85
Diluted.................................................................. 0.69 1.37 0.81
=========================================
NET INCOME PER SHARE-NOTE A
Basic.................................................................... $ 0.71 $ 1.40 $ 0.85
Diluted.................................................................. 0.69 1.36 0.81
=========================================
DIVIDENDS PER SHARE.......................................................... $ 0.50 $ 0.36 $ 0.23
=========================================
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 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income......................................................................... $28,705 $56,059 $33,046
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ..................................................... 1,860 360 1,905
Provision for losses on foreclosed real estate ................................ - (100) 868
Provision for depreciation .................................................... 10,109 9,435 9,096
(Increase) decrease in assets held for sale ................................... (45,850) (4,615) 19,418
Increase in accrued interest receivable ....................................... (4,318) (137) (413)
Increase in prepaid expenses and other assets ................................. (3,941) (3,116) (2,525)
Increase (decrease) in other liabilities ...................................... 42,729 (3,350) 12,599
Net amortization of yield adjustments ......................................... 5,996 (1,522) 8,149
Other items, net .............................................................. 5,752 (4,064) (25,134)
-----------------------------------------
Net cash provided by operating activities .................................. 41,042 48,950 57,009
INVESTING ACTIVITIES
Increase in loans receivable ...................................................... (858,490) (472,326) (555,554)
Principal repayments on available for sale mortgage-backed securities ............. 211,515 139,692 64,844
Principal repayments on held to maturity mortgage-backed securities ............... 165,980 117,168 153,084
Purchase of available for sale mortgage-backed securities ......................... (29,995) (5,000) (32,840)
Purchase of held to maturity mortgage-backed securities ........................... - - (51,065)
Sale of available for sale mortgage-backed securities ............................. - - 27,542
Maturities of available for sale investment securities ............................ 85,618 81,310 92,170
Maturities of held to maturity investment securities .............................. 350 8,981 3,268
Purchase of available for sale investment securities .............................. (129,798) (119,539) (68,104)
Purchase of held to maturity investment securities ................................ - (751) (3,413)
Sale of available for sale investment securities .................................. 18,119 47,195 47,344
Additions to real estate .......................................................... (3,879) (10,235) (16,294)
Real estate sold .................................................................. 8,484 16,315 46,117
(Increase) decrease in Federal Home Loan Bank stock ............................... (25,190) (4,916) 213
Purchase of office properties and equipment ....................................... (16,114) (15,866) (13,852)
Proceeds from sale of office properties and equipment.............................. 112 (16) _
-----------------------------------------
Net cash used in investing activities ......................................... (573,288) (217,988) (306,540)
FINANCING ACTIVITIES
Net increase (decrease) in deposits ............................................... 23,571 (22,674) 135,133
New long-term borrowings .......................................................... 875,000 298,418 50,598
Repayment of long-term borrowings ................................................. - (74,500) (15,000)
Increase (decrease) in short-term borrowings, net ................................. (144,411) 4,150 69,965
Dividends paid to stockholders .................................................... (19,571) (13,670) (8,953)
Net proceeds from exercise of stock options ....................................... 8,100 10,289 7,833
Issuance of common stock........................................................... 77 - 15,440
Purchase of treasury stock ........................................................ (27) (17,237) (24,906)
Increase (decrease) in advance payments by borrowers for taxes and insurance....... (9,306) 294 512
-----------------------------------------
Net cash provided by financing activities ..................................... 733,433 185,070 230,622
-----------------------------------------
Increase (Decrease) in Cash and Cash Equivalents .................................. 201,187 16,032 (18,909)
Cash and cash equivalents at beginning of year ................................ 238,133 222,101 241,010
-----------------------------------------
Cash and Cash Equivalents at End of Year .......................................... $439,320 $238,133 $222,101
=========================================
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"),
Annuity Network, Inc. ("Annuity Network") and St. Paul Trust Company.
The Bank is a consumer-oriented retail financial institution operating 65
banking offices throughout the Chicago, Illinois, metropolitan area. In July
1998, the Company completed a merger with Beverly Bancorporation ("Beverly").
See Aquisitions following for further details. St. Paul Trust Company (formerly
known as Beverly Trust Company) provides a variety of trust and fund management
services for individuals and corporations and the administration of land trusts.
St. Paul Financial engages in residential and commercial real estate development
and equity and debt financing 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 wholly owned
subsidiaries: SPF Insurance Agency, Inc.; St. Paul Securities, Inc.;
Managed Properties, Inc.; MPI Illinois Corporation; Community Finance
Corporation; EFS/San Diego Service Corporation; Serve Corps Mortgage
Corporation; ATM Connection, Inc.; 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 primarily holds equity investments in companies
that acquire limited partnership interests in low-income building development
projects and complies with the provisions of the Community Reinvestment Act.
EFS/San Diego Service Corporation owns assets leased to others.
Serve Corps Mortgage Corporation operates as a 1-4 family mortgage loan
broker. The Bank acquired the operations of Serve Corps in
January 1998.
ATM Connection, Inc. owns and operates the Bank's automated teller machine
network, and began operations in January 1998.
St. Paul Investment Corporation, and its subsidiary, St. Paul Asset
Management Company, acquire and manage certain real estate-related assets for
the Bank. St. Paul Investment Corporation also has a small non-real
estate investment portfolio. St. Paul Asset Management was liquidated during
1998.
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.
ACQUISITIONS: On July 1, 1998, the Company completed a merger with Beverly
Bancorporation, Inc. ("Beverly"). The transaction was accounted for as a pooling
of interests, and, accordingly, all financial statements and information have
been restated to incorporate Beverly's results on a historical basis. Beverly
had two subsidiaries, Beverly Bank and Beverly Trust Company. Beverly Bank was a
commercial bank serving the south and southwest Chicagoland area with 12
branches. Beverly Bank was merged into the Bank's operations. Beverly Trust
Company provided a variety of trust and fund management services for individuals
and corporations and the administration of land trusts. Beverly Trust Company
was renamed St. Paul Trust Company. At July 1, 1998, Beverly had total assets of
$705 million and stockholders' equity of $73.4 million. Each share of Beverly
was exchanged for 1.063 shares of the Company's $0.01 par value common stock,
resulting in the issuance of 6.1 million of Company common stock. The Company
also reserved 558,000 of additional common shares for the outstanding stock
options issued to Beverly officers and directors.
The following table shows gross revenues (interest income and non-interest
income), extraordinary items, net income and diluted earnings per share for the
periods indicated for the Company and Beverly individually and on a combined
basis:
FOR SIX MONTHS For the Year Ended
ENDED JUNE 30, December 31,
- ----------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------
REVENUES:
St. Paul ...................... $180,042 $360,383 $331,976
Beverly ....................... 28,932 55,788 51,256
------------------------------
Combined ...................... $208,974 $416,171 $383,232
==============================
EXTRAORDINARY LOSS (net of tax):
St. Paul ...................... $ - $ (403) $ -
Beverly ....................... - - -
------------------------------
Combined ...................... $ - $ 403) $ -
==============================
NET INCOME:
St. Paul ...................... $ 24,654 $ 49,058 $ 26,257
Beverly ....................... 2,562 7,001 6,789
------------------------------
Combined ...................... $ 27,216 $ 56,059 $ 33,046
==============================
DILUTED EARNINGS PER SHARE:
St. Paul ...................... $ 0.70 $ 1.40 $ 0.74
Beverly ....................... 0.42 1.23 1.43
------------------------------
Combined ...................... $ 0.65 $ 1.36 $ 0.81
==============================
44
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The combined consolidated results of operations are not necessarily
indicative of the results that would have occurred had the merger been
consummated in the past or may be attained in the future. In connection with the
merger, the Company recorded a $11.5 million merger-related charge. See Note B -
Non-Recurring Charges for further details.
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, including securities pledged to
brokers under repurchase agreements, as 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 has not classified
any securities as trading during 1998, 1997 and 1996.
3) Available for Sale: Securities classified as available for sale are carried
at fair value, with unrealized gains and losses included in other comprehensive
income, 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 1998, 1997 or 1996.
LOANS RECEIVABLE: Loans receivable classified as held to maturity are recorded
at cost, adjusted for unamortized premiums and discounts and net deferred loan
origination fees. Net deferred loan origination fees are comprised of loan
origination fees less certain deferred direct origination costs. 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, discounts and net
deferred loan origination fees (or costs) when loans receivable are repaid prior
to their contractual maturities. Premiums and discount 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 repayments 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. Commercial and commercial real estate 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 impaired commercial and commercial real estate
loans. 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. 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 and 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 Loan Loss Reserve Committee of the Bank's Board of Directors approves the
adequacy of the allowance for loan losses on a quarterly basis. The allowance
for loan losses reflects Management's best estimate of the reserves needed to
provide for impairment of commercial and commercial real estate loans, as well
as other perceived credit risks of the Bank. However, actual results could
differ from this estimate, and future additions or reductions 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.
45
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
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- --------------------------------------------------------------------------------
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 accumulated provision for loan losses is charged
for any excess of net book value over fair value at the foreclosure or
in-substance foreclosure date. The Bank had no REOISF at Dec. 31, 1998 or 1997.
Subsequent to foreclosure, the allowance for foreclosed real estate losses is
used to establish loss provisions on individual REO properties if 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 each
specific real estate asset in relationship to its book value, 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.
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 establishing, amortizing
and valuing mortgage servicing rights.
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, the carrying value of the asset is allocated between mortgage
servicing rights and the loan (or security) based upon the relative fair values
of those assets at the time of sale or securitization in accordance with SFAS
No. 125. 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. Capitalized mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing income. See Note M - Mortgage Servicing Rights for further details.
Mortgage servicing rights must be stratified in accordance with accounting rules
and evaluated for impairment. The carrying value of each stratum of mortgage
servicing rights is adjusted down when it exceeds fair value. Also see Note X -
Fair Value of Financial Instruments for further details of the fair value of
mortgage servicing rights.
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.
OFFICE PROPERTIES AND EQUIPMENT: Office properties and equipment, including
assets under capital leases, are carried at amortized cost. Depreciation and
amortization are computed principally using the straight-line method over the
estimated useful lives of the assets or the remaining term of the capital lease.
TRUST ASSETS: Assets held in fiduciary or agency capacities are not included
in the consolidated statement of financial condition, since these assets are
not owned by the Company.
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 cost 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 discontinued its leveraged Employee Stock Ownership Plan ("ESOP")
in 1998. The ESOP debt was repaid in 1998, using proceeds from the sale of
unallocated shares. In accordance with the Employee Retirement Income Security
Act ("ERISA"), all residual shares were allocated to all plan participants. The
Company is waiting for a final determination from the Internal Revenue Service
before final distribution of the allocated shares. The Company applied the
provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 93-6, Employers' Accounting for Employee Stock
Ownership Plans, which was prospectively adopted in 1994. 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. In addition, under SOP 93-6,
unallocated shares were not considered outstanding and were excluded from the
earnings per share ("EPS") calculation beginning in 1994. Also, under SOP 93-6,
dividends on the unallocated ESOP shares were reported as a reduction of accrued
interest on the ESOP borrowing rather than as a reduction of retained earnings.
During 1998, the ESOP released 364,963 shares that were accounted for under
SOP 93-6. Accordingly, the Company recognized $3.7 million of expense as part of
the one-time cost reduction plan charge for the release of these shares. During
1997, only 3,193 shares subject to SOP 93-6 were released, which increased
compensation expense by $83,816.
Shares acquired by the ESOP prior to 1994 were 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 was reported as a liability and a reduction in
stockholders' equity on the Company's Consolidated Statements of Financial
Condition. Both the lia-
46
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
bility and contra-equity accounts are reduced as the borrowing is repaid. In
1997, the remaining shares accounted for under SOP No. 76-3 were released to
participants.
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 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 the 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.
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 item. 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 Impact of
Recently Issued Accounting Standards following for further details. See Note T -
Financial Instruments With Off-Balance Sheet Credit Risk for details of the
interest rate exchange agreements. Market losses of forward loan sale
commitments are included in the Consolidated 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. To conform, the Company changed the method used to compute earnings
per share and restated all prior periods. The Company 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
approximate the previously reported primary 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: During 1997, the Company adopted
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The implementation of some of the provisions of
this Statement was delayed until 1998 as required by SFAS No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125. These
Statements provide accounting and reporting standards for the sale,
securitization and servicing of receivables and other financial assets and the
extinguishment of liabilities. The adoption of these Statements did not affect
operations in a material way. In accordance with SFAS No. 125, as amended by
SFAS No. 127, the Company began to report the collateral that has been pledged
to a third party in connection with a repurchase agreement and for which the
third party may sell or repledge the collateral and which the Company does not
have the right to redeem on short notice as "Securities Due from Brokers" on the
Consolidated Statements of Financial Position. The amount due from brokers
consists of the carrying value of MBS pledged as collateral.
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
reporting of financial information from operating segments in annual and interim
financial statements. This Statement requires that financial information be
reported on the basis that it is reported internally for evaluating segment
performance. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will not
impact the primary financial statements. See Note BB - Segment Reporting for
further details.
47
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, Employers' Disclosure about Pensions and Other Post-retirement
Benefits. This Statement revises an employer's financial statement disclosures
for pension and other post-retirement benefit plans. This Statement does not,
however, change the measurement or recognition of those plans, and will
therefore have no effect on the financial statements. This Statement is
effective for 1998. See Note S - Employee Benefit Plans for further details.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. This Statement provides a standard for the
recognition and measurement of derivatives and hedging activities. Because of
the Company's limited use of derivatives, Management does not anticipate that
the adoption of the new Statement will have a significant impact on earnings or
the financial position of the Company. However, the Statement is complex and
defines derivatives broadly and will require an extensive accounting analysis to
determine if any unidentified provision within instruments and contracts of the
Company are subject to the Standard.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Entity - An Amendment of FASB No. 65. This Statement requires
that after the securitization of mortgage loans, an entity classify the
resulting mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities (i.e.,
trading, available for sale or held to maturity). This Statement will not have a
material impact on operations. This Statement does not become effective until
1999, but early adoption is permitted.
In January 1999, the Company adopted SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This SOP provides
guidance on accounting for the costs related to developing, obtaining, modifying
and/or implementing internal use software. The prospective implementation of
this SOP should not have a material impact on the Company.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the 1998 presentation. All share and per share amounts have been
restated for stock splits and dividends.
NOTE B
- --------------------------------------------------------------------------------
NON-RECURRING CHARGES
In 1998, the Company recorded two non-recurring charges, a $11.5 million pre-tax
charge related to the Beverly merger and a $25.0 million pre-tax charge related
to the cost reduction plan announced in August 1998.
The $11.5 million pre-tax charge associated with the Beverly merger was
comprised of $9.025 million of costs recorded as general and administrative
costs and a $2.5 million provision for loan losses to conform the Beverly loan
portfolio to the Company's loan loss allowance methodology. The costs recorded
as general and administrative expenses included buyer and seller transaction
costs, severance and other human resource costs, contract termination penalties
and other costs.
The Company also recorded a $25.0 million charge associated with a cost
reduction plan and certain information technology initiatives. Most of the cost
reduction plan focused on the employee compensation and benefit plans.
Approximately $7.8 million of the charge was associated with modifications to
executives' and directors' pension plans. The current obligations of both plans
were frozen at current levels and will be funded. The charge also included $3.7
million related to the termination of the Company's leveraged employee stock
ownership plan, as an accounting change in 1993 made maintaining the leveraged
plan cost prohibitive beyond 1998. Another $6.4 million of the charge was
related to the early retirement option offered to certain employees, as well as
a reduction in workforce. This program will allow the Company to reduce staffing
levels by approximately 90. Information systems initiatives comprise $5.7
million of the charge, mainly attributed to the write-offs of computer hardware
and software and severance. Almost all major systems have been upgraded or
replaced, including the Bank's core deposit, loan and general ledger transaction
processing systems (including the systems that supported the old Beverly
locations), the teller platform systems and enhancements to the automated
telephone response system.
The following table provides a rollforward of the two one-time charges in
1998, including the amounts paid and written off and the amount still to be paid
as of December 31, 1998:
Asset
Write-down/ Balance
Charge Amount Valuation to Be
Dollars in thousands Recorded Paid Allowance Paid
- ----------------------------------------------------------------------
Merger-Related Charge
Buyer/seller costs..... $ 2,749 $ (2,714) $ - $ 35
Contract termination costs 2,609 (842) - 1,767
Human resource costs .. 2,241 (1,902) - 339
Provision for loan losses 2,500 - (2,500) -
Other.................. 1,426 (126) (886) 414
---------------------------------------
Total merger-related charge $11,525 $ (5,584) $(3,386) $2,555
Cost Reduction Plan Charge
Changes to pension plan (a) $ 7,800 $ (7,800) $ - $ -
ESOP .................. 3,747 (3,747) - -
Early retirement plan (b) 6,401 (6,401) - -
System upgrade ........ 5,736 (416) (5,236) 84
Other.................. 1,316 - (1,046) 270
---------------------------------------
Total cost reduction plan $25,000 $(18,364) $(6,282) $354
---------------------------------------
Grand total ........... $36,525 $(23,948) $(9,668) $2,909
=======================================
(a) A Rabbi Trust for the benefit of plan participants has been established,
while the amounts remain as general obligations of the Company.
(b) Amounts have been charged to expense in accordance with SFAS No. 88,
Employers' Accounting for Settlement and Curtailment of Defined Benefit
Pension Plans and for Termination Benefits, and will be paid out of the Plan
assets in accordance with ERISA.
- --------------------------------------------------------------------------------
In 1996, the Company also recorded a $21.0 million pre-tax charge to
recapitalize the Savings Association Insurance Fund ("SAIF"). During that year,
federal legislation was enacted that required members of the SAIF, such as the
Bank, to pay a one-time assessment to bring the SAIF up to desired
capitalization levels. The Bank's share of the charge was $21.0 million and was
included in general and administrative expenses in 1996. After payment of the
special assessment, the Bank's insurance premiums dropped to about one-fourth of
the previous level.
48
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE C
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
The following tables present the amortized cost and fair values of cash and cash
equivalents as of Dec. 31, 1998 and 1997.
Dollars in thousands DEC. 31, 1998
- ----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
BY TYPE:
Cash and amounts due from
depository institutions ................ $128,958 $ -- $ -- $128,958
Federal funds sold and interest-
bearing bank balances .................. 83,300 -- -- 83,300
Short-term cash equivalent securities:
U.S. Treasury securities ............... 221,570 23 25 221,568
Commercial paper ....................... 5,494 -- -- 5,494
-----------------------------------------
Total cash and cash
equivalents ............................ $439,322 $ 23 $ 25 $439,320
=========================================
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 ........... $113,293 $ -- $ -- $113,293
Federal funds sold and interest-
bearing bank balances ............. 66,845 -- -- 66,845
Short-term cash equivalent securities:
U.S. Treasury securities .......... 53,769 38 -- 53,807
Commercial paper .................. 4,188 -- -- 4,188
-------------------------------------------
Total cash and cash
equivalents ....................... $238,095 $ 38 $ -- $238,133
===========================================
Included in "cash and amounts due from depository institutions" at Dec. 31,
1998 was a $12.2 million reserve requirement maintained with the Federal Reserve
Bank of Chicago.
NOTE D
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
The following tables present the amortized cost and fair values of marketable
debt and equity investment securities at Dec. 31, 1998 and 1997.
Dollars in thousands Dec. 31, 1998
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE:
U.S. Treasury securities .......... $ 30,101 $ 404 $ -- $ 30,505
U.S. agency securities ............ 118,411 268 10 118,669
Obligations of state and
political subdivisions ......... 37,856 1,391 2 39,245
Corporate debt securities ......... 3,048 -- 10 3,038
Equity securities ................. 11,987 805 325 12,467
------------------------------------------
201,403 2,868 347 203,924
HELD TO MATURITY:
U.S. Treasury ..................... 2,067 23 -- 2,090
Obligations of state and
political subdivisions ......... 7,891 322 -- 8,213
------------------------------------------
9,958 345 -- 10,303
------------------------------------------
Total investment securities ....... $211,361 $ 3,213 $ 347 $214,227
=========================================
Dollars in thousands Dec. 31, 1997
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE:
U.S. Treasury securities ....... $ 51,466 $ 45 $ 141 $ 51,370
U.S. agency securities ......... 69,375 45 214 69,206
Obligations of state and
political subdivisions ...... 23,538 429 15 23,952
Corporate debt securities ...... 17,162 771 -- 17,933
Equity securities .............. 11,104 635 2 11,737
-------------------------------------------
172,645 1,925 372 174,198
HELD TO MATURITY:
U.S. Treasury .................. 2,112 -- 7 2,105
Obligations of state and
political subdivisions ...... 11,266 202 6 11,462
-------------------------------------------
13,378 202 13 13,567
-------------------------------------------
Total investment securities .... $186,023 $ 2,127 $ 385 $187,765
===========================================
The following table summarizes, by amortized cost and fair value, the
maturity tion of marketable-debt securities as of Dec. 31, 1998 based
upon contractual maturities. This table does not include marketable-equity
securities, with an amortized cost and fair value of $12.0 million and $12.5
million, respectively, which have no stated maturity date.
Dollars in thousands MATURITY SCHEDULE AS OF DEC. 31, 1998
- ----------------------------------------------------------------------------------
1 Year 1 Year to 5 Years to More Than
or Less 5 Years 10 Years 10 Years Total
- ----------------------------------------------------------------------------------
AMORTIZED COST:
Available for sale .... $ 53,018 $ 88,493 $ 21,448 $ 26,457 $189,416
Held to maturity ...... 2,400 3,863 3,137 558 9,958
--------------------------------------------------------
$ 55,418 $ 92,356 $ 24,585 $ 27,015 $199,374
========================================================
FAIR VALUE:
Available for sale .... $ 53,056 $ 89,170 $ 22,358 $ 26,873 $191,457
Held to maturity ...... 2,434 3,920 3,340 609 10,303
--------------------------------------------------------
$ 55,490 $ 93,090 $ 25,698 $ 27,482 $201,760
========================================================
Weighted
average yield
(tax-equivalent
basis) ............. 5.65% 5.98% 7.31% 6.20% 6.08%
========================================================
During 1998, $18.1 million of investment securities were sold, resulting in a
gross gain of $465,000 and a tax liability of $153,000. During 1997, $47.2
million of investment securities were sold, resulting in a gross gain of $1.2
million and a tax liability of $396,000. During 1996, $47.3 million of
investment securities were sold, resulting in a gross gain of $138,000 and a tax
liability of $45,000.
U.S. Treasury securities are used as collateral for tax deposits and public
funds and ESOP borrowings. The amortized cost of securities used as collateral
at Dec. 31, 1998 and 1997 was $42.5 million and $44.5 million, respectively.
49
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES/SECURITIES DUE FROM BROKERS
The following tables present the amortized cost and fair values of MBS and
securities due from brokers at Dec. 31, 1998 and 1997, including securities
issued by Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as Collateralized Mortgage Obligations
("CMOs").
Dollars in thousands DEC. 31, 1998
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
AVAILABLE FOR SALE:
FNMA (MBS) ........................ $149,393 $ 1,212 $ 257 $150,348
FNMA (due from brokers) ........... 78,908 771 -- 79,679
FHLMC ............................. 49,523 158 465 49,216
Privately issued .................. 33,115 163 968 32,310
CMOs .............................. 25,872 140 14 25,998
-----------------------------------------
336,811 2,444 1,704 337,551
HELD TO MATURITY:
Privately issued .................. 212,513 4,829 1,606 215,736
CMOs .............................. 36,196 306 67 36,435
FNMA .............................. 15,842 -- 111 15,731
-----------------------------------------
264,551 5,135 1,784 267,902
-----------------------------------------
Total MBS/securities due
from brokers ................... $601,362 $ 7,579 $ 3,488 $605,453
=========================================
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 ............................. 81,940 1 1,391 80,550
Privately issued .................. 15,108 40 991 14,157
CMOs .............................. 35,273 174 20 35,427
-----------------------------------------
517,522 6,121 3,379 520,264
HELD TO MATURITY:
Privately issued .................. 318,503 4,700 2,157 321,046
CMOs .............................. 87,186 785 40 87,931
FNMA .............................. 29,337 93 7 29,423
-----------------------------------------
435,026 5,578 2,204 438,400
-----------------------------------------
Total MBS ......................... $952,548 $ 11,699 $ 5,583 $958,664
=========================================
The following table summarizes, by amortized cost and fair value, the
contractual maturities of MBS held as of Dec. 31, 1998:
Dollars in thousands MATURITY SCHEDULE AS OF DEC. 31, 1998
- ---------------------------------------------------------------------------------------
1 Year 1 Year to 5 Years to More Than
or Less 5 Years 10 Years 10 Years Total
- ---------------------------------------------------------------------------------------
AMORTIZED COST:
Available for sale ......... $ 8,550 $ 28,332 $ 31,986 $267,943 $336,811
Held to maturity ........... -- 12,033 -- 252,518 264,551
--------------------------------------------------------
$ 8,550 $ 40,365 $ 31,986 $520,461 $601,362
========================================================
FAIR VALUE:
Available for sale ......... $ 8,584 $ 28,333 $ 32,125 $268,509 $337,551
Held to maturity ........... -- 11,983 -- 255,919 267,902
--------------------------------------------------------
$ 8,584 $ 40,316 $ 32,125 $524,428 $605,453
========================================================
Weighted
average yield ........... 5.41% 5.50% 6.65% 6.82% 6.71%
========================================================
The amortized cost of MBS used to collateralize certain deposits, securities
sold under agreements to repurchase, recourse arrangements, public funds and
various other borrowings was $113.5 million at Dec. 31, 1998 and $410.9 million
at Dec. 31, 1997.
MBS totaling $156.2 million and $292.2 million at Dec. 31, 1998 and 1997,
respectively, represented loans originated, securitized and serviced by the
Bank.
During 1998 and 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. No held to maturity MBS were sold
during 1998, 1997 or 1996.
NOTE F
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
Loans receivable as of Dec. 31, 1998 and 1997 are summarized as follows:
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
MORTGAGE AND COMMERCIAL LOANS:
1-4 family units .................. $ 3,406,333 $ 2,434,403
Commercial real estate ............ 1,000,835 1,108,946
Commercial and industrial ......... 47,628 55,291
Land and land development ......... 910 1,467
---------------------------
4,455,706 3,600,107
---------------------------
CONSUMER LOANS:
Credit card ....................... -- 1,237
Automobile ........................ 28,769 39,200
Other ............................. 9,948 14,758
Personal .......................... 2,375 2,684
Secured by deposits ............... 2,356 1,015
Home improvement .................. 89 136
Education ......................... 240 1,281
---------------------------
43,777 60,311
---------------------------
Contract amount of loans receivable 4,499,483 3,660,418
ADD (DEDUCT):
Net unearned premiums ............. 15,257 5,189
Net deferred loan costs (fees) .... 3,264 (505)
---------------------------
Loans receivable .................. 4,518,004 3,665,102
---------------------------
Less: accumulated provision for
loan losses-Note G ............. (40,423) (38,569)
---------------------------
Net loans receivable .............. $ 4,477,581 $ 3,626,533
===========================
Combined weighted average
yield of loans receivable ...... 7.14% 7.57%
===========================
50
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 1998 and 1997. Most of the Company's impaired
loans are commercial real estate loans.
The Amount of the
Recorded Investment for Which
There is No
The Total Recorded Investment in Related "Specific"
Impaired Loans Allowance for Credit Loss
- -------------------------------------------------------------------------------------------------------------------
Total Total
Performing Nonperforming Impaired Performing Nonperforming Impaired
Dollars in thousands Loans Loans Loans Loans Loans Loans
- -------------------------------------------------------------------------------------------------------------------
Balance at Jan. 1, 1997 ....... $ 61,420 $ -- $ 61,420 $ 56,161 $ -- $ 56,161
New Impairments ............... 1,069 -- 1,069 718 -- 718
Transfers to REO .............. -- (1,920) (1,920) -- (1,920) (1,920)
Transfers to nonperforming .... (10,579) 10,579 -- (9,803) 9,803 --
Charge-offs ................... (1,568) -- (1,568) 57 -- 57
Improvement in valuation ...... (18,981) (7,710) (26,691) (18,060) (7,710) (25,770)
Repayments .................... (10,392) (949) (11,341) (9,583) (173) (9,756)
--------------------------------------------------------------------------------
Balance at Dec. 31, 1997 ...... 20,969 -- 20,969 19,490 -- 19,490
New Impairments ............... 34 -- 34 107 -- 107
Transfers to REO .............. -- -- -- -- -- --
Recoveries .................... 288 -- 288 -- -- --
Improvement in valuation ...... (17,178) -- (17,178) (15,590) -- (15,590)
Repayments .................... (839) -- (839) (733) -- (733)
--------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1998 ...... $ 3,274 $ -- $ 3,274 $ 3,274 $ -- $ 3,274
================================================================================
The Amount of the
Recorded Investment for Which
There is a
Related "Specific"
Allowance for Credit Loss
------------------------------
Balance at Jan. 1, 1997 ....... $ 5,259 $ -- $ 5,259
New Impairments ............... 351 -- 351
Transfers to REO .............. -- -- --
Transfers to nonperforming .... (776) 776 --
Charge-offs ................... (1,625) -- (1,625)
Improvement in valuation ...... (921) -- (921)
Repayments .................... (809) (776) (1,585)
-----------------------------
Balance at Dec. 31, 1997 ...... 1,479 -- 1,479
New Impairments ............... (73) -- (73)
Transfers to REO .............. -- -- --
Recoveries .................... 288 -- 288
Improvement in valuation ...... (1,588) -- (1,588)
Repayments .................... (106) -- (106)
-----------------------------
Balance at Dec. 31, 1998 ...... $ -- $ -- $ --
=============================
The following table presents the average recorded investment in impaired
loans during the years ending Dec. 31, 1998, 1997 and 1996 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 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
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 ........ $ 9,082 $ 755 $34,538 $ 2,525 $48,204 $ 3,535
Nonperforming loans ..... -- -- 2,643 -- 1,330 --
----------------------------------------------------------------------------
Total ................... $ 9,082 $ 755 $37,181 $ 2,525 $49,534 $ 3,535
============================================================================
At Dec. 31, 1998, the Bank had $14.0 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, 1998 and 1997, the Bank had $257,000 and $857,000,
respectively, of trouble debt restructured loans ("TDRs"). The loans reported as
TDRs at Dec. 31, 1998 and 1997 were performing in accordance with the terms of
the debt restructurings. Interest income of $101,000 and $25,000 was recorded on
TDRs during 1998 and 1997, respectively, that equaled the amount of cash
payments received.
NOTE G
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Real Estate/
Commercial Consumer Total
Loans Loans Loans
- --------------------------------------------------------------------------------
Balance at Jan. 1, 1996 ...... $ 41,127 $ 1,016 $ 42,143
Provision for losses ......... 1,905 -- 1,905
Charge-offs .................. (5,277) (204) (5,481)
Recoveries ................... 1,178 240 1,418
Transfers .................... 293 (293) --
--------------------------------
Balance at Dec. 31, 1996 ..... 39,226 759 39,985
Provision for losses ......... 360 -- 360
Charge-offs .................. (2,901) (390) (3,291)
Recoveries ................... 1,358 157 1,515
Transfers .................... (785) 785 --
--------------------------------
Balance at Dec. 31, 1997 ..... 37,258 1,311 38,569
Provision for losses ......... 1,710 150 1,860
Charge-offs .................. (802) (332) (1,134)
Recoveries ................... 1,019 109 1,128
Transfers .................... 486 (486) --
--------------------------------
Balance at Dec. 31, 1998 ..... $ 39,671 $ 752 $ 40,423
================================
See Note A-Summary of Significant Accounting Policies for a description of
the Company's accounting policy for the allowance of loan losses.
51
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE H
- --------------------------------------------------------------------------------
LOANS HELD FOR SALE AND LOANS SERVICED FOR OTHERS
Loans held for sale as of Dec. 31, 1998 and 1997 are as follows:
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------
1-4 family real estate loans .... $57,796 $58,683 $11,742 $11,805
Education loans ................. 7,558 7,558 7,762 7,762
------------------------------------------
Loans held for sale ............. $65,354 $66,241 $19,504 $19,567
==========================================
The following are related mortgage servicing portfolio statistics at Dec.
31, 1998, 1997 and 1996:
Dollars in thousands 1998 1997 1996
- ------------------------------------------------------------------------------------
Total mortgage servicing portfolio .......... $2,883,632 $3,080,036 $3,272,275
Loans serviced for others ................... 608,628 794,689 970,363
Loans serviced and held in MBS portfolio .... 156,196 292,228 391,919
------------------------------------
NOTE I
- --------------------------------------------------------------------------------
FORECLOSED REAL ESTATE
The components of foreclosed real estate at Dec. 31, 1998 and 1997 are as
follows:
Dollars in thousands 1998 1997
- -------------------------------------------------------------------------------
REO........................................................... $2,097 $1,637
Less allowance for REO losses ................................ (155) (157)
------ ------
Total foreclosed real estate ................................. $1,942 $1,480
====== ======
The following schedule provides a rollforward of the allowance for REO
losses:
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------------
Balance at Jan. 1 .................................... $ 157 $ 284 $ 1,974
Provision for losses (reversal of provision) ......... -- (100) 868
Charge-offs .......................................... (10) (130) (2,662)
Recoveries ........................................... 8 103 104
------- ------- -------
Balance at Dec. 31 ................................... $ 155 $ 157 $ 284
======= ======= =======
The following schedule provides details of the results of operations on
foreclosed real estate for the years ended Dec. 31, 1998, 1997 and 1996:
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Operating income on foreclosed real estate ..... $ -- $ 133 $ 1,687
Operating expense on foreclosed real estate .... 208 252 1,472
----------------------------
Net operating gain (loss) on
foreclosed real estate ...................... (208) (119) 215
Gain on sale of foreclosed real estate ......... 212 405 46
Reversal of provision
(provision for) losses on REO ............... -- 100 (868)
----------------------------
Gain (loss) on foreclosed real estate .......... $ 4 $ 386 $ (607)
============================
NOTE J
- --------------------------------------------------------------------------------
REAL ESTATE HELD FOR DEVELOPMENT OR INVESTMENT
Income from real estate development or investment operations is summarized as
follows:
Dollars in thousands 1998 1997 1996
- ------------------------------------------------------------------------------------
Sales of real estate ................................. $ 8,854 $14,164 $12,956
Cost of sales ........................................ 5,473 10,025 10,439
---------------------------
Income from real estate development .................. 3,381 4,139 2,517
Other income ......................................... 19 94 42
General and administrative expense ................... 1,016 1,310 1,502
Interest income, net of interest expense ............. 1,056 916 123
---------------------------
Income before income taxes ........................... $ 3,440 $ 3,839 $ 1,180
===========================
Interest capitalized to the balance of real estate held for development or
investment amounted to $626,000, $1.0 million and $567,000 during 1998, 1997 and
1996, 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 $3.2 million, $2.6 million and $2.4
million in 1998, 1997 and 1996, respectively. Dividend income is included with
dividends on equity investment securities 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, 1998 and 1997 are summarized as
follows:
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
Cost:
Land ............................................ $ 13,840 $ 13,872
Buildings and improvements ...................... 65,183 60,852
Furniture, fixtures and equipment ............... 51,203 54,851
Leasehold improvements .......................... 4,207 3,604
-------------------
134,433 133,179
Less allowances for depreciation and amortization 59,413 64,052
-------------------
Total office properties and equipment ........... $ 75,020 $ 69,127
===================
The Bank entered into a 20-year capital lease agreement in connection with a
former Beverly branch in 1996. The Company has the option to purchase the
building in later years and has classified the lease as a capital lease. The
Bank also has operating leases on certain office properties. Rent expense
incurred in connection with these leases was $3.1 million, $4.5 million and $2.9
million in 1998, 1997 and 1996, respectively.
52
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Minimum future operating lease commitments are summarized as follows:
Dollars in thousands Year ending Dec. 31
- --------------------------------------------------------------------
Capital Operating
Leases Leases
- --------------------------------------------------------------------
1999 ........................................ $ 74 $ 1,943
2000 ........................................ 76 1,771
2001 ........................................ 79 1,712
2002 ........................................ 81 1,584
2003 ........................................ 83 1,365
Later years ................................. 1,230 8,828
--------------------
Total ....................................... $ 1,623 $17,203
====================
Less amount representing interest............ (1,016)
-------
Present value of net minimum
lease payments under capital lease ..... $ 607
=======
NOTE M
- ---------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS
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, 1998 and 1997:
Dollars in thousands 1998 1997
- -------------------------------------------------------------------
Balance at Jan. 1............................ $ 3,401 $3,804
Additions.................................... 1,208 561
Amortization................................. (876) (871)
Valuation allowance.......................... (1,754) (93)
-------------------
Balance at Dec. 31........................... $ 1,979 $3,401
===================
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.
commercial and commercial real estate) and interest rate type (i.e., fixed vs.
adjustable). Impairment is recognized through a valuation allowance related to
each individual stratum. Valuation allowance activity during 1998 and 1997 was
caused by higher than anticipated loan prepayments. In 1998, additions to the
valuation allowance, which were charged to operations, totaled $1.7 million,
compared to $93,000 in 1997. There were no additions to the valuation allowance
in 1996. The fair value of mortgage servicing rights was $2.2 million and $3.8
million at Dec. 31, 1998 and 1997, respectively. See Note X - Fair Value of
Financial Instruments.
53
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE N
- --------------------------------------------------------------------------------
Deposits
Deposit balances at Dec. 31, 1998 and 1997 are summarized as follows:
Dollars in thousands 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Interest Rate
as of Dec. 31 Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------------
Transaction, savings and money market accounts:
Interest-bearing transaction............................ 1.01% 1.30% $ 404,456 10.4% $386,577 10.0%
Noninterest-bearing transaction ........................ - - 282,789 7.2 213,543 5.5
Savings accounts ....................................... 2.17 2.34 782,415 20.1 771,409 19.9
Money market accounts .................................. 3.68 3.65 280,503 7.2 247,528 6.4
-------------------------------------------------------------------
Transaction, savings and money market accounts ......... 1.79 1.98 1,750,163 44.9 1,619,057 41.8
Certificates of deposit (a):
3 months and under ..................................... 4.32 4.49 33,851 0.9 42,204 1.1
4 months ............................................... 4.06 4.23 2,111 0.1 3,605 0.1
5 months ............................................... 4.73 5.71 13,211 0.3 39,441 1.0
6 months ............................................... 4.72 5.27 269,730 6.9 245,249 6.3
7 months ............................................... 5.60 5.78 581,840 15.0 151,473 3.9
8 months ............................................... 5.21 5.43 12,442 0.3 11 *
9 months ............................................... 4.89 5.44 12,679 0.3 17,449 0.5
11 months .............................................. 4.86 5.40 90,232 2.3 100 *
12 months .............................................. 4.96 5.46 370,307 9.5 332,626 8.6
13 months .............................................. 5.65 5.88 26,178 0.7 725,065 18.7
15 months .............................................. 5.62 5.83 204,617 5.3 79,227 2.1
18 months .............................................. 4.88 5.66 82,386 2.1 84,152 2.2
24 months .............................................. 5.35 5.76 87,013 2.2 79,246 2.1
30 months .............................................. 5.59 5.37 48,829 1.3 70,895 1.8
36 months .............................................. 5.67 5.82 62,439 1.6 70,173 1.8
42 months .............................................. 5.49 5.60 1,473 * 2,587 0.1
48 months .............................................. 5.89 5.85 16,161 0.4 16,486 0.4
60 months .............................................. 5.71 5.57 142,026 3.7 205,336 5.3
84-120 months .......................................... 6.09 6.09 59,100 1.5 59,934 1.5
Jumbo accounts ......................................... 3.41 3.01 970 * 478 *
Other................................................... 9.75 9.46 27,213 0.7 26,606 0.7
-------------------------------------------------------------------
Certificates of deposit ................................ 5.40 5.72 2,144,808 55.1 2,252,343 58.2
-------------------------------------------------------------------
Total deposits (b) ..................................... 3.78% 4.16% $3,894,971 100.0% $3,871,400 100.0%
===================================================================
Accrued interest ....................................... $ 16,488 $ 7,649
-------------------------------------------------------------------
Total deposit-related liabilities ...................... $3,911,459 $3,879,049
===================================================================
* Less than 0.1%.
(a) Based upon original maturities.
(b) Includes $513.7 million and $481.4 million of deposits in denominations of
$100,000 or more at Dec. 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Interest expense by category of deposit is summarized as follows:
Dollars in thousands 1998 1997 1996
- ------------------------------------------------------------------------
Checking accounts.................. $ 4,397 $ 5,640 $ 5,645
Savings accounts.................... 17, 812 19,141 19,592
Money market accounts............... 8,614 8,866 7,920
Certificates of deposit............. 121,785 128,463 124,931
---------------------------------
$152,608 $162,110 $158,088
=================================
The following table represents 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,
1999.................................... $1,799,849 5.24%
2000.................................... 177,344 5.56
2001.................................... 57,548 5.66
2002.................................... 40,308 6.42
2003.................................... 43,701 5.73
2004 and thereafter..................... 26,058 8.73
--------------------------
$2,144,808 5.40%
==========================
The following table presents the amounts of the Bank's time deposits of
$100,000 or more at Dec. 31, 1998 maturing during the periods indicated:
Dollars in thousands 1997
- -----------------------------------------------------------
Jan 1, 1999 to March 31, 1999 $101,946
April 1, 1999 to June 30, 1999 71,977
July 1, 1999 to Dec. 31, 1999 44,985
After Dec. 31, 1999 35,568
--------
$254,476
========
54
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE O
- --------------------------------------------------------------------------------
BORROWINGS
Borrowings consisted of the following at Dec. 31, 1998 and 1997:
Dollars in thousands 1998 1997
- -----------------------------------------------------------------------------------------------
Weighted Weighted
Amount Average Amount Average
Borrowed Interest Rate Borrowed Interest Rate
- -----------------------------------------------------------------------------------------------
SHORT-TERM:
FHLB advances ................... $ 300,000 5.49% $ 40,000 5.76%
Securities sold under agree-
ments to repurchase .......... 75,000 5.22 330,000 5.81
Retail repurchase
agreements ................... 3,918 4.97 3,334 4.83
Mortgage-backed notes ........... 16,400 8.54 -- --
ESOP borrowings ................. -- -- 203 8.50
---------------------------------------------------------
395,318 5.56 373,537 5.81
LONG-TERM:
FHLB advances ................... 1,026,085 5.10 301,085 5.82
Senior notes (net of
unamortized discount
in 1998 of $1,331 and
in 1997 of $1,531) ........... 98,669 7.43 98,469 7.43
Mortgage-backed notes ........... -- -- 16,400 8.54
Capital lease obligations ....... 607 12.47 602 12.47
ESOP borrowings ................. -- -- 2,901 8.50
---------------------------------------------------------
1,125,361 5.31 419,457 6.34
---------------------------------------------------------
Total borrowings ................ $1,520,679 5.37% $ 792,994 6.22%
=========================================================
The following table presents the maturity distribution of borrowings at
Dec. 31, 1998:
Dollars in thousands Year-End 1998 Borrowings by Maturity
- --------------------------------------------------------------------------------------------------------------------------------
After
1999 2000 2001 2002 2003 2003 Total
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM:
FHLB advances ................. $ 300,000 $ -- $ -- $ -- $ -- $ -- $ 300,000
Securities sold under
agreements to repurchase ..... 75,000 -- -- -- -- -- 75,000
Retail repurchase agreement ... 3,918 -- -- -- -- -- 3,918
Mortgage-backed notes ......... 16,400 -- -- -- -- -- 16,400
---------------------------------------------------------------------------------------------
395,318 -- -- -- -- -- 395,318
LONG-TERM:
FHLB advances ................. -- 150,000 250,247 100,000 225,000 300,838 1,026,085
Senior notes .................. -- -- -- -- -- 98,669 98,669
Capital lease obligations ..... -- -- -- -- -- 607 607
---------------------------------------------------------------------------------------------
-- 150,000 250,247 100,000 225,000 400,114 1,125,361
---------------------------------------------------------------------------------------------
Total borrowings .............. $ 395,318 $ 150,000 $ 250,247 $ 100,000 $ 225,000 $ 400,114 $1,520,679
=============================================================================================
Weighted average rate ......... 5.56% 5.29% 5.08% 5.37% 4.90% 5.67% 5.37%
=============================================================================================
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, 1998, the collateral securing these
borrowings had a carrying amount of $78.9 million and a fair value of $79.7
million. As of Dec. 31, 1998, the Bank had approximately $1.3 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.
MORTGAGE-BACKED NOTES: The Bank had $16.4 million of mortgage-backed notes
outstanding as of Dec. 31, 1998 and 1997. The mortgage-backed notes are secured
by MBS held by an independent trustee.
55
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998, the collateral securing these notes had a carrying
amount and fair value of approximately $18.2 million and $18.1 million,
respectively. 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. As of Dec. 31, 1998, 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. This borrowing was repaid in 1998 and
all collateral released. See Note A - Summary of Significant Accounting Policies
for further details.
At Dec. 31, 1997, Company stock securing the $3.1 million borrowings had an
original cost of $2.9 million and fair value of $9.6 million. At Dec. 31, 1997,
the marketable-debt securities securing the borrowings had a carrying amount,
which approximated their fair value, of $164,000.
CAPITAL LEASE OBLIGATIONS: The Bank entered into a capital lease in connection
with a Beverly Branch. See Note L - Office Properties and Equipment for further
details.
LINE OF CREDIT: The Company has obtained a $20.0 million revolving unsecured
line of credit from another financial institution. The Company can elect the
interest rate on this borrowing to be either the prime rate or 75 basis points
over the 3-month LIBOR rate. No funds had been borrowed as of Dec. 31, 1998 or
1997.
NOTE P
- --------------------------------------------------------------------------------
INCOME TAXES
The following schedule summarizes the components of income tax expense for 1998,
1997 and 1996.
For the Years Ended Dec. 31,
- --------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX EXPENSE:
Current provision ............$ 22,901 $ 30,707 $ 14,013
Deferred expense (benefit) ... (7,518) (2,597) 1,969
--------------------------------
15,383 28,110 15,982
--------------------------------
STATE INCOME TAX EXPENSE:
Current provision ............ 283 174 95
Deferred expense (benefit) ... (957) (78) 305
--------------------------------
(674) 96 400
--------------------------------
TOTAL INCOME TAX EXPENSE:
Current provision ............ 23,184 30,881 14,108
Deferred expense (benefit) ... (8,475) (2,675) 2,274
--------------------------------
$ 14,709 $ 28,206 $ 16,382
================================
A reconciliation from expected federal income tax expense to consolidated
effective income tax expense before extraordinary item for the years ended Dec.
31, 1998, 1997 and 1996 is as follows:
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Federal income tax expense at
statutory rate (35%) ................ $ 15,195 $ 29,634 $ 17,300
State tax expense (benefit),
net of federal taxes ................ (438) 62 260
Tax exempt interest, net of cost to
carry investment .................... (613) (682) (623)
Other .................................. 565 (808) (555)
----------------------------------
Income taxes ........................... $ 14,709 $ 28,206 $ 16,382
==================================
Effective income tax rate .............. 33.9% 33.3% 33.1%
==================================
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, 1998,
1997 and 1996 are as follows:
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
General loan loss allowance ................... $ (637) $(1,375) $ 1,798
Excess of tax accumulated provision
for losses over base year amount ........... (69) -- --
Yield adjustments on interest-earning
assets and interest-bearing liabilities .... 579 398 160
Tax depreciation in excess of
book depreciation .......................... (474) 61 (326)
Prepaid expenses .............................. (434) 1 (37)
Accrued compensation and benefits ............. (5,456) (555) (557)
Stock dividends on FHLB stock ................. 172 21 (45)
Other, net .................................... (2,156) (1,226) 1,281
-----------------------------
Total deferred expense (benefit) .............. $(8,475) $(2,675) $ 2,274
=============================
The following schedule summarizes current and deferred income tax
liabilities and assets as of Dec. 31, 1998 and 1997.
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
INCOME TAX ASSETS AND (LIABILITIES):
Income taxes currently payable
included in or "Other liabilities" ......... $(20,062) $ (169)
====================
Deferred income tax assets .................... $ 26,714 $ 19,774
Deferred income tax liabilities ............... (5,813) (7,766)
--------------------
Net deferred income tax assets included in
"Prepaid expenses and other assets" ........ $ 20,901 $ 12,008
====================
The sources of the deferred income tax assets and liabilities at
Dec. 31, 1998 and 1997 are as follows:
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
General loan loss allowance ......................... $ 15,306 $ 14,669
Accrued compensation and benefits ................... 9,807 4,351
Other ............................................... 1,601 754
====================
Total deferred assets ............................... 26,714 19,774
Stock dividends on FHLB stock ....................... (1,618) (1,446)
Unrealized gain on available for sale securities .... (1,234) (1,652)
Tax depreciation in excess of book depreciation ..... (601) (1,075)
Prepaid expenses .................................... (277) (711)
Yield adjustments on interest-earning assets
and interest-bearing liabilities ................. (1,945) (1,366)
Excess tax accumulated provision for losses over
base year amount ................................. (138) (207)
Other ............................................... -- (1,309)
--------------------
Total deferred liabilities .......................... (5,813) (7,766)
--------------------
Net deferred tax asset .............................. $ 20,901 $ 12,008
====================
56
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Retained earnings at Dec. 31, 1998 and 1997 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 Dec. 31, 1998 and 1997.
NOTE Q
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
HOLDING COMPANY: The Company's Certificate of Incorporation authorizes up to 80
million shares of common stock and up to 10 million shares of preferred stock.
The number of authorized common shares was increased to 80 million shares, at
the June 1998 Special Meeting of Shareholders, from 40 million shares. The
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, 1998 and 1997,
there were 164,300 and 134,578 shares of preferred stock reserved for future
exercise of the Rights, respectively.
As of Dec. 31, 1998, the Company held 867,199 shares of its own outstanding
common stock under prior share repurchase plans. In January 1999, the Company
announced its intentions to repurchase up to 2.0 million shares of its common
stock (or about 5% of the outstanding shares) during the first six months of
1999. The Company retired, in 1997, 3.75 million of its repurchased shares.
During 1998, the Company also issued 385,035 of shares previously reacquired in
connection with the exercise of stock options by employees 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, 1998, the Bank meets all capital adequacy requirements to which it is
subject.
At both Dec. 31, 1998 and 1997, the Bank met 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. 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, 1998:
Total capital (to risk weighted assets)............. $486,590 15.62% >=$249,195 >=8.00% >=$311,494 >=10.00%
Tier I capital (to risk weighted assets) ........... 447,635 14.37 >= 124,597 >=4.00 >= 186,896 >= 6.00
Tier I capital (core) (to regulatory assets) ....... 447,635 7.62 >= 234,935 >=4.00 >= 293,668 >= 5.00
AS OF DEC. 31, 1997:
Total capital (to risk weighted assets)............. $475,129 16.63% >=$228,522 >=8.00% >=$285,652 >=10.00%
Tier I capital (to risk weighted assets) ........... 440,754 15.43 >= 114,261 >=4.00 >= 171,391 >= 6.00
Tier I capital (core) (to regulatory assets) ....... 440,754 8.62 >= 204,509 >=4.00 >= 255,637 >= 5.00
-------------------------------------------------------------------
57
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998 and 1997,
the Bank's tangible capital ratio of 7.62% and 8.62%, respectively, exceeded the
minimum required ratio.
The following schedule reconciles stockholders' equity of the Company to each
of the components of regulatory capital of the Bank at Dec. 31, 1998 and 1997:
In thousands 1998 1997
- ------------------------------------------------------------------------
Stockholders' equity of the Company.............. $509,924 $486,331
Less: Capitalization of the Company
and non-Bank subsidiaries..................... (59,174) (37,287)
---------------------
Stockholder's equity of the Bank................. 450,750 449,044
Less: Unrealized gain on available for sale
investment securities, net of taxes........... (1,706) (2,265)
Less: Investment in non-includable subsidiaries.. (580) (1,495)
Less: Intangible assets and other
non-includable assets ........................ (829) (4,530)
---------------------
Tangible and core capital........................ 447,635 440,754
Plus: Allowable general valuation allowances..... 38,955 34,375
---------------------
Risk-based capital............................... $486,590 $475,129
=====================
Regulatory rules currently impose limitations on all capital distributions by
savings institutions, including dividends, stock repurchase and cash-out
mergers. In 1998, the Bank paid quarterly dividends of 100% of the quarterly net
income to the Company. However, during the third quarter the Bank recorded an
operating loss because of the two one-time charges and paid no dividend to the
Company. The Bank intends to dividend 100% of its income to the Company in 1999.
NOTE R
- -------------------------------------------------------------------------------
STOCK OPTION PLANS
The Company maintains five stock option programs for the benefit of employees,
officers and directors, including two plans acquired in the Beverly merger. The
programs are for the benefit of directors, officers and other employees of the
Company and its subsidiaries. A total of 5,484,552 shares of authorized but
unissued common stock was reserved for issuance under all plans approved by
shareholders.
Under the three St. Paul plans, the Company may grant non-qualified stock
options, incentive stock options, stock appreciation rights, restricted stock,
performance shares and performance units to key employees and nonemployee
directors. The third plan does not provide for the issuance of options to
directors. As of Dec. 31, 1998, the Company has issued only non-qualified stock
options under these plans. During 1998 and 1997, there were 1,221,713 and
596,513 non-qualified stock options issued under these plans, respectively. The
plans authorize the Stock Option Committee of the Board of Directors to
administer the plans and make recommendations to award stock-based compensation
to 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 the first
two St. Paul plans 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.
Options granted under the third 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. All options also become exercisable upon any
merger or consolidation of the Company in which the Company is not the surviving
entity.
The Company also administers two stock option plans that were maintained by
Beverly. The first plan (the Incentive Stock Option Plan) is for the benefit of
directors, members of the advisory boards and officers. This plan allows the
issuances of incentive stock options. Under this plan, 68,120 shares of common
stock are available for distribution. The options allow for the purchase of
common stock at a price not less than fair market value on the date the option
is granted. The options vest ratably over a five-year period and are exercisable
no later than 10 years after the date of grant. The second plan (the Long-Term
Stock Incentive Plan) is for the benefit of key officers and employees of the
Company. This plan allows for the grant of non-qualified stock options. Under
this Plan, 108,828 shares of common stock are available for distribution. The
options allow for the purchase of common stock at a price not less than 85% of
fair market value. The options vest based upon the Board of Directors'
recommendation for each option grant. All options outstanding under both former
Beverly plans became fully vested in July 1998, when the Company completed a
merger with Beverly, and are exercisable no later than 10 years after the date
of grant.
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. 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.
Even though SFAS No. 123 was not adopted for accounting purposes, its
disclosure requirements are required. SFAS No. 123 requires use of option
valuation models for measuring the compensation cost of employee stock options.
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 as compensation 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 1998, 1997 and 1996:
1998 1997 1996
- ------------------------------------------------------------------------------
Risk-free interest rate................ 5.3% 6.3% 6.9%
Dividend yield ........................ 2.6% 1.5% 1.7%
Expected volatility of the Company's
common stock ....................... 0.27 0.37 0.36
Weighted-average expected life
of the option ...................... 6.9 years 5.6 years 7.0 years
Weighted-average fair value of options
granted during the year ............ $6.59 $8.41 $5.29
------------------------------------
58
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Compensation
costs chargeable to income under SFAS No. 123 was $10.2 million, $2.3 million
and $3.7 million during 1998, 1997 and 1996, respectively. The amount recognized
as compensation expense for 1998, 1997 and 1996 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 follows:
Dollars in thousands, except per share amounts 1998 1997 1996
- -----------------------------------------------------------------------------------------
Pro forma net income ............................. $ 22,334 $ 54,717 $ 30,695
Pro forma earnings per share:
Basic ......................................... 0.55 $ 1.37 $ 0.79
Diluted ....................................... $ 0.54 $ 1.33 $ 0.75
------------------------------------
A summary of the Company's stock option activity and related information for
the years ended Dec. 31 follows:
1998 1997 1996
Weighted-Average Weighted-Average Weighted-Average
1998 Option Price 1997 Option Price 1996 Option Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at Jan. 1 .......... 3,879,484 $ 11.97 4,240,696 $ 8.37 4,504,616 6.84
Granted ................................ 1,221,713 22.99 789,808 21.48 760,534 12.43
Exercised .............................. (385,035) 9.51 (1,092,047) 5.41 (989,737) 4.42
Canceled/forfeited ..................... (95,926) 21.04 (58,973) 14.77 (34,717) 8.03
--------------------------------------------------------------------------------------
Options outstanding at Dec. 31 ......... 4,620,236 $ 14.57 3,879,484 $ 11.77 4,240,696 $ 8.37
======================================================================================
Options exercisable at Dec. 31 ......... 4,155,460 $ 13.70 3,006,315 $ 9.72 3,800,033 $ 8.18
Shares available for future grant
at Dec. 31............................. 864,316 1,059,099 1,091,262
======================================================================================
A summary of the Company's stock options outstanding and exercisable by stock
option price ranges at December 31, 1998 follows:
Weighted-Average Weighted-Average Weighted-Average
Exercise Price Remaining Life Exercise Price
Exercise Options of Options of Options Options of Options
Price Range Outstanding Outstanding Outstanding Exercisable Exercisable
- -----------------------------------------------------------------------------------------------------------
$ 3.38 to $ 7.82 .... 1,223,990 $ 6.14 3.65 1,223,990 $ 6.14
$ 7.83 to $12.77 .... 1,505,954 $ 11.88 6.76 1,496,566 $ 11.87
$12.78 to $18.92 .... 130,785 $ 16.63 8.28 130,785 $ 16.63
$18.92 to $24.88 .... 1,759,507 $ 22.59 9.29 1,304,119 $ 22.60
--------------------------------------------------------------------------------
Total ............ 4,620,236 $ 14.57 6.94 4,155,460 $ 13.70
================================================================================
NOTE S
- --------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS
PENSION PLANS: The Bank sponsors a defined benefit pension plan ("the Plan")
covering substantially all employees of the Company. Effective Jan. 1, 1999, the
Company amended the Plan and converted it into a Cash Balance Pension Plan. The
benefit formula under the Plan was frozen effective Dec. 31, 1998, and each
participant's accrued benefit as of that date was converted into a cash balance
using the interest rate that would be used by the Pension Benefit Guaranty
Corporation for determining the present value of a lump sum distribution upon
Plan termination. The Cash Balance Pension Plan will provide each participant
with an individual account balance similar to a savings account. Each year, an
employer contribution based on the participant's years of service as defined in
the Plan, as well as an earnings credit of 4.1% or higher, will be credited to
each participant's pension account.
Additionally, prior to Jan. 1, 1999, the Bank sponsored a supplemental
retirement plan ("the Supplemental Plan"). Prior to Jan. 1, 1999, the Bank also
sponsored a non-qualifying, defined benefit retirement plan for the Company's
directors ("the Directors' Plan"). Effective Jan. 1, 1999, the Supplemental Plan
and the Directors' Plan were frozen at current levels and will be funded into a
Rabbi Trust. Payments due under the Supplemental Plan and the Directors' Plan
will be funded from the Bank's assets when due. In the future, earnings from the
assets funded into the Rabbi Trust will equal the expense to recognize the
additional obligation to participants.
59
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total net periodic pension cost for 1998, 1997 and 1996 was $3.5 million,
$3.8 million and $3.7 million, respectively. In 1998, the Company incurred $12.5
million of additional pension costs associated with special termination benefits
and plan amendments and modifications. Pension cost was comprised of the
following components:
Dollars in thousands 1998 1997 1996
- ---------------------------------------------------------------------------
THE PLAN:
Service cost benefits earned
during the period ................... $ 2,042 $ 2,111 $ 1,950
Interest cost .......................... 2,106 1,960 1,791
Expected return on plan assets ......... (2,369) (1,705) (1,561)
Amortization of:
Actuarial loss ...................... -- 247 306
Prior service cost .................. (61) (61) (73)
Transition (asset) .................. (70) (70) (70)
--------------------------------
Net periodic pension cost .............. $ 1,648 $ 2,482 $ 2,343
================================
Special termination benefits ........... $ 2,624 $ -- $ --
SFAS 88 charges:
Curtailments ........................ (32) -- --
Settlements ......................... 2,343 -- --
--------------------------------
Additional pension cost ................ $ 4,935 $ -- $ --
================================
THE SUPPLEMENTAL PLAN:
Service cost benefits earned
during the period ................... $ 250 $ 315 $ 331
Interest cost .......................... 807 476 447
Amortization of:
Actuarial loss ...................... 58 72 77
Prior service cost .................. 413 150 150
Transition obligation ............... 25 25 25
--------------------------------
Net periodic pension cost .............. $ 1,553 $ 1,038 $ 1,030
================================
Special termination benefits ........... $ 130 $ -- $ --
FAS 88 charges:
Curtailments ........................ 1,931 -- --
Settlements ......................... 6,075 -- --
--------------------------------
Additional pension cost ................ $ 8,136 $ -- $ --
================================
THE DIRECTORS' PLAN:
Service cost benefits earned
during the period ................... $ 77 $ 79 $ 97
Interest cost on projected interest cost 92 102 98
Amortization of:
Actuarial (gain) .................... (35) (26) --
Prior service cost .................. 144 144 144
--------------------------------
Net periodic pension cost .............. $ 278 $ 299 $ 339
================================
SFAS 88 charges:
Curtailments ........................ 109 -- --
Settlements ......................... (639) -- --
--------------------------------
Additional pension cost ................ $ (530) $ -- $ --
================================
TOTAL:
Service cost benefits earned
during the period ................... $ 2,369 $ 2,505 $ 2,378
Interest cost .......................... 3,005 2,538 2,336
Expected return on plan assets ......... (2,369) (1,705) (1,561)
Amortization of:
Actuarial loss ...................... 23 293 383
Prior service cost .................. 496 233 221
Transition (asset) .................. (45) (45) (45)
--------------------------------
Net periodic pension cost .............. $ 3,479 $ 3,819 $ 3,712
================================
Special termination benefits ........... $ 2,754 $ -- $ --
SFAS 88 charges:
Curtailments ........................ 2,008 -- --
Settlements ......................... 7,779 -- --
--------------------------------
Additional pension cost ................ $ 12,541 $ -- $ --
================================
60
45
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 1998
- ------------------------------------------------------------------------------------------------
Employees' Supplemental Directors'
Pension Plan Plan Plan Total
- ------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation beginning of year .... $ 31,029 $ 10,827 $ 1,518 $ 43,374
Service cost ............................ 2,042 250 77 2,369
Interest cost ........................... 2,106 807 92 3,005
Plan amendments ......................... (3,392) -- -- (3,392)
Actuarial loss/(gain) .................... 3,655 447 (173) 3,929
Curtailments ............................ -- (4,173) -- (4,173)
Settlements ............................. -- 6,075 (295) 5,780
Special termination benefits ............ -- 130 -- 130
Benefits paid ........................... (1,466) (62) -- (1,528)
Lump sums payable due to
terminated employees ................... (9,283) (1,126) -- (10,409)
----------------------------------------------------
Benefit obligation end of year .......... $ 24,691 $ 13,175 $ 1,219 $ 39,085
===================================================
CHANGE IN PLAN ASSETS:
Fair value beginning of year ............ $ 25,764 $ -- $ -- $ 25,764
Actual return on assets ................. 1,429 -- -- 1,429
Company contributions ................... 2,841 1,188 -- 4,029
Benefits paid ........................... (1,466) (62) -- (1,528)
Lump sums payable due to
terminated employees ................... (9,283) (1,126) -- (10,409)
----------------------------------------------------
Fair value end of year .................. $ 19,285 $ -- $ -- $ 19,285
===================================================
RECONCILIATION OF FUNDED STATUS:
Funded status end of year ............... $ (5,406) $(13,175) $ (1,219) $(19,800)
Unrecognized net transition
obligation (asset) ..................... (117) -- -- (117)
Unrecognized prior service cost ......... (3,797) -- -- (3,797)
Unrecognized net loss/(gain) ............. 2,447 -- -- 2,447
----------------------------------------------------
Accrued benefit liability
recognized at end of year .............. $ (6,873) $(13,175) $ (1,219) $(21,267)
===================================================
Dollars in thousands 1997
- ----------------------------------------------------------------------------------------------
Employees' Supplemental Directors'
Pension Plan Plan Plan Total
- ----------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation beginning of year .... $ 26,623 $ 6,198 $ 1,541 $ 34,362
Service cost ............................ 2,111 315 79 2,505
Interest cost ........................... 1,960 476 102 2,538
Plan amendments ......................... -- 3,517 -- 3,517
Actuarial loss/(gain) .................... 2,696 327 (133) 2,890
Curtailments ............................ -- -- -- --
Settlements ............................. -- -- -- --
Special termination benefits ............ -- -- -- --
Benefits paid ........................... (2,361) (6) (71) (2,438)
Lump sums payable due to
terminated employees ................... -- -- -- --
--------------------------------------------------
Benefit obligation end of year .......... $ 31,029 $ 10,827 $ 1,518 $ 43,374
--------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value beginning of year ............ $ 20,233 $ -- $ -- $ 20,233
Actual return on assets ................. 5,472 -- -- 5,472
Company contributions ................... 2,420 6 71 2,497
Benefits paid ........................... (2,361) (6) (71) (2,438)
Lump sums payable due to
terminated employees ................... -- -- -- --
--------------------------------------------------
Fair value end of year .................. $ 25,764 $ -- $ -- $ 25,764
==================================================
RECONCILIATION OF FUNDED STATUS:
Funded status end of year ............... $ (5,265) $(10,827) $ (1,518) $(17,610)
Unrecognized net transition
obligation (asset) ..................... (281) 92 -- (189)
Unrecognized prior service cost ......... (497) 4,727 253 4,483
Unrecognized net loss/(gain) ............. 2,912 1,334 (206) 4,040
--------------------------------------------------
Accrued benefit liability
recognized at end of year .............. $ (3,131) $ (4,674) $ (1,471) $ (9,276)
==================================================
The following table presents the development of the accrued pension cost
at Dec. 31, 1998, 1997 and 1996:
Dollars in thousands 1998 1997 1996
- -----------------------------------------------------------------------------
THE PLAN:
Accrued pension cost as of Jan. 1 ........ $ (3,131) $ (3,069) $ (2,458)
Pension cost ............................. (1,648) (2,482) (2,343)
SFAS 88 and special benefits cost ........ (4,935) -- --
Employer contributions ................... 2,841 2,420 1,732
--------------------------------
Accrued pension cost as of Dec. 31 ....... $ (6,873) $ (3,131) $ (3,069)
================================
THE SUPPLEMENTAL PLAN:
Accrued pension cost as of Jan. 1 ........ $ (4,674) $ (3,642) $ (3,190)
Pension cost ............................. (1,553) (1,038) (1,030)
SFAS 88 and special benefits cost ........ (8,136) -- --
Employer contributions ................... 1,188 6 578
--------------------------------
Accrued pension cost as of Dec. 31 ....... $(13,175) $ (4,674) $ (3,642)
================================
THE DIRECTORS' PLAN:
Accrued pension cost as of Jan. 1 ........ $ (1,471) $ (1,243) $ (910)
Pension cost ............................. (278) (299) (339)
SFAS 88 and special benefits cost ........ 530 -- --
Employer contributions ................... -- 71 6
--------------------------------
Accrued pension cost as of Dec. 31 ....... $ (1,219) $ (1,471) $ (1,243)
================================
TOTAL:
Accrued pension cost as of Jan. 1 ........ $ (9,276) $ (7,954) $ (6,558)
Pension cost ............................. (3,479) (3,819) (3,712)
SFAS 88 and special benefits cost (income) (12,541) -- --
Employer contributions ................... 4,029 2,497 2,316
--------------------------------
Accrued pension cost as of Dec. 31 ....... $(21,267) $ (9,276) $ (7,954)
================================
At Dec. 31, 1998, no additional minimum liability or intangible asset
existed in the pension plans. At Dec. 31, 1997, an additional minimum liability
and intangible asset existed in the Supplemental Plan and Directors' Plan in the
amount of $1.5 million and $47,000, respectively.
The following weighted-average actuarial assumptions were used in
calculating benefit obligations:
1998 1997
- -----------------------------------------------------------------------
Discount rate.................................... 6.75% 7.00%
Long-term rate of return on assets .............. 8.50 8.50
Rate of increase in future
compensation levels .......................... 4.00 5.00
---------------
The following weighted-average actuarial assumptions were used in calculating
net pension cost:
1998 1997 1996
- ------------------------------------------------------------------------
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, 1998, the Plan's assets consisted of various equity securities,
corporate and government bonds, and cash equivalents. Included in the equity
securities is $9.1 million (or 334,158 shares) of Company stock. Total dividends
received by the Plan on Company common stock totaled $167,079.
61
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN: The Company adopted a plan to terminate the
leveraged ESOP during the third quarter of 1998, and at that time the account of
each participant became fully vested. In September 1998, the ESOP fully paid the
outstanding borrowing balance of $3.0 million with proceeds from the sale of
unallocated shares. The remaining unallocated shares have been allocated to plan
participants in accordance with ERISA. See Note A - Summary of Significant
Accounting Policies for further details.
The Company had established the leveraged ESOP to invest in the common stock
of the Company for the benefit of employees of the Company. All employees who
had completed at least one year of credited service at the Bank were eligible to
participate in the ESOP. The ESOP was subject to ERISA and was intended to
constitute a qualified stock bonus plan for income tax purposes.
Leveraged shares of Company stock were held by the ESOP trustee as collateral
on the loan. As principal and interest on the loan were paid, shares held as
collateral were released. The ESOP loan was being repaid from Bank
contributions. Dividends on the unallocated shares of Company stock were used
either to repay the ESOP loan or purchase additional shares of Company stock for
the ESOP. Dividends on allocated shares were used to purchase additional Company
stock for the ESOP.
Contributions to the ESOP were made at the sole discretion of the Board of
Trustees of the ESOP, but could not exceed 15% of the aggregate compensation of
all participants. Since the ESOP's inception, contributions had 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 compensation and interest expense for
the years indicated:
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------
Contributions to ESOP:
Compensation expense ....................... $738 $621 $442
Interest expense associated with shares
accounted for under SOP 93-6 ............. 165 237 239
-----------------
In addition, the Company incurred a $3.7 million charge in 1998 associated
with the termination of the ESOP. See Note B - Non-Recurring Charges for further
details.
The following table summarizes shares of Company stock held by the ESOP:
Dec. 31 1998 1997 1996
- -------------------------------------------------------------------------------
Beginning allocated shares ........ 1,350,970 1,389,846 1,359,462
Shares allocated due
to:
Debt service ................... 209,963 36,654 29,734
Contributions and dividends used
to purchase additional shares 17,906 50,398 43,913
Withdrawals .................... (33,165) (125,928) (43,263)
-----------------------------------------
Shares allocated to participants .. 1,545,674 1,350,970 1,389,846
Unallocated shares:
Grandfathered under SOP 93-6 ... -- -- 33,461
Unearned ESOP shares ........... -- 364,963 368,157
-----------------------------------------
Total ............................. 1,545,674 1,715,933 1,791,464
=========================================
Fair value of unearned ESOP shares $ -- $ 9,580,279 $ 5,767,781
=========================================
PROFIT SHARING PLAN: Beverly maintained a 401(k) plan covering all of its
full-time and certain part-time employees after completion of one year of
service as defined. Contributions from participants were voluntary and were
limited to the Internal Revenue Code maximum contribution. Beverly also had a
partial matching program. Total Company contributions to the plan for 1998, 1997
and 1996 were $94,000, $305,000 and $295,000, respectively. The Beverly 401(K)
plan was merged into the Company's 401(K) plan.
NOTE T
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK
LOANS SOLD WITH RECOURSE: At Dec. 31, 1998 and 1997, the Bank serviced $1.5
million and $29.6 million, respectively, of commercial real estate loans sold
with recourse. The Bank's credit exposure with respect to these loans sold with
recourse at Dec. 31, 1998 totaled $1.5 million and was collateralized by $2.1
million of MBS. In comparison, the Bank's credit exposure for these loans at
Dec. 31, 1997 totaled $8.1 million and was collateralized by $7.2 million of
MBS.
The commercial real estate 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 commercial real estate loans
sold with recourse that would be recognized by the Bank in the event of complete
default by the borrowers and worthlessness of the underlying collateral at Dec.
31, 1998 and 1997 was $1.5 million and $8.1 million, respectively. The Company
did not repurchase any commercial loans sold with recourse because of the
recourse provisions in 1998 or 1997.
The following schedule presents the geographical distribution of the real
estate collateral of commercial real estate loans sold with recourse as of Dec.
31, 1998 and 1997:
Dollars in thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------
Minnesota.............. $ -- --% $14,914 50.4%
California ............ 1,506 100.0 10,070 34.0
Washington ............ -- -- 3,211 10.9
Other ................. -- -- 1,390 4.7
---------------------------------------------
$ 1,506 100.0% $29,585 100.0%
=============================================
62
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At Dec. 31, 1998, the Bank serviced $16.7 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 complete worthlessness of the underlying
collateral at Dec. 31, 1998 was $16.7 million. There were no additional 1-4
family loans sold with recourse and no 1-4 family loans repurchased under
recourse provisions during 1998. At Dec. 31, 1998, the Bank also had $156.2
million of MBS that if sold from its portfolio would have recourse to the Bank.
At Dec. 31, 1997, the Bank serviced $22.6 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, 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 provision 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.
LOAN ORIGINATION COMMITMENTS: At Dec. 31, 1998, the Bank had $127.0 million
in outstanding loan commitments to originate 1-4 family mortgage and consumer
loans, as well as $118.9 million of commitments to originate commercial and
commercial real estate and land and land development loans. Most of these
commitments expire after 60 days.
At Dec. 31, 1997, the Bank had $25.0 million in outstanding loan commitments
to originate 1-4 family mortgage and consumer loans, as well as $62.2 million of
commitments to originate commercial and commercial real estate and land and land
development loans.
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 fulfilled.
FORWARD SALE COMMITMENTS: As of Dec. 31, 1998, the Bank had forward loan sale
commitments of $58.5 million, including $58.2 million of forward contracts
related to loan origination 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. All market
value losses on forward sale commitments have been reflected in the
consolidated financial statements.
UNUSED CREDIT LINES: The Bank had outstanding unused home equity lines of credit
of $143.4 million and $128.0 million as of Dec. 31, 1998 and 1997, respectively.
Home equity lines of credit represent junior mortgages on 1-4 family homes. Home
equity lines of credit have fixed expiration dates. The Company had $26.5
million and $15.9 million of unused lines of credit issued to commercial
customers at Dec. 31, 1998 and 1997, respectively. 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, 1998 and 1997, 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 $169.9 million and $143.9 million, respectively.
LETTERS OF CREDIT: At Dec. 31, 1998 and 1997, the Company had issued $6.4
million and $10.7 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. The letters of
credit were issued on behalf of St. Paul Financial Development or commercial
customers. The credit risk involved in issuing letters of credit is essentially
the same as that involved in lending. As of Dec. 31, 1998 and 1997, 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 was $6.4
million and $10.7 million, respectively.
INTEREST RATE EXCHANGE AGREEMENTS: The Bank used interest rate exchange
agreements in 1998 and 1997 to help reduce certain interest rate exposures. At
Dec. 31, 1998 and 1997, the Bank had $84.3 million and $99.8 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 1998 1997
- ------------------------------------------------------------------
Balance at beginning of year............. $ 99,766 $93,560
Additions................................ - 25,000
Maturities............................... - -
Amortization............................. (15,476)) (18,794)
---------------------
Balance at year-end...................... $ 84,290 $ 99,766
=====================
Included in interest expense in 1998, 1997 and 1996 was $498,000, $487,000
and $939,000, respectively, on interest rate exchange agreements. In 1998 and
1997, interest income was reduced by $59,000 and $51,000, respectively, related
to hedging of fixed-rate loans.
The following table presents a summary of interest rate exchange agreements
at Dec. 31, 1998 (dollars in thousands):
Original Current Fixed
Notional Notional Payment
Amount Amount Rate Variable Receipt Rate Maturity Date Purpose
- ------------------------------------------------------------------------------------------------------------------------------------
$ 50,526* $23,590 6.34% 6-month LIBOR (5.41406%) 03/24/99 Hedge matched funding used to acquire MBS
49,100* 20,650 6.63% 6-month LIBOR (5.41406%) 03/24/99 Hedge matched funding used to acquire MBS
34,685* 15,050 6.54% 6-month LIBOR (5.25000%) 04/01/99 Hedge matched funding used to acquire MBS
25,000 25,000 6.44% 6-month LIBOR (5.75000%) 07/23/02 Hedge fixed-rate loan originations
- ------------------------------------------------------------------------------------------------------------------------------------
$159,311 $84,290
====================================================================================================================================
*Notional amount amortizes semi-annually.
- ------------------------------------------------------------------------------------------------------------------------------------
63
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
NOTE V
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
The following schedule presents the geographical distribution of the Company's
collateral on mortgage and commercial loans receivable as of Dec. 31, 1998 and
1997:
1998
- --------------------------------------------------------------------------------------------------------------------
1-4 Family Real Estate Loans Commercial and Other Real Estate Loans Total
- -------------------------------------------------------------------------------------------------------------------
Dollars in thousands Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------
California........... $ 303,899 8.9% $ 370,930 35.3% $ 674,829 15.1%
Illinois............. 1,362,791 40.0 405,710 38.7 1,768,501 39.7
Maryland............. 59,349 1.8 25,076 2.4 84,425 1.9
Michigan............. 239,036 7.0 -- -- 239,036 5.4
Missouri............. 61,022 1.8 -- -- 61,022 1.4
Washington........... 24,792 0.7 100,451 9.6 125,243 2.8
Other................ 1,355,444 39.8 147,206 14.0 1,502,650 33.7
---------------------------------------------------------------------------------------
Total................ $3,406,333 100.0% $1,049,373 100.0% $4,455,706 100.0%
=======================================================================================
1997
- -------------------------------------------------------------------------------------------------------------------------------
1-4 Family Real Estate Loans Commercial and Other Real Estate Loans Total
- -------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------------
California..................... $ 147,337 6.0% $ 497,146 42.6% $ 644,483 17.9%
Illinois....................... 1,116,502 45.9 380,858 32.7 1,497,360 41.6
Maryland ...................... 62,603 2.6 27,732 2.4 90,335 2.5
Michigan ...................... 77,399 3.2 -- -- 77,399 2.1
Missouri ...................... 140,653 5.8 -- -- 140,653 3.9
Washington .................... 24,348 1.0 89,377 7.7 113,725 3.2
Other ......................... 865,561 35.5 170,591 14.6 1,036,152 28.8
-------------------------------------------------------------------------------------------
Total.......................... $2,434,403 100.0% $ 1,165,704 100.0% $ 3,600,107 100.0
===========================================================================================
See Note T-Financial Instruments With Off-Balance Sheet Credit Risk for
geographical concentration of commercial real estate loans sold with recourse.
64
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE W
- --------------------------------------------------------------------------------
PARENT COMPANY-ONLY FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
Dec. 31,
- --------------------------------------------------------------------------------
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents ........................ $ 122,729 $ 59,203
Investment securities ............................ 12,623 11,902
Mortgage-backed securities ....................... -- 5,000
Investment in St. Paul Federal Bank .............. 450,750 449,044
Investment in other subsidiaries ................. 13,891 12,885
Advances to St. Paul Federal Bank ................ -- 28,730
Advances to other subsidiaries ................... 11,000 21,700
Prepaid expenses and other assets ................ 1,058 632
----------------------
Total assets ..................................... $ 612,051 $ 589,096
======================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Borrowings ....................................... $ 98,669 $ 98,469
Other liabilities ................................ 3,458 4,296
----------------------
Total liabilities ................................ 102,127 102,765
Common stock ..................................... 416 415
Paid-in capital .................................. 158,764 152,353
Retained earnings ................................ 363,931 354,797
Unrealized gain on securities, net of tax ........ 2,138 2,680
Borrowings by employee stock ownership plan ...... -- (221)
Unearned employee stock ownership plan shares .... -- (2,858)
Treasury stock ................................... (15,325) (20,835)
----------------------
Total stockholders' equity ....................... 509,924 486,331
----------------------
Total liabilities and stockholders' equity ....... $ 612,051 $ 589,096
======================
STATEMENTS OF INCOME
Dollars in thousands, except per share amounts 1998 1997 1996
- ----------------------------------------------------------------------------------------
Equity in earnings of
St. Paul Federal Bank ....................... $ 25,891 $ 54,791 $ 33,859
Equity in earnings of
other subsidiaries .......................... 2,411 2,682 1,251
St. Paul Bancorp gain (loss) ................... 403 (1,414) (2,064)
-------------------------------------
Net income ..................................... $ 28,705 $ 56,059 $ 33,046
=====================================
Income before extraordinary item per share:
Basic ....................................... $ 0.71 $ 1.41 $ 0.85
Diluted ..................................... 0.69 1.37 0.81
=====================================
Net income per share:
Basic ....................................... $ 0.71 $ 1.40 $ 0.85
Diluted ..................................... 0.69 1.36 0.81
=====================================
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Dollars in thousands 1998 1997 1996
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ................................ $ 28,705 $ 56,059 $ 33,046
Earnings of St. Paul Federal Bank
not providing cash ..................... (25,891) (54,791) (33,859)
Earnings of other subsidiaries
not providing cash ..................... (2,411) (2,682) (1,251)
Other uses, net ........................... (5,216) (1,503) (4,926)
--------------------------------
Net cash used in operating activities ..... (4,813) (2,917) (6,990)
INVESTING ACTIVITIES:
Maturities of available for sale
investment securities .................. 165 10,200 250
Maturity of available for sale
mortgage-backed securities ............. 5,000 -- --
Purchase of available for sale
investment securities .................. (4,540) (21,587) (201)
Purchase of available for sale
mortgage-backed securities ............. -- (5,000) --
Sale of available for sale
investment securities .................. 3,500 1,523 --
Dividends received from
St. Paul Federal Bank .................. 34,800 48,100 17,450
Dividends received from
other subsidiaries ..................... 1,405 2,365 2,226
Net repayments from (advances to)
St. Paul Federal Bank .................. 28,730 (28,730) --
Net repayments from (advances to)
other subsidiaries ..................... 10,700 (12,950) (6,101)
--------------------------------
Net cash provided by (used in)
investing activities ................... 79,760 (6,079) 13,624
FINANCING ACTIVITIES:
New long-term borrowings .................. -- 98,418 --
Repayment of long-term borrowings ......... -- (34,500) (11,000)
Purchase of treasury stock ................ (27) (17,237) (24,906)
Dividends paid ............................ (19,571) (13,670) (8,953)
Net proceeds from issuance of stock ....... 8,177 10,289 23,273
--------------------------------
Net cash provided by (used in)
financing activities ................... (11,421) 43,300 (21,586)
--------------------------------
Total cash provided (used) ................ 63,526 34,304 (14,952)
Cash and cash equivalents
at beginning of year ................... 59,203 24,899 39,851
--------------------------------
Cash and cash equivalents
at end of year.......................... $122,729 $ 59,203 $ 24,899
================================
The parent company's current primary activity is that of a unitary, non-
diversified savings and loan holding company.
65
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998 and 1997. 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 1998 1997
- ---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents ......... $ 439,320 $ 439,320 $ 238,133 $ 238,133
Investment securities:
Available for sale ............. 203,924 203,924 174,198 174,198
Held to maturity ............... 9,958 10,303 13,378 13,567
-------------------------------------------------------
213,882 214,227 187,576 187,765
Mortgage-backed securities/
securities due from brokers:
Available for sale ............. 337,551 337,551 520,264 520,264
Held to maturity ............... 264,551 267,902 435,026 438,400
-------------------------------------------------------
602,102 605,453 955,290 958,664
Loans receivable:
1-4 family units ............... 3,406,333 3,460,415 2,434,403 2,455,452
Commercial real estate ......... 1,000,835 1,008,375 1,108,946 1,122,624
Commercial and industrial ...... 47,628 47,628 55,291 55,291
Land and land development ...... 910 910 1,467 1,467
Consumer loans ................. 43,777 46,454 60,311 59,639
Loans held for sale ............ 65,354 66,241 19,504 19,567
Net deferred costs ............. 18,521 -- 4,684 --
Allowance for
loan losses .................. (40,423) -- (38,569) --
-------------------------------------------------------
4,542,935 4,630,023 3,646,037 3,714,040
Accrued interest receivable ....... 35,048 35,048 30,730 30,730
FHLB stock ........................ 66,304 66,304 41,114 41,114
Other financial assets ............ 2,200 2,427 3,687 4,287
-------------------------------------------------------
Total financial assets ............ $ 5,901,791 $ 5,992,802 $ 5,102,567 $ 5,174,733
=======================================================
Deposits:
Checking, savings and money
market accounts ............. $ 1,750,163 $ 1,750,163 $ 1,619,057 $ 1,619,057
Certificates of deposit ........ 2,144,808 2,154,845 2,252,343 2,254,870
-------------------------------------------------------
3,894,971 3,905,008 3,871,400 3,873,927
Borrowings:
FHLB advances .................. 1,326,085 1,300,460 341,085 336,225
Securities sold under
agreements to repurchase ..... 75,000 75,016 330,000 329,994
Senior notes ................... 98,669 101,000 98,469 103,000
Mortgage-backed notes .......... 16,400 16,759 16,400 16,974
ESOP borrowings ................ -- -- 3,104 3,104
Retail purchase agreements ..... 3,918 3,918 3,334 3,334
Capital lease .................. 607 607 602 602
-------------------------------------------------------
1,520,679 1,497,760 792,994 793,233
Accrued interest payable .......... 26,091 26,091 15,479 15,479
Other financial liabilities ....... -- 1,577 -- 1,062
-------------------------------------------------------
Total financial liabilities ....... $ 5,441,741 $ 5,430,436 $ 4,679,873 $ 4,683,701
=======================================================
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 AND SECURITIES DUE FROM BROKERS: The fair value of
MBS and securities due from brokers was 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 commercial and commercial real estate loans, 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 commercial and
commercial real estate loans 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 since 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 deposit 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, 1998 and
1997 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 and the mortgage-backed note were
based upon quotes received from securities dealers. The fair value of the ESOP
borrowing and retail purchase agreements approximates their 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.
66
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER FINANCIAL ASSETS AND LIABILITIES: Other financial assets and liabilities
include mortgage servicing rights, loan origination and sales commitments,
letters of credit, recourse provisions on loans sold with recourse and interest
rate exchange agreements.
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 gain the Bank
would realize to enter into an offsetting agreement and was determined from
quotes received from securities dealers.
The fair value of the letters of credit 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 a
dealer quote and represents the estimated amount the Bank would receive or pay
to terminate the agreements, taking into account current interest rates and the
creditworthiness of the counterparties.
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 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Interest income ..................$ 97,858 $ 90,263 $ 93,018 $ 92,121 $ 89,388 $ 89,871 $ 90,699 $ 87,608
Interest expense ................. 58,021 53,209 53,250 52,640 50,071 50,355 51,467 49,441
-----------------------------------------------------------------------------------------
Net interest income .............. 39,837 37,054 39,768 39,481 39,317 39,516 39,232 38,167
Provision for (reversal of)
loan losses ..................... -- 180 2,500 180 (320) -- (320) --
Gain on assets sold .............. 2,153 992 1,234 659 1,598 446 1,293 568
Other income ..................... 11,985 14,708 12,788 13,235 13,239 13,151 12,757 12,549
Cost reduction plan charge ....... -- -- 25,000 -- -- -- -- --
Merger-related charge ............ -- -- 9,025 -- -- -- -- --
Other G&A expense ................ 35,150 31,585 32,368 31,867 35,060 31,931 33,328 30,501
Gain (loss) on REO ............... 97 439 (14) (69) (43) 61 (36) (45)
-----------------------------------------------------------------------------------------
Net income (loss) before income
taxes and extraordinary item .... 18,922 21,428 (15,117) 21,259 19,371 21,243 20,238 20,738
Income taxes ..................... 5,739 7,052 (3,423) 7,075 6,002 7,132 6,391 6,947
-----------------------------------------------------------------------------------------
Net income (loss) before
extraordinary item .............. 13,183 14,376 (11,694) 14,184 13,369 14,111 13,847 13,791
Extraordinary loss, net of tax ... -- -- -- -- -- -- -- 403
-----------------------------------------------------------------------------------------
Net income (loss) after
extraordinary item ..............$ 13,183 $ 14,376 $(11,694) $ 14,184 $ 13,369 $ 14,111 $ 13,847 $ 13,388
=========================================================================================
Income before extraordinary
item per share:
Basic .........................$ 0.32 $ 0.36 $ (0.29) $ 0.36 $ 0.33 $ 0.36 $ 0.35 $ 0.33
Diluted ....................... 0.32 0.35 (0.29) 0.34 0.32 0.34 0.33 0.32
=========================================================================================
Net income per share:
Basic .........................$ 0.32 $ 0.36 $ (0.29) $ 0.36 $ 0.33 $ 0.36 $ 0.35 $ 0.33
Diluted ....................... 0.32 0.35 (0.29) 0.34 0.32 0.34 0.33 0.32
=========================================================================================
Cash dividends per share .........$ 0.150 $ 0.100 $ 0.150 $ 0.100 $ 0.100 $ 0.080 $ 0.100 $ 0.080
=========================================================================================
AVERAGE BALANCE SHEET For the Quarters Ended
- ---------------------------------------------------------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets ............ $6,005,306 $5,246,161 $5,503,636 $5,208,711 $5,289,886 $5,089,279 $5,222,137 $5,046,600
Investments ............. 469,251 382,346 489,549 375,952 466,847 370,869 476,047 427,125
MBS ..................... 657,093 1,001,299 734,635 1,073,064 818,005 1,131,063 920,345 1,186,782
Loans receivable ........ 4,631,281 3,618,579 4,045,957 3,522,782 3,758,319 3,361,002 3,627,904 3,200,189
Deposits ................ 3,872,798 3,853,810 3,865,688 3,858,766 3,858,544 3,906,203 3,852,809 3,929,581
Borrowings .............. 1,496,278 827,878 1,024,660 789,051 834,375 630,371 882,085 530,914
Stockholders' equity .... 502,729 484,111 507,779 471,350 497,214 455,556 492,707 455,888
=====================================================================================================
67
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE Z
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Interest paid on deposits ................... $141,013 $176,774 $151,687
Loans exchanged for
mortgage-backed securities ............... $ -- $ -- $380,929
Interest paid on borrowings ................. 58,500 38,936 31,523
Income taxes paid, net ...................... 1,383 23,339 15,440
Real estate acquired through foreclosure .... 2,559 3,975 23,596
Loans originated in connection with real
estate acquired through foreclosure ...... -- 2,677 23,446
------------------------------
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, 1998, 1997 and 1996:
1998 1997 1996
- ------------------------------------------------------------------------------------------
Income before extraordinary item ............... $ 28,705 $ 56,462 $ 33,046
=======================================
Denominator for basic earnings per
share-weighted average shares ............... 40,296,222 39,905,921 39,059,590
Effect of diluted securities:
Stock options issued to
employees and directors ..................... 1,215,358 1,386,763 1,960,478
---------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions .............. 41,511,580 41,292,684 41,020,068
=======================================
Income before extraordinary item per share:
Basic ..................................... $ 0.71 $ 1.41 $ 0.85
=======================================
Diluted ................................... $ 0.69 $ 1.37 $ 0.81
=======================================
NOTE BB
- --------------------------------------------------------------------------------
SEGMENT REPORTING
The Company operates many different businesses in the financial services sector.
For Segment Reporting, the Company has organized these businesses into four
distinct segments.
CONSUMER FINANCIAL SERVICES: This segment includes the following business
activities: the branch network and other deposit gathering support services of
the Bank, discount brokerage (Investment Network, Inc.), insurance agency
(Annuity Network, Inc. and SPF Insurance Agency, Inc.), ATM operations (ATM
Connection, Inc.) and trust services (St. Paul Trust Co.).
COMMERCIAL AND MULTIFAMILY LENDING: This segment is comprised of the
multifamily, commercial real estate, and business lending portfolios and related
activities of the Bank, activities of the real estate development company (St.
Paul Financial Development) and investments in low-income housing with tax
credits (Community Finance Corporation).
COMMUNITY LENDING: This segment includes the Company originated 1-4 family loan
portfolio including MBS swaps and gains on sales, all consumer loan activities,
loan originations and gains on sales from mortgage brokerage (Serve Corps
Mortgage Corporation), and loan servicing for these portfolio loans and loans
sold with servicing retained.
MONEY MANAGEMENT: This segment is comprised of the wholesale acquisitions of 1-4
family mortgage portfolios, investment portfolios, wholesale financing
activities, internal funds transfer pricing allocations, holding company
activities and tax management.
FINANCIAL RESULTS: FOR THE YEAR ENDED DECEMBER 31, 1998
Consumer Commercial/
Financial Multifamily Community Money
Dollars in thousands Services Lending Lending Management
- -------------------------------------------------------------------------------------------------
Interest income ........................ $ 228,960 $ 96,290 $ 118,020 $ 220,476
Interest expense ....................... 154,247 67,133 94,976 189,236
------------------------------------------------------
Net interest income .................... 74,713 29,157 23,044 31,240
Provisions ............................. -- (537) 9 (112)
------------------------------------------------------
Net interest income after provisions ... 74,713 29,694 23,035 31,352
Other income ........................... 46,591 2,223 6,789 1,444
Other expense .......................... 99,435 8,624 21,727 6,120
------------------------------------------------------
Net operating income ................... 21,869 23,293 8,097 26,676
Gain on foreclosed real estate ......... -- 4 -- --
------------------------------------------------------
Net income before tax .................. 21,869 23,297 8,097 26,676
Income taxes ........................... 8,667 8,475 3,185 4,998
------------------------------------------------------
Net income ............................. $ 13,202 $ 14,822 $ 4,912 $ 21,678
======================================================
Average assets ......................... $ 4,219,678 $ 1,200,629 $ 1,648,194 $ 3,724,644
======================================================
Consolidated
Special Financial
Charges Eliminations Statements
-----------------------------------------
Interest income ......................... $ -- $ (292,783) $ 370,963
Interest expense ........................ -- (292,783) 212,809
-----------------------------------------
Net interest income ..................... -- -- 158,154
Provisions .............................. 2,500 -- 1,860
-----------------------------------------
Net interest income after provisions .... (2,500) -- 156,294
Other income ............................ -- -- 57,047
Other expense ........................... 34,025 -- 169,931
-----------------------------------------
Net operating income .................... (36,525) -- 43,410
Gain on foreclosed real estate .......... -- -- 4
-----------------------------------------
Net income before tax ................... (36,525) -- 43,414
Income taxes ............................ (10,616) -- 14,709
-----------------------------------------
Net income .............................. $ (25,909) $ -- $ 28,705
=========================================
Average assets .......................... $ -- $(5,250,748) $ 5,542,397
=========================================
In the segment reporting process, balance sheets are created for each
segment, allocating assets, liabilities and equity based on the business lines
contained in the segment. The development of balance sheets for each segment
also includes the effects of allocations of capital using a risk-adjusted
method, and the balances allocated from a central funding center in connection
with internal transfer pricing. The "eliminations" category adjusts for the
consolidated effects of the internal allocations.
An internal ("transfer pricing") mechanism is used to value financial assets
and liabilities for each segment. Market yield curves are used to assign rates
to the various balance sheet items that result in a funding charge and/or credit
to the segment. Because this is an internal funding system, the resulting charge
or credit is eliminated in interest income/expense.
Because Beverly Bank did not have any "segment" information, it was not
practicable to provide 1997 comparable segment results.
68
53
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. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 did not audit the 1997 and 1996 financial statements of Beverly
Bancorporation, Inc., which statements reflect total assets constituting 13% of
the consolidated financial statement totals as of December 31, 1997 and which
reflect net income constituting 12% and 21% of the consolidated financial
statement totals for the two years in the period ended December 31, 1997. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Beverly
Bancorporation, Inc., is based solely on the report of the other auditors.
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 and, for 1997 and 1996, the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1997 and 1996, the report of
other auditors, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Paul Bancorp,
Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 28, 1999
69
54
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, 1998.
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. 29, 1999, St. Paul Bancorp, Inc. had 40,795,468 shares of common
stock outstanding. The aggregate market value of common stock held by
non-affiliates as of Jan. 29, 1999, was $846,192,222. (1)
St. Paul Bancorp, Inc. has filed all reports required to be filed by Section
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 19-21, 44-45, 71
Distribution of Assets, Liabilities
and Stockholders' Equity; Interest Rates and
Interest Differential 25-26
Investment Portfolio 39, 49-50
Loan Portfolio 33-36, 38, 45, 50-52, 64
Summary of Loan Loss Experience 35-36, 45, 51
Deposits 25, 54
Return on Equity and Assets 18
Short-Term Borrowings 39, 54-56
Item 2 Properties 71
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 19, 23, 24, 34, 57-59, 70-73, 76
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-39
Item 7a Quantitative and Qualitative
Disclosure about Market Risk 37-38
Item 8 Financial Statements and Supplemental Data 40-69
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 74*
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 Statement Schedules and
Reports on Form 8-K 72-73
(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 1999 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.
70
55
ANNUAL REPORT ON FORM 10-K St. Paul Bancorp, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPETITION
- --------------------------------------------------------------------------------
St. Paul Bancorp experiences substantial competition in attracting and retaining
deposit accounts, making mortgage, commercial and other loans, and selling
investment products and trust services. Competition for deposit accounts,
including commercial deposits, 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 and
trust services comes primarily from other brokerage operations, insurance
companies, mutual funds, commercial banks and other money management firms. 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, 1998, the Bank had 65
banking offices located throughout the greater Chicago metropolitan area.
Sixteen 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
65 banking offices, 41 were owned and 24 were leased. Also, the Bank owned six
administrative buildings. Office properties include 12 branch office locations
acquired by the Company in the Beverly merger. The leased office space includes
spaced leased by Beverly in the south and southwestern suburbs of Chicago for
executive offices, business development and mortgage originations. The Company
also acquired a lease for office space in a southwestern suburb of Chicago when
the Bank acquired the operations of Serve Corps. During 1998, the Bank also
began to occupy a 70,000 square foot facility in a suburb of Chicago that serves
as an operations center. At Dec. 31, 1998, the aggregate net book value of St.
Paul Federal's banking and administrative offices owned and the leasehold
improvements at the offices leased was $36.3 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 $11.6 million at Dec. 31, 1998.
Included in the equipment owned by the Bank are mainframe, hardware, teller
platforms, desktop computers, ATMs and furnishings.
REGULATIONS
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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 Office of Thrift Supervision ("OTS") as their primary federal
regulator. The Bank also is subject to regulations, supervision and examination
by the Federal Deposit Insurance Corporation ("FDIC") and as to certain matters
by the Board of Governors of the Federal Reserve System ("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 1996 which contemplates the merger of the Savings
Association Insurance Fund ("SAIF"), of which the Bank is a member, with the
Bank Insurance Fund (the "BIF"), which generally insures deposits in national
and state-chartered banks. A condition to the combined insurance fund, however,
is that the savings association charter be eliminated. Several proposals in this
regard were introduced in Congress during 1997, but were not included in
financial modernization legislation considered in 1998. While no legislation has
been passed to date, the issue may be considered by Congress again in 1999. If
legislation is passed abolishing the federal thrift charter, the Bank may be
required to convert to a national bank holding company regulated 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 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.
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56
ANNUAL REPORT ON FORM 10-K (continued) St. Paul Bancorp, Inc.
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EXHIBITS (C)
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FINANCIAL STATEMENTS FILED Page
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St. Paul Bancorp, Inc.
Consolidated Financial Statements 40
Notes to Consolidated Financial Statements 44
Report of Independent Auditors 69
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 1998.
The following Exhibit Index lists the Exhibits to this Annual Report on Form
10-K.
EXHIBIT NUMBER 3
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Certificate of Incorporation and Bylaws
i Certificate of Incorporation (a).
ii Certificate of Amendment of Certificate of Incorporation of Registrant,
dated June 26, 1998.
iii Bylaws of Registrant, as amended (a).
iv 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).
v Amendment to Bylaws of Registrant, dated June 22, 1998.
EXHIBIT NUMBER 10
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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 Amendment to 1995 Incentive Plan dated May 6, 1998 (b).
vi Beverly Bancorporation Stock Option Plan (a) (b).
vii Beverly Bancorporation 1997 Long-Term Stock Incentive Plan (a) (b).
viii 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).
ix 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).
x 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).
xi 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).
xii 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).
xiii 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).
xiv 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).
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57
ANNUAL REPORT ON FORM 10-K St. Paul Bancorp, Inc.
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- --------------------------------------------------------------------------------
xv 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).
xvi St. Paul Federal Bank For Savings Deferred Compensation Trust Agreement,
dated April 21, 1987 (a) (b).
xvii 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).
xviii St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified
Retirement Plan for Directors, as amended and restated as of January 1,
1999 (b).
xix St. Paul Federal Bank For Savings Supplemental Retirement Plan and Excess
Benefit Plan as amended and restated as of January 1, 1999 (b).
xx St. Paul Federal Bank For Savings Supplemental Retirement Trust as amended
and restated as of December 31, 1998 (b).
xxi St. Paul Bancorp, Inc. and St. Paul Federal Bank For Savings Employee
Severance Compensation Plan, executed Dec. 20, 1993 (a) (b).
xxii First Amendment to St. Paul Bancorp, Inc. and St. Paul Federal Bank For
Savings Employee Severance Compensation Plan, executed as of October 26,
1998 (b).
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).
EXHIBIT NUMBER 13
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1998 Annual Report to Shareholders
EXHIBIT NUMBER 21
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Subsidiaries of Registrant
EXHIBIT NUMBER 23
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Consent of Ernst & Young LLP
Consent of Grant Thornton LLP
Report of Independent Auditors Grant Thornton LLP
EXHIBIT NUMBER 27
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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.
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58
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
22, 1999 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 22, 1999 by the following persons on behalf of
the registrant and in the capacities indicated.
Joseph C. Scully Alan J. Fredian
Chairman and Chief Executive Officer Director
Patrick J. Agnew Paul C. Gearen
President and Chief Operating Officer Director
Robert N. Parke Kenneth J. James
Senior Vice President and Treasurer Director
(principal financial officer)
Jean C. Murray, O.P.
Paul J. Devitt Director
First Vice President and Controller
(principal accounting officer) Anthony R. Pasquinelli
Director
William A. Anderson
Director John J. Viera
Director
John W. Croghan
Director
DIRECTORS
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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
Anthony R. Pasquinelli
Executive Vice President and Secretary, Pasquinelli Construction Co.;
former Chairman, Beverly Bancorporation-C
John J. Viera
Retired Vice President, Commonwealth Edison Companypublic utility-D F* G H I
Joseph C. Scully, 58, 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, 56, 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, 51, 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, 54, 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, 50, 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, 54, 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, 50, 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, 42, 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
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59
INVESTOR INFORMATION St. Paul Bancorp, Inc.
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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, 1998, St. Paul Bancorp had 40,724,824 shares of common stock
outstanding. At that date, there were 6,476 shareholders of record.
As of the close of business on Feb. 25, 1999, St. Paul Bancorp's stock price
was $21.94.
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 June 22, 1998 and again on January 25, 1999 to increase the
quarterly dividend per share. The dividend was increased by 50 percent and 33
percent, respectively.
STOCK PRICES
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1997 15 3/16 - 19 5/16 17 1/2 - 23 1/16 21 13/16 - 25 3/8 22 1/2 - 29
1998 21 3/4 - 27 1/8 22 1/2 - 26 3/4 17 1/8 - 25 1/4 16 11/16 - 27 1/2
- --------------------------------------------------------------------------------
DIVIDENDS PER SHARE PAID*
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1998 1997
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First Quarter $0.100 $0.080
Second Quarter $0.100 $0.080
Third Quarter $0.150 $0.100
Fourth Quarter $0.150 $0.100
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* Restated for a three-for-two stock split distributed on July 14, 1997.
DIVIDEND PAYMENT DATES
St. Paul Bancorp pays dividends in February, May, August and November, with
record dates earlier in those same months. 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)
804-2284. 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.
Mail Stop 45-02-64
P.O. Box 8040
Boston, MA 02266-0664
(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 26, 1999 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 April 6, 1999.
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.
76